Forgiveness of loan to charity - cash or non cash?

Technical topics regarding tax preparation.
#51
Chay  
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Jeff-Ohio wrote:Yeah, but Chay doesn’t want to say he has a Receivable.

Not true. The cash, currently in someone else's possession, is attached to a note receivable and classified under that heading. It's like creating separate accounts for office real estate and rental real estate; one you can use freely in your operations, the other you have devoted to the production of income.

The Receivable is not a distinct asset under Chay’s theory. It is just the mechanism that determines the timing of the deduction.

A note receivable embodies the interest that the lender maintains in the cash they've lent. It's like a title to a property. The note also serves the function of a rental agreement. In an accounting sense, we don't typically create separate asset accounts for rental agreements or titles because assets only show up in the books if there is a dollar figure attached to them. There are plenty of meaningful assets that don't show up in the books, and in this way the note receivable and the cash are two different things even though they don't show up that way in the books.

Chay says his current year deduction is in the nature of Cash…cash he gave a long while ago. But he’s saying he really didn’t give it a long time ago, given that he wants to take a current year Cash deduction for it.

My current year deduction is for cash that I lent a long while ago.

Chay is calling it a “Cash I gave awhile ago, but I Haven’t Given It Yet” Asset.

It's a “Cash I lent awhile ago, but I Haven’t Given It Yet” Asset.

There is no Receivable Asset under Chay’s theory, and hence, there cannot be a loss deduction.

The "receivable asset" is there, and it consists of the cash that's been lent plus the note receivable. There is no problem with a loss deduction for cash.

What Chay’s asset sounds like, under Chay’s theory, is a prepaid expense

A prepaid expense arises when cash is actually paid, not when it's lent. Thus, your theory more closely resembles a prepaid expense than mine.

If the contributed amount was $10k, and Chay’s saying it was all cash, and any deduction flowing from the transaction would be a cash deduction, you cannot parse things apart at any point and say, “This much is deductible Cash and this much is non-deductible Cash.” You can’t do that with cash (unless some benefit was received in return).

You can if you incrementally forgive portions of a loan balance, e.g. Story v. Commissioner (see #48).

Or unless you have some misguided theory that ignores a Receivable as a separate asset, but uses its existence to determine the timing and value of the tax deduction associated with a long-ago cash advance.

My theory actually depends on the note receivable being a separate asset from the cash. Because the note is not the cash, but rather controls the terms of the loan of the cash, it doesn't prevent me from doing as I choose with the cash assuming I do so within the terms of the loan.

jerem200 wrote:Pitch solved it! All hail Pitch!

Indeed. Thanks for your contribution, Pitch.
 

#52
Nilodop  
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Code: Select all
Furthermore, the question here is not whether petitioners intended to collect the debt, but whether they intended to make a gift of the amount advanced when it was advanced, or to create an obligation portions of which could be forgiven from time to time as gifts in the future. We think the latter was the case here.
. (From Story).

In our facts, we are working anote where the intent was to collect.
 

#53
Chay  
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Under your theory, creating an obligation results in a loss of ownership of the cash and the cash can no longer be donated, although the obligation itself can be. If true, it shouldn't matter why the lender created the obligation or what they were planning on doing with it; they lose ownership of the cash all the same. Thus, the Story case conflicts with your theory.

I'd also like to point out that your quote doesn't imply that the petitioners did not intend to collect. It only implies that such question was not relevant to the case.
 

#54
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Pitch solved it! All hail Pitch!


It was solved before it started, quite frankly. Chay is merely presenting an alternative argument as to the “type” of deduction we get – cash vs. non-cash.

Indeed. Thanks for your contribution, Pitch.


LOL. LOL to your theory too.

So, the $10k in cash you “lent” to charity 5-years ago, which is now insolvent, magically becomes cash you gave in the current year by virtue of your current year forgiveness of a worthless Receivable. Seems you have a little valuation problem with your theory, as has been previously stated, given that cash donations are fully allowable. Add the valuation problem to all the other problems of your theory. Here is what the acknowledgement might say:

“Thank you kindly for your current year cash donation of $10k. The fair market value of your cash donation is $10k. Please consult your tax adviser about how much you can deduct. No good or services were received in exchange for the cash you gave to us in the current year many years ago.”

You should definitely claim a $10k deduction on your return, Chay, since that’s what the rules for cash donations provides.
 

#55
Chay  
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Jeff-Ohio wrote:Chay is merely presenting an alternative argument as to the “type” of deduction we get – cash vs. non-cash.

That's not an "alternative" argument, that's the central question of this thread.

So, the $10k in cash you “lent” to charity 5-years ago, which is now insolvent, magically becomes cash you gave in the current year by virtue of your current year forgiveness of a worthless Receivable.

No, it doesn't work if the charity is insolvent. See #43.

Add the valuation problem to all the other problems of your theory.

I believe I addressed the "valuation problem" in #42. I don't think there's anything relevant you or Nilodop have brought that I haven't been able to reasonably incorporate into my theory.

You and Nilodop, on the other hand, have yet to adequately address the issues in #40 and #48.
 

#56
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If true, it shouldn't matter why the lender created the obligation or what they were planning on doing with it; they lose ownership of the cash all the same. Thus, the Story case conflicts with your theory.


