Most tax attorneys perk up when they hear the term “side agreement.” Oftentimes, the side agreement is simply a method to hide a part of a transaction from the IRS, that if known to the IRS would likely have adverse tax consequences.
In a recent Tax Court case, a taxpayer donated a historic façade easement, and sought a charitable contribution deduction for it. As part of the gift, the taxpayer received a “side letter” that the easement would be removed if the taxpayer did not receive a charitable contribution deduction.
The IRS sought to disallow the deduction because the side agreement made the gifts conditional – that is, made it subject to a subsequent event. The Court agreed and the charitable deduction was denied.
One interesting question from the case is whether the taxpayer would have received the deduction if there had been no side agreement.
An even more interesting question is whether the taxpayer will be able to terminate the easement since the charitable deduction was denied. This is interesting because the taxpayer claimed in the Tax Court proceeding that the side letter was unenforceable under New York law because the conditions weren’t included in the recorded deed and under the doctrine of merger. Will that admission make it harder, or impossible, for the taxpayer to cancel the easement? Or will the taxpayer forego the cancelation of the easement out of the goodness of his heart? Or will the taxpayer be stuck both with the easement and no charitable contribution deduction?
Graev, 140 TC No. 17 (2013)Follow @RubinOnTax Tweet