New Tax Court Decision in Mattacchione: Intuitive But Unsettling
By: Adam Aptowitzer
In the still smoldering wreckage of the charitable donation tax shelters a new case has surfaced, which holds that the receipt itself could vitiate the entire gift. Those familiar with these strategies understand that the only reason most people participate in such plans is the seductive siren call of an overvalued tax receipt which more than offsets the cost of involvement in the first place. Nevertheless, the idea that the receipt – because of the process involved in issuing it – can be a benefit to the donor thus voiding the entire transaction may be intuitive but is a dangerous concept that deserves further examination.
The taxpayers in the Mattacchione case were planners of a charitable donation scheme but the case centers on their role as participants in a semi-individualized version of the tax shelter they later peddled to others. The case was complex for a case of its ilk but fundamentally it is the same as all buy low donate high structures. The only significant difference is that the ostensible amounts donated were in the millions of dollars.
As regards the issue of the receipt as a benefit Justice Miller himself noted the law in that area was unsettled :
Notwithstanding the recent decision of the Federal Court of Appeal in Castro v R. in which the court commented in obiter on the issue of donative intent, the law remains somewhat unsettled as to whether or not a charitable donation tax receipt can constitute a benefit for the purposes of vitiating a gift.
Generally, a receipt is evidence that a transaction took place and not a benefit of the transaction. However, The Federal Court of Appeal in Berg held that taken with other factors an inflated tax receipt could be a benefit of a transaction. In other words, but for other benefits the receipt is not by itself a benefit. Indeed Justice Miller himself quoted from the Castro case that:
47. The Judge was correct to find that Berg did not resolve the question before her, as the Court did not rule that the inflated tax receipt by itself constituted a benefit. …
[Emphasis in the original].
Indeed in other cases (also cited by Justice Miller) the Courts found that there were other factors which, when taken with the receipt, were a benefit which vitiated the gift such as ‘pretence documents’ and kickbacks. But in Mattacchione Justice Miller found that:
As with so many concepts in law – it depends on the circumstances. And the circumstances here, I suggest, are the nature of the deal generally, the timing of the acquisition and donation and the legitimacy of the appraisal.
To come full circle then, is the tax receipt, inflated 50 fold from Roberto’s cost, a benefit vitiating Roberto’s gift to the charity? It is, only because it does not stand alone but is part of a coincidental transaction that included the provision of a questionable appraisal in circumstances demanding greater scrutiny. I am satisfied there was no intention on Roberto’s part to impoverish himself in any way by transferring these medical supplies to the charity. He was in the business of profiting from buy low – donate high programs and this particular transaction was more in keeping with that profit motive than a charitable donation motive. I conclude he had no donative intent.
Respectfully, Justice Miller’s reasoning here is circular. The Federal Court of Appeal required something besides an overinflated receipt. The appraisal effectively is the overinflated amount. It defies logic to say the appraisal is the ‘something else’ the Court required. The acquisition, donation and appraisal are not factors separate and apart from the receipt. They are integral parts of issuing the receipt. But for their existence there would be no need for a receipt. Indeed the receipt is evidence that they occurred. One would think they are the reason the Court in Berg said that something other than a receipt is needed to show a benefit. Clearly, an overvalued appraisal would result in a benefit to the donor but the remedy for that situation is to lower the valuation to an appropriate value because such a valuation cannot indicate that the entire gift resulted in a benefit to the donor.
This is the logic that underpins most of the settlements in the donation tax shelter cases. The CRA allows that the price paid for the items donated is their fair market value and allows the receipt at that amount. Clearly, if the donor is out of pocket they were impoverished!
Of course there is intuitive reasoning in Justice Miller’s decision. We all understand that the vast majority of participation in tax shelter donation programs was to receive the tax receipt. But for an overvalued tax receipt there was no real reason to engage in the transaction, and so Justice Miller’s reasoning makes experiential sense. However, it opens the door to the Court to look at the circumstances of each transaction to determine whether the receipt was a reason for giving. In our experience, while most donations may not be tax motivated, the large ones are at least tax conscious, and indeed there are an increasing number of incentives within the Income Tax Act designed to increase the tax motivation for giving. Justice Miller’s decision should raise some concern amongst donors and their advisors as to what circumstances a Court may consider vitiating a gift because the donor received a favourable receipt. We know of several practical situations where the receipt was a serious consideration for making the gift and are concerned that in those circumstances a judge would find that this consideration is part of the other factors.
Our concern in this regard is complicated by the degree to which the Courts seem to have imbibed the donative intent test. It is entirely too easy to fail that test if a donor has engineered a situation to have a favourable receipt. We would have hoped Justice Miller would have shied away from this dangerous territory. As it stands, donors and their advisors will now have to be far more cautious in the planning of donations and consider documenting the reasons for which a donor is engaging in a gift transaction.