It matters if the “obligation” is bona fide or not. That was the seminal question in Story. If bonafide, forgive as time goes by and you get the deduction accordingly. If not bonafide, there was no debt to forgive in the first place. Therefore, the deduction all hits in Year1. That’s the gist of Story. No real mention of the type of the deduction – cash or non-cash. And back then, it might not have mattered. Story has no real relevance to OP’s situation. It doesn’t answer anything. Of course, the Code answers it. And so does the Regulation’s “actually paid” wording. But you apparently don’t like those authorities, nor the Rev Rul, instead opting for the esoteric, magical accounting theories of Post #51.

And here’s a newsflash: When you make a loan, you no longer own the cash. It’s basic. I’m pretty sure that when the charity records the entry to book up the forgiveness, there won’t be any credit to Cash.

Tons of holes in your theory – it applies to this, it doesn’t apply to that, it has to be modified for this, etc., etc., etc. Compare and contrast to a simple theory that passes muster no matter the situation.

In any case, just go tell your clients they don’t need appraisals. Not a big deal…
Last edited by Jeff-Ohio on 11-Oct-2019 7:10am, edited 1 time in total.
 

#57
Chay  
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Jeff-Ohio wrote:It matters if the “obligation” is bona fide or not. That was the seminal question in Story. If bonafide, forgive as time goes by and you get the deduction accordingly. If not bonafide, there was no debt to forgive in the first place. Therefore, the deduction all hits in Year1. That’s the gist of Story.

Correct. An obligation that isn't bona fide is no obligation at all, so it doesn't apply to our facts. The obligation in Story was bona fide, so it does apply to our facts.

No real mention of the type of the deduction – cash or non-cash.

Wrong. The mention is right here:

    And we see no reason why a taxpayer cannot advance money to a charity when it is needed and arrange the transaction in such a manner that he can take full advantage of the charitable deduction provisions of the income tax statutes over a period of years, provided he does not actually part with all dominion and control over the property contributed at the time it is advanced, and truly intends to make a contribution of the property advanced over a period of years rather than all at one time.
The contribution in Story was of "the property advanced". The petitioners did not advance a note receivable. They advanced cash.

But you apparently don’t like those authorities, nor the Rev Rul, instead opting for the esoteric, magical accounting theories of Post #51.

And here’s a newsflash: When you make a loan, you no longer own the cash. It’s basic. I’m pretty sure that when the charity records the entry to book up the forgiveness, there won’t be any credit to Cash.

Tons of holes in your theory – it applies to this, it doesn’t apply to that, it has to be modified for this, etc., etc., etc. Compare and contrast to a simple theory that passes muster no matter the situation.

Your problems with my theory all spring from the fact that you are stuck in an accounting mindset where nothing exists or has relevance unless a dollar figure is attached to it. In such a world, the complexities and nuances of actual property transactions may seem magical.

If you could clear your head of all that and approach things from a practical standpoint, you might find yourself wondering, as I did in #40, what it is exactly that prevents someone from lending money and getting it back later in the same way that any other asset may be lent and retrieved. You might reach the same conclusion I did, which is that the fungibility of cash means there is no problem with such an arrangement.

You, and anyone else who might agree with your accounting-centric theory, should broaden your perspective, read the Story case objectively, and understand that accounting systems don't control real-world transactions but only reflect them to the extent necessary to accomplish a narrow goal.
 

#58
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Wrong. The mention is right here:

You’re reading way too much into this case. The case involved one of these serial forgiveness situations, with some particularly unique facts. We don’t have any of that in the OP. This is presently a “no rule” area for the IRS and has been for a long time. And for good reason.

Your problems with my theory all spring from the fact that you are stuck in an accounting mindset where nothing exists or has relevance unless a dollar figure is attached to it.


I’m really not stuck on a single fact. All I know is that with Cash, basis always equals FMV. Your theory invokes the idea that it doesn’t. Guy lends $10k in cash to charity. He forgives later, when the value of his Receivable is lower than the amount he advanced. If this is really a donation of cash, in the year of forgiveness, there is no way possible for the deduction to be different than the amount advanced. And also note, your theory wouldn’t adequately cover a situaiton when then Receivable was actually worth more than the amount advanced. Seems odd that your theory doesn’t work when value is lower, doesn’t work when the value is higher, but does work when value equals basis. Your theory also falls flat as to the Sec 170 actual payment requirement within the taxable year.

If you could clear your head of all that and approach things from a practical standpoint


My head is pretty clear. Story’s situation was this: He funded construction…hard outlays by the church. Of great importance is that he wanted to control the management and supervision of the project, so he had the charity sign a promissory note. If the charity didn’t do things his way, now he has a backup plan. If the charity did things his way, then here, keep the money I advanced. That was the purpose of the Note and the reason it was bonafide. This is not the situation with a plain old loan, where the evidence of indebtedness exists just so the charity is forced to do things the lender’s/donor’s way. I have no problem with the result and analysis in Story. But it won’t hold up in any factually dissimilar situation, such as the OP’s situation, which involves an ordinary loan from what I can see and no serial forgiveness. And it won’t hold up because it would be inapplicable. Nonetheless, we are all in agreement that when we have bonafide indebtedness – in a serial and non-serial forgiveness situation – we get a deduction upon forgiveness. We’re not debating that point.

