SEPT. 25, 2000

Tax Tid-Bits
Contract Constitutes Completed Gift

The Tax Court has held that a contract to sell property to a church for less than full consideration constitutes a completed gift to the church, and the taxpayers are therefore entitled to a charitable deduction regardless of certain rights the taxpayers retained until completion of the transaction.

Mr. and Mrs. Musgrave signed a contract to sell property worth $450,000 to a church for $152,000. The contract dictated that while the couple would retain legal title to the property, the church would have the right to enter and enjoy the property. The church would insure improvements on the property, maintain improvements, pay all property taxes, and make monthly payments to the couple of $1,400. The title to the property would pass to the church once it had paid the full purchase price.

The couple claimed a charitable deduction for 1994 and carried over part of the deduction to their 1995 return. The IRS, however, denied the deduction, stating that the gift was incomplete. The couple challenged the IRS, and the Tax Court held in favor of the couple.

The Court examined the substance of the transaction and concluded that the rights the church received under the contract were essentially the same as it would have received had it been given legal title to the property and then granted a mortgage back.