Summary:
A recent arms-length sale of donated property is more important than appraisal of asset you donate for determining charitable contribution tax deduction.

William Thornton wanted to donate a cemetery to nearby University of Nevada-Reno, which cost him $28,702 and deduct $503,500. But he didn't have a ghost of a chance.

In 1930 the founder's heirs abandoned Hillside Cemetery, founded in 1875 and the oldest cemetery in Reno. It deteriorated from dumped garbage and wrecked cars and vandalism. Many wooden grave markers and headstones had been stolen. Other headstones were defaced or toppled. Weeds and brush became a fire and health hazard and a city eyesore.

Thornton saw an opportunity. For half interest in the property, Thornton, an attorney, agreed to help two heirs of the cemetery founder get clear title. He also agreed to try to solve legal problems preventing the property from being used as apartments, fraternity houses or dormitories.

He got clear title for the heirs, but getting the property marketable proved deadly. Nevada law said the bodies would have to be dug up and reburied in a cemetery outside Reno.

After failing to get the state to change the law, Thornton saw a tax opportunity. He gave the heirs $15,000 for their half interest and donated the property to the university.

The university considered converting it to housing for married students, but because of cost and potential ill-will from moving the bodies, it abandoned the plan.

Undeterred by the university's change of plans, Thornton claimed a charitable deduction of over half a million dollars. His appraiser had valued the property at $454,206, assuming clearing up the legal hurdles of moving the bodies and gaining authority to convert the site for multiple unit housing.

The Internal Revenue Service refused the deduction. In the Tax Court evidence indicated the major cost would be moving bodies. To disinter 1,434 graves and consolidate them in a small section of the cemetery would, at minimum, cost $150 per grave--or $215,000. This assumes they could rebury military style: place bodies in common graves in stacks up to seven deep.

Considering the indefinite costs and the political problems, the court said the land's potential for multiple unit housing is too speculative to be considered. The court allowed a deduction of $28,702. It had added the $15,000 paid the heirs to $13,702, Thornton's expenses to acquire the property.

Comment. Thornton's case shows that an important factor in valuing donated property is a recent arms-length sale plus costs. This was relevant because no facts changed after the sale that would affect value.

More at Charitable Contributions.

THE MORAL: Inflating charitable deductions can be a grave mistake.