There is this passage from Story:

Of course, a gift or contribution to a qualified organization may be made in property and be the basis for a deduction authorized by section 170, and respondent does not argue that if there was a debt from Soldiers Chapel in Nelson's favor, he could not have made gifts or contributions to the organization in 1957 and 1958 by canceling portions of the debt.3

Given that said passage references the old Rev Rul, via Footnote #3, it’s clear that the word “property” is referring to the Note. But I digress, because the whole cash vs. non-cash thing wasn’t really taken up in the case. Like I said, back then, it didn’t matter. Take a look at the 1955 Form 1040. Again, you’re reading a cash vs. non-cash element into the case, and quite frankly, it wasn’t even an issue. In other words, even if the court came right out and said that the contribution was non-cash, in the form of a Note, it wouldn’t have mattered back then. Nowadays, though, it would, given the strict substantiation rules surrounding non-cash donations. With the changed landscape, I can totally see the IRS distinguishing current cases from Story, completely relying on the old Rev Rul, and putting the taxpayer that didn’t get an appraisal in a real bind. And I think the IRS would have a good chance of winning.

In Story, the real focus was on the bonafideness of the debt. Part of that discussion involved some comments about the charity’s financial condition. But that discussion wasn’t surrounding the valuation of the Note. It surrounded the intention of creating bonafide indebtedness and the ability of the charity to repay. But even so, the court was satisfied that the Note could have been paid off. I can totally see the IRS using this idea not just to determine the validity of the Note, but to value it as well. And guess what: The burden of proof is on the taxpayer. If the IRS argues that this is a non-cash contribution, and wins, it makes little difference that the charity could easily pay off the note through non-appraisal evidence.

Further, there is nothing more practical than pointing out that that cash has a basis equal to value. Any theory premised on the fact that I advanced Cash of $10k and my deduction might be something different falls short of being able to classify the donation a cash donation.

Like I said, just tell your clients not to get an appraisal for their ordinary loans to charity…I myself wouldn’t want to chance it. The old Rev Rul is pretty clear when it comes to an ordinary loan.
 

#59
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If this amount of debate is generated from "cash or noncash?", then this is why Congress gets nothing done. ;)
 

#60
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In Story, the real focus was on the bonafideness of the debt.. Which is why I left it out of my posts. It sends some of us offtrack.
 

#61
Chay  
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Jeff-Ohio wrote:You’re reading way too much into this case.

No, the language used was quite clear. The best you can do in response is put up an argument as to why the problematic elements of the case no longer matter in "the changed landscape". Because the goal of a theory is to explain observations in the simplest way possible, your theory is still that much weaker.

All I know is that with Cash, basis always equals FMV. Your theory invokes the idea that it doesn’t.

Really? I wasn't aware of that element of my theory. I thought I was saying the exact opposite in #35 and #42.

And also note, your theory wouldn’t adequately cover a situaiton when then Receivable was actually worth more than the amount advanced.

Sure it would. Forgiving the balance of the receivable results in a cash donation and a deduction equal to the balance forgiven. Donating the receivable itself results in a non-cash donation equal to the value of the receivable.

Your theory also falls flat as to the Sec 170 actual payment requirement within the taxable year.

Only if you misinterpret the requirement to exclude constructive transfers such as forgiving a loan balance or signing over the title to real estate that is currently rented to the charity. Constructive receipt, and constructive payment by corollary, are concepts that stretch to all aspects of the Tax Code. What is your argument as to why they don't stretch to section 170? Why do you think the IRS didn't bother trying to make such an argument in the Story case?

I have no problem with the result and analysis in Story.

Then I assume you have no problem with the concept of retaining "dominion and control" over cash after it's been lent out and claiming a deduction under section 170 for relinquishing that dominion and control.

But it won’t hold up in any factually dissimilar situation, such as the OP’s situation, which involves an ordinary loan from what I can see and no serial forgiveness.

You seem to be saying that in order for Story treatment to apply, the lender must have intended to eventually make gifts from the beginning. But you also agree that the loan in Story was bona fide. The loan in this thread is bona fide. We don't know what the lender was thinking when they initially made the loan, but why should that matter? Does the recognition of COD income depend on the original intention of either the lender or the borrower? Does the ability to make donations depend on why the asset to be donated was originally acquired?

Any theory premised on the fact that I advanced Cash of $10k and my deduction might be something different falls short of being able to classify the donation a cash donation.

Fantastic. My theory doesn't say anything like this, so I'm in the clear.

The old Rev Rul is pretty clear when it comes to an ordinary loan.

Which one, and does it actually say that you can't forgive part of a loan balance for a cash deduction? Does it even address what happens in that situation at all?
 

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No, the language used was quite clear.


The language was all over the place. And that’s because the case had nothing to do with cash vs. non-cash. “Property” was used to describe the Note in that case. It was also used to describe the Cash. And it might be used to describe the construction costs. If you are hanging your hat on that case deciding the cash vs. non-cash issue, it’s a real thin thread, given that the case had nothing to do with the main issue in this thread. There was a reason Nilodop wrote what he wrote in Post #60. It was perfectly expected that this bogus case would be seized on to decide the issue at hand. That case doesn’t decide the issue, it had no reason to decide the issue, and it didn’t decide the issue.

I wasn't aware of that element of my theory.

Sure it would. Forgiving the balance of the receivable results in a cash donation

Only because you want to parse the cash given up into cash given up, plus or minus something that isn’t cash. Makes a lot of sense, when in fact, all that was given was Cash.

