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October 22, 2007

IRS Cracks Down on Charities Involved in Questionable Real-Estate Deals

The Internal Revenue Service is trying to crack down on a possible scam involving real estate and charities.

The tax agency has started contacting charities it believes have taken part in so-called successor member interest real-estate transactions — transactions that it believes could be an abuse of the federal tax code.

The tax agency has sent letters to nonprofit groups it believes have taken part in the transactions.

Those organizations will be required to fill out a questionnaire about the transactions and could face penalties if they fail to properly answer the IRS’s questions.

The transactions are potentially abusive because they allow donors to improperly claim substantial tax deductions on ownership of a property.

In such cases, a donor buys either direct or indirect interest in a property. To avoid claiming capital gains— or to inflate the value of a loss — the donor transfers his or her interest in that property to a charity and takes a charitable-contribution deduction on his or income taxes that is significantly greater than the amount the donor paid to acquire the interest.

The IRS is concerned about the transactions because there is often a large discrepancy between the amount the donor paid for the interest in the property and the amount claimed by the donor as a charitable contribution.

— Peter Panepento

Monday October 22, 2007 | Permalink

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