Tax Insights

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Charitable contribution through loan forgiveness

charitable contribution, charitable contributions, tax, IRS, loan forgivenessSome years ago, we were involved in an IRS examination where the deductibility of a charitable contribution was brought in to question. This contribution was not your standard charitable donation. In this case, the contribution resulted from a taxpayer forgiving a loan to a charitable organization. This threw the IRS agent for a loop. He informed us that he consulted with his manager and they indicated that the deduction should be disallowed. Since the amount in dispute was six figures, it was time to educate the IRS.

Here are some details in the case:

  • The taxpayer had a timely signed and dated acknowledgement from the charitable organization for all contributions made during the year under examination, including the amount of the loan forgiveness.
  • The taxpayer had a properly executed note with the charitable organization and at the time the note was executed, it was not the taxpayer’s intent to forgive the loan.
  • Since the loan was secured with the charitable organization’s real property, the taxpayer had properly recorded the note and related security.
  • In the year that the note was forgiven, the taxpayer executed a Deed of Trust and Full Reconveyance to the charitable organization.

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To convince the IRS that the loan forgiveness was valid, we provided the agent with two Tax Court decisions, a listing of twelve additional decisions and a Revenue Ruling that validated loan forgiveness as a charitable contribution.

In conclusion, even if you have the proper documentation and related support, you may have to educate the taxing authorities to secure a deduction.