Only if you misinterpret the requirement


Don’t think so. You don’t make a actual payment of cash without cash changing hands within the current taxable year. There’s not much to interpret.

Then I assume you have no problem with the concept of retaining "dominion and control" over cash after it's been lent out and claiming a deduction under section 170 for relinquishing that dominion and control.


Yeah, I have a big problem with that, because that’s not the case with a loan. The accounting entries prove it out.

You seem to be saying that in order for Story treatment to apply, the lender must have intended to eventually make gifts from the beginning.


No, I’m not saying that. I’m saying to stop reading so much into Story. It is not on point. The IRS made no argument about valuation in that case. The IRS made no argument about cash vs. non-cash. These days, there are strict substantiation requirements. The IRS will toss out your deduction if those are not met. They could care less if it really was a valid donation.

Fantastic. My theory doesn't say anything like this, so I'm in the clear.


Sure it does. Remember, your theory is practical. It’s simple. Charity ends up with $10k of my cash. My cash charitable deduction might be something different. It’s pretty incredible that you wish to recognize the Receivable, but not as an Asset. You just want to take certain aspects of it to determine the highly relevant cash deduction and then argue that that’s all your doing with it.

Does it even address what happens in that situation at all?


Only if you can put 2 and 2 together, which pretty much every judge can.

Just answer us this, in front of everyone:

Taxpayer lends $1m to a charity. Several years down the road, he forgives all of it. You would advise this taxpayer to not get an appraisal, since those are not needed for cash donations, is that right?
 

#63
Chay  
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Jeff-Ohio wrote:
No, the language used was quite clear.


The language was all over the place. And that’s because the case had nothing to do with cash vs. non-cash. “Property” was used to describe the Note in that case. It was also used to describe the Cash. And it might be used to describe the construction costs.

Seems pretty consistent to me. Anyways, I'm not concerned about what the donation is called or whether or not the court implied that the donation could have been construed as a donation of the note itself. Both cash and a note receivable are property, and both are capable of being donated. What I'm concerned about is the part at the end where the court characterizes an advance of money (i.e. a loan) as a transaction in which the taxpayer has not actually parted with all dominion and control over the money and still may make charitable gifts of that money at a later time. Put all the spin on that you want, you still can't deny it conflicts with your argument and not with mine.

Only because you want to parse the cash given up into cash given up, plus or minus something that isn’t cash. Makes a lot of sense, when in fact, all that was given was Cash.

I have no idea what you're talking about.

You don’t make a actual payment of cash without cash changing hands within the current taxable year.

You do if it's a constructive payment, such as the type made in the Story case. I'm still waiting on that argument as to why the concept doesn't apply to section 170.

Then I assume you have no problem with the concept of retaining "dominion and control" over cash after it's been lent out and claiming a deduction under section 170 for relinquishing that dominion and control.


Yeah, I have a big problem with that, because that’s not the case with a loan. The accounting entries prove it out.

Aha, so you do have a problem with the result and analysis in Story after all. Unfortunately for you, Story is precedent for tax purposes, while accounting entries and your opinions are not.

You seem to be saying that in order for Story treatment to apply, the lender must have intended to eventually make gifts from the beginning.


No, I’m not saying that.

So what are you saying? What would it take for the result and analysis in Story to apply to any other set of facts?

It is not on point. The IRS made no argument about valuation in that case. The IRS made no argument about cash vs. non-cash.

And it wouldn't have mattered if they did. The part that contradicts your theory would still contradict it.

Charity ends up with $10k of my cash. My cash charitable deduction might be something different.

Right, because there are different arrangements in place with regard to each portion of cash. I give up complete dominion and control over one portion but not over another. Constructive payments can be made. Lending really is lending.

It’s pretty incredible that you wish to recognize the Receivable, but not as an Asset. You just want to take certain aspects of it to determine the highly relevant cash deduction and then argue that that’s all your doing with it.

I'm taking all aspects of the arrangement into account. You're the one with the limited view based on accounting concepts and terminology.

Does it even address what happens in that situation at all?


Only if you can put 2 and 2 together

Looks like I must have missed that lesson back in school. I'm stumped. Please teach me how to put 2 and 2 together and determine the outcome of forgiving part of a loan balance based on your old revenue ruling.

You would advise this taxpayer to not get an appraisal, since those are not needed for cash donations, is that right?

No, I would chicken out and tell him he needs an appraisal because it may or may not be a non-cash contribution of a note receivable. Now, how about you answer in front of everyone how that helps to support your argument in any way?
 

#64
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No, I would chicken out and tell him he needs an appraisal because it may or may not be a non-cash contribution of a note receivable.


That’s what I thought.

Put all the spin on that you want, you still can't deny it conflicts with your argument and not with mine.


It doesn’t conflict with anything I said. The judge’s comments were just in response to the IRS’ argument that Story parted with dominion/control in Year1, making the loan not bona fide. That’s all that comment was addressing. The judge could have just as easily said, “While, yes, he did part with dominion and control of the asset. It was no longer under his dominion and no longer under his control. What he didn’t part with was the Note Receivable.” The judge didn’t make that comment because he didn’t need to. He was simply telling the IRS he didn’t buy the idea that the entire donation should have been accounted for in Year1. Again, you are reading way too much into this case. You are seizing on wording and language that is peripheral and tangential to the focal point in the case. You’re using it to resolve an issue that the judge wasn’t trying to resolve. That non-focal point – cash vs. non-cash - wasn’t even an issue. Even if the IRS said, “Your honor, we believe this was a non-cash donation!!!” You know what the judge would have said: “So what. Cash, non-cash it’s all the same in 1955.” If the IRS makes the same argument today, you know what the judge will say, “Okay, tell me more. Because if it is a non-cash donation, the taxpayer needed a qualified appraisal.” Again, the cash/non-cash thing wasn’t an issue in the case. Anything you are trying to read into that case to advance your cash vs. non-cash position is off point.

In any case, if we are to dissect the judge’s words, as if they are relevant to today’s inquiry, it's disturbing that you actually agree with the judge’s comments as applied to an ordinary loan. If I make a routine cash loan to someone, I do not control how those loan proceeds are used. Now, if the proceeds are to be used to buy a specific asset, you might say I am in control of things. But all I’m in control of is the decision as to how the cash will be momentarily used. When the cash is gone, I don’t control it. And when the asset is bought, I don’t control that collateral either. The borrower does. This is why the bank branch manager isn’t lying asleep in your bed right now. I have also parted with the cash. It is no longer in my dominion. If an asset was purchased, that is no longer in my dominion either. The only thing in my control is how I act when the borrower doesn’t make a scheduled payment, pursuant to the four corners of the note. And what is in my dominion and control is the Note Receivable, which is what I got back in the agreed-upon exchange of value. I say all of this with an ordinary loan in mind. In Story’s case, if we must, he forced the charity’s hand by forcing his specs on the charity. Further, he insisted he be the one to supervise and manage the project. A higher degree of control there, hence the judge’s comments being understandable. And again, only in response to the IRS’ argument.
I have no idea what you're talking about.


That’s odd. That charity ended up with $10k in cash. The donor is owed nothing back. But under your theory, the deduction might be higher, lower, or equal to that amount.

You do if it's a constructive payment, such as the type made in the Story case.


Again, more seizing on the irrelevant Story case.

Aha, so you do have a problem with the result and analysis in Story after all.


No, not really. I have no problem with the results in Story. IRS didn’t make a non-cash argument. IRS didn’t make a valuation argument. The reason the IRS didn’t make these arguments is because it didn’t matter. Their argument was that the note wasn’t bona fide. That was the issue. Once that was dispatched with, in the taxpayer’s favor, the taxpayer wins. My issue with the dominion and control argument is explained above. As stated, and first, the D/C argument was directed at the IRS’ argument. And second, as stated, Story involved very unique facts. Applying the judge’s words to an ordinary loan situation falls flat. And third, as stated, even if the judge said, “D/C was lost,” he still would have concluded that the Note had value and that’s what was given. But that wasn’t necessary, since all the judge had to do was to decide if a full gift was made in Year1.

Unfortunately for you, Story is precedent for tax purposes,


It's only precedent for cases involving identical facts, which makes it irrelevant to the OP. And the stuff in the case that was peripheral to the main issue (like if this was a cash or non-cash donation) has zero precedential value, because that case wasn’t deciding any peripheral issue. Yet, you continue to seize on these peripheral comments and use them to resolve an issue that that case was not trying to resolve. Of course, the minute that case was posted, Nilodop knew exactly what you’d do. I did too.

What would it take for the result and analysis in Story to apply to any other set of facts?


I would say you’d need identical facts. That’s why I said this case, with peripheral comments about the issue at hand, is irrelevant. And, mind you, those peripheral comments, when taken together don’t even support your theory. It is a hodgepodge of stuff that is referred to as “the property.”
And it wouldn't have mattered if they did.


With the unique facts as they were, maybe not. And because it was 1955, maybe not. But if we’re talking about an ordinary loan in today’s world, you better watch out if the IRS is hell-bent on calling that a non-cash donation. When you point to your Story case, they will shred it apart is irrelevant, as I have done herein.
Lending really is lending.


Right. Just like endorsing Notes back to the borrower are transfers of assets.

Whey they say, “If you give a Bond you bought back to the entity that issued it, and your deduction is based on the value of the bond so given,” it’s a pretty safe bet a judge would say, “Sure sounds like you gave the bond. It clearly had value, since that’s what the deduction is predicated on. If something has value and goes away, I’d say that specific thing is what was given, thereby causing it to go away.”

Now, with all that said, would I ever use Chay’s argument? Sure would, but only if client didn’t get an appraisal. I’d slap it down as a cash donation. But if we’re in the planning phase, I would undoubtedly advise the client to get an appraisal. If that advice is not given, you run a big, and unnecessary, risk.
 

#65
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Jeff-Ohio wrote:That’s what I thought.

And just like I thought, it's not even relevant to your argument.

The judge’s comments were just in response to the IRS’ argument that Story parted with dominion/control in Year1, making the loan not bona fide. That’s all that comment was addressing.

It doesn't matter what the judge was trying to do or what reasoning he could have employed. The fact is that he employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement. No matter how much you object around the edges, you can't change that fact.

You've also got cause and effect reversed in the IRS' argument. They argued that because the loan wasn't bona fide, there was a loss of dominion and control. And guess what? That implies that a bona fide loan maintains dominion and control.

In any case, if we are to dissect the judge’s words, as if they are relevant to today’s inquiry, it's disturbing that you actually agree with the judge’s comments as applied to an ordinary loan. If I make a routine cash loan to someone, I do not control how those loan proceeds are used. Now, if the proceeds are to be used to buy a specific asset, you might say I am in control of things. But all I’m in control of is the decision as to how the cash will be momentarily used. When the cash is gone, I don’t control it. And when the asset is bought, I don’t control that collateral either. The borrower does. This is why the bank branch manager isn’t lying asleep in your bed right now. I have also parted with the cash. It is no longer in my dominion. If an asset was purchased, that is no longer in my dominion either. The only thing in my control is how I act when the borrower doesn’t make a scheduled payment, pursuant to the four corners of the note. And what is in my dominion and control is the Note Receivable, which is what I got back in the agreed-upon exchange of value. I say all of this with an ordinary loan in mind.

All of this was dealt with way back in #38 and #40.

In Story’s case, if we must, he forced the charity’s hand by forcing his specs on the charity. Further, he insisted he be the one to supervise and manage the project. A higher degree of control there, hence the judge’s comments being understandable.

Yes, a higher degree of control. But we all agree the loan was bona fide, and the judge's reasoning that you keep trying to qualify was presented in a very broad and non-qualified way. And when we look further into that case to find what is really meant by "dominion and control", we find the following:

    Respondent also argues that no true obligation on the part of Soldiers Chapel to repay the amount advanced by Nelson arose in 1955; consequently, Nelson lost all dominion and control over the money advanced in 1955 and gave nothing by canceling portions of the principal of the note at the end of 1955 and in subsequent years. The notes, on their faces, evidenced a binding obligation to pay a sum certain, and there is no evidence upon which to conclude that they were without consideration, invalid, unreal, or otherwise than what they purported to be. So far as we can determine they were valid negotiable instruments, however collectible they might have been.
Whether the petitioners had "dominion and control" over the money was entirely a question of whether or not the obligation was bona fide. It was; hence, no loss of dominion and control. As you've said yourself, the entire case revolved around that particular point. All of the evidence, including the petitioners' desire to influence the charity, went toward proving that the obligation was bona fide, which in turn showed dominion and control. There was no corollary line of reasoning that linked the petitioners' influence over the chapel construction with their ability to control funds that were in the possession of the charitable organization.

That charity ended up with $10k in cash. The donor is owed nothing back. But under your theory, the deduction might be higher, lower, or equal to that amount.

I don't know where you're getting this. If the entire $10k is forgiven, then that's the amount of the deduction.

You do if it's a constructive payment, such as the type made in the Story case.


Again, more seizing on the irrelevant Story case.

And more of your reluctance or inability to state why the concepts of constructive receipt and payment don't apply to section 170.

I have no problem with the results in Story.

Then you admit that it's possible to retain dominion and control over cash after it's been lent out and later claim a deduction under section 170 for relinquishing that dominion and control.

It's only precedent for cases involving identical facts

I'm pretty sure that's not how case law works. I've seen opinions quoting non-central language from other opinions to build support.

What would it take for the result and analysis in Story to apply to any other set of facts?


I would say you’d need identical facts.

Alright. A starting point for consensus. So, the Story situation can be reproduced, and constructive payments are possible. This means you'll be backing off from your strict "actually paid" interpretation of section 170, right?

those peripheral comments, when taken together don’t even support your theory. It is a hodgepodge of stuff that is referred to as “the property.”

"[T]he property contributed", in the relevant context, refers to money. It can be constructively paid because there is dominion and control over it after it is lent so long as the loan is bona fide. This portion of the Story case conflicts with your theory but not with mine.

if we’re talking about an ordinary loan in today’s world, you better watch out if the IRS is hell-bent on calling that a non-cash donation

Point taken. That's a real possibility.

“If you give a Bond you bought back to the entity that issued it, and your deduction is based on the value of the bond so given,” it’s a pretty safe bet a judge would say, “Sure sounds like you gave the bond. It clearly had value, since that’s what the deduction is predicated on. If something has value and goes away, I’d say that specific thing is what was given, thereby causing it to go away.”

Sure. I never disputed that giving a bond as a noncash donation was a possibility.

Now, with all that said, would I ever use Chay’s argument? Sure would, but only if client didn’t get an appraisal. I’d slap it down as a cash donation. But if we’re in the planning phase, I would undoubtedly advise the client to get an appraisal. If that advice is not given, you run a big, and unnecessary, risk.

Depending on the size of the gift, I'd do the same. If the appraisal came back with a lower FMV than the balance remaining, I'd discuss whether or not to take the position that the donation is a cash donation with the client. If they wanted to go cash, I'd sign the return, no problem.

If we're talking about $10,000, I'd call it a cash donation and then call it a day.
 

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And just like I thought, it's not even relevant to your argument.

Rather, it is the crux of my argument. You have your theory – cash donation – no appraisal required. Yet, you’d get an appraisal. Those are only required for non-cash donations.

It doesn't matter what the judge was trying to do.


For good reason, Nilodop stopped talking about this irrelevant case a while ago – you know, the case that included tangential and peripheral comments, and sometimes unintelligible comments, about “the property” – the one where it’s unclear what “property” he’s actually talking about. I will cease discussing that case now as well. You say it stands as precedent to support your deduction. I say it stands for the proposition that if a bona fide loan exists, then 100% of the deduction doesn’t hit in Year1.

I don't know where you're getting this. If the entire $10k is forgiven,


No, Chay. Only a portion was forgiven. End result: We transferred $10k in cash to the charity. Charity got $10k in cash. Yet, our deduction is lower. Of yeah, I forget, you can’t apply your theory when the value of the Note changes.

And more of your reluctance or inability to state why the concepts of constructive receipt and payment don't apply to section 170.


Why in the world would they apply when there’s an actual transfer of a Note? You want constructive to over-ride actual. I don’t think so. Moreover, your constructive transaction simply flows from the real one.

I've seen opinions quoting non-central language from other opinions to build support.


Build support as you may, with those tangential, peripheral, and sometimes hard-to-follow comments…you still won’t have enough support to convince a judge that the cash you actually gave years ago, is constructively given this year and that constructive contribution over-rides the actual contribution of the Note. What you want to do is treat the actual contribution of the Note to create a fiction: Fiction being, charity repaid the loan (to the extent of value) and then I took that cash and made a deductible contribution. That is the fiction, but it’s only constructed out of the reality.

Point taken. That's a real possibility.


A real and scary possibility. One which I would not want to advise improperly on.
 

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Jeff-Ohio wrote:Rather, it is the crux of my argument.

I'm sure you don't really mean this. Your argument doesn't hinge on whatever action I would take in the planning stages of a charitable contribution.

I will cease discussing that case now as well. You say it stands as precedent to support your deduction. I say it stands for the proposition that if a bona fide loan exists, then 100% of the deduction doesn’t hit in Year1.

What I say is that Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement.

Only a portion was forgiven. End result: We transferred $10k in cash to the charity. Charity got $10k in cash. Yet, our deduction is lower.

Right, because there are different arrangements in place with regard to each portion of cash. I give up complete dominion and control over one portion but not over another. Constructive payments can be made. Lending really is lending.

Of yeah, I forget, you can’t apply your theory when the value of the Note changes.

I don't believe this follows from anything I've said, but please tell us why you think this might be the case.

And more of your reluctance or inability to state why the concepts of constructive receipt and payment don't apply to section 170.

Why in the world would they apply when there’s an actual transfer of a Note? You want constructive to over-ride actual. I don’t think so. Moreover, your constructive transaction simply flows from the real one.

You are contradicting yourself with every new post. In #58 and #64, you say you have no problem with the Story decision. The Story decision describes a constructive transfer of "the property advanced", which is the money and not the note. In #62 and now in #66, you say that constructive transfers can't trump actual transfers, implying that the deduction must be for the note and cannot be for the money. So which is it?

Build support as you may, with those tangential, peripheral, and sometimes hard-to-follow comments…you still won’t have enough support to convince a judge that the cash you actually gave years ago, is constructively given this year and that constructive contribution over-rides the actual contribution of the Note.

That is a possibility. But I will at least have enough support to show that under the current body of case law, the act of lending money does not preclude a subsequent contribution of that same money, contrary to what you and Nilodop have said. One source is better than no sources.
 

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Your argument doesn't hinge on whatever action I would take in the planning stages of a charitable contribution.

Your action speaks to your argument. And through your action, you have revealed that you have a low degree of confidence in your argument…by taking steps that are more consistent with my argument. All along, I’ve said it’s non-cash. That would require an appraisal. And here comes Chay wanting to get an appraisal…

What I say is that Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement.


There is no line of reasoning in that case, whatsoever, that said: Here’s why this is a non-cash donation…or here’s why this is a cash donation. And that’s because that issue was irrelevant. Further, I’ve already pointed to the passage that is footnoted with Footnote #3. Read it again. What property is he talking about? Two of the other four times the word “property” is used in that case, it is being used very loosely, simply to distinguish a gift all at once vs. over a period of time. And even there, he speaks of an advance of “money” and then references “property.” What’s the deal? Here’s the deal: It’s is a generic, loose and peripheral statement, with no intent to resolve any issue of cash vs. non-cash. Nilodop saw your improper reading coming.

The Story decision describes a constructive transfer of "the property advanced", which is the money and not the note.

Quit talking about Story – a case involving very unique facts and a control-freak donor because the guy’s son died and he wanted to build a memorial. This case was not in 2019, involving an ordinary loan like in OP’s case, where the IRS could argue: This is a non-cash donation of the Note. As per the RR, the deduction equals the value of the Note. The taxpayer needed an appraisal and he didn’t get one. Therefore, his deduction should be $0.

But I will at least have enough support to show that under the current body of case law,


There is no current “body” of case law that supports your position. There isn’t even a single case.

In any event, you’ve told everyone what we need to know…that my argument is the better one. Why else would Chay get an appraisal?
 

#69
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Jeff-Ohio wrote:Your action speaks to your argument. And through your action, you have revealed that you have a low degree of confidence in your argument…

Suppose you've got a client with a $1M loan to a charity that he wants to donate. The loan was not evidenced with a formal note, but the actions of both the lender and the borrower are sufficient to prove the loan is bona fide. In addition, if you take the position that there is a note that can be donated, the FMV is higher than the balance due on account of the creditworthiness of the charity and a precipitous drop in interest rates.

Your argument all along has been that you can't donate cash you've already lent out. So, you would conclude that a note receivable must exist for tax purposes, resulting in a non-cash donation of appreciated property when the debt is forgiven. But your argument isn't firmly rooted in case law or statute, and you would be foolish to move forward without considering that the IRS could argue that not only is a cash donation of a loan balance possible, it's the only way to characterize your client's transaction because they cannot donate appreciated "property" in the absence of a negotiable instrument that could reasonably be "sold" for a "fair market" value.

Now let's assume for a moment that you do consider that, and you advise your client accordingly. You discuss the risks and decide to take action to bolster your non-cash position in case it's challenged. Would your action "speak to your argument" on this thread? Would your standing against my similarly poorly-evidenced argument suffer at all?

There is no line of reasoning in that case, whatsoever, that said: Here’s why this is a non-cash donation…or here’s why this is a cash donation. And that’s because that issue was irrelevant. Further, I’ve already pointed to the passage that is footnoted with Footnote #3. Read it again. What property is he talking about? Two of the other four times the word “property” is used in that case, it is being used very loosely, simply to distinguish a gift all at once vs. over a period of time. And even there, he speaks of an advance of “money” and then references “property.” What’s the deal? Here’s the deal: It’s is a generic, loose and peripheral statement, with no intent to resolve any issue of cash vs. non-cash. Nilodop saw your improper reading coming.

The one thing you've said about this case that is relevant to my claim about it is "it’s unclear what 'property' he’s actually talking about." But that's not true. He's talking about property that's been "advanced". It is quite clear throughout the relevant paragraph and throughout the entire case that the property advanced is money. The fact that he calls money "property" may be suggestive to you of a non-cash contribution, but it shouldn't be. As you keep insisting, back in 1955 there was little difference between donating money and other property. If anything, the term merely broadens the line of reasoning so that it applies to other forms of property in addition to cash.

As to the rest of everything you've said about the case, none of it matters. Here's what matters:

  1. The IRS argued that the petitioners had lost "all dominion and control over the money advanced in 1955" because the note receivable was not bona fide.
  2. The evidence proved that the note was bona fide, defeating the argument that there was no dominion and control over the money advanced.
  3. Judge Drennen went one step further in the second to last paragraph, stating that he could not think of any reason why a taxpayer cannot "advance money to a charity" and then subsequently claim deductions "provided he does not actually part with all dominion and control over the property contributed at the time it is advanced."
Why does that matter? Because my claim is "Judge Drennen employed a line of reasoning that is inconsistent with your claims about the nature of a lending arrangement". You are seizing on aspects of the Story case that are irrelevant to that claim and railing on about how irrelevant they are to it and to everything else. But no matter how much you do that, it won't disprove my claim.

Quit talking about Story

I might do that if you would stop misrepresenting my claim about the case every time you post to this thread.

There is no current “body” of case law that supports your position.

Right, and I also didn't say there was. What I said was under the current body of case law, the act of lending money does not preclude a subsequent contribution of that same money. In case that's not clear, what I mean is that you won't be able to find anything in U.S. tax case law to support your position that I can't constructively contribute the balance of an outstanding loan to a charity.

In any event, you’ve told everyone what we need to know…that my argument is the better one. Why else would Chay get an appraisal?

I can't believe you're actually brandishing this as evidence that your claims are true. Am I going to have to spell out how fallacious that is?
 

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it's the only way to characterize your client's transaction because they cannot donate appreciated "property" in the absence of a negotiable instrument that could reasonably be "sold" for a "fair market" value.


Brilliant. Now you’ve just told the Factoring Industry that what they are doing cannot be done. And you’ve turned upside down any corporate tax law that says if you distribute a Receivable out of a corporation, to a shareholder, isn’t not a sale…

you won't be able to find anything in U.S. tax case law to support your position that I can't constructively contribute the balance of an outstanding loan to a charity.


What would negate your position is if the contribution of the balance of your Note (an asset, and hence property for federal tax purposes) to a charity is viewed as an actual transfer…which it is. You’ve got it backwards, in arguing that it’s an actual gift of cash, which then triggers the constructive contribution of the Note. And you’ve also got it wrong that there’s an actual gift of cash in the first place, because there isn’t. There was only a loan of cash, as you state. If you’re suggesting that the gift of a promissory note to a charity isn’t an “actual” gift of the Note, and there is no case law supporting that it’s an actual gift of the Note, just let me know and then I’ll go pull some cases.

And don’t forget…I could buy your Note Receivable from you and then donate it to charity. Will your theory still tell me that I get a deduction for the Cash you previously forwarded to the charity? I suppose you’ll tell us that your theory doesn’t apply to third party notes.

Also don’t forget that in Story, the Note was secured by the Land. Under you theory, wouldn’t that indicate that the land really isn’t controlled by the charity, because it was encumbered? Yes, I think so, under your theory. This means that when said encumbrance is lifted, by virtue of the Note going away, the Land now becomes free and clear to the charity. Seems to me, under you theory, that would mean Story made a charitable contribution of the land. Quite an amazing theory you have.

None of that matters. Here's what matters:


Right. Only the words you pick, from an off-point case, matter.

I can't believe you're actually brandishing this as evidence that your claims are true.


I can’t believe that you’d get an appraisal if you know your claims to be true. If you believed your theory, you wouldn’t need an appraisal. I’m not the one being inconsistent.
 

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