Court trims claimed $132M charitable deduction
Barney v. Commissioner. T.C., No. 5310-22.
Tax Court treated the 2012 transfer of Mr. Barney’s S corporation college group to a §501(c)(3) nonprofit as a bargain sale.
The court allowed a charitable deduction, but it sharply reduced the claimed values and left the final tax and penalty amounts for Rule 155 computations.
Holding
The court found the transferred S corporations had a collective fair market value of $300 million at closing. The court also found the promissory notes received had a fair market value of $267 million.
The difference supported bargain sale treatment and a deductible charitable component under §170, but not at the amounts Mr. Barney reported.
Why It Matters
Large noncash gifts tied to closely held businesses live or die on credible valuation. Optimistic management projections can sink the number.
Seller-financed notes get valued at fair market value for §1001 amount realized, not face amount, when the facts support a discount.
The court can allow the deduction while still rejecting the taxpayer’s appraisal conclusions as inflated.
Penalty exposure under §6662 turns on the final underpayment after computations, not the headline adjustment.
Timeline
2009: Mr. Barney explored selling the college business. Market conditions derailed the sale.
December 31, 2012: Five S corporations operating for-profit colleges merged into CEHE, a §501(c)(3) nonprofit. Three entities transferred for notes. Two were donated.
2013: S corporations filed 2012 Forms 1120S. Mr. Barney filed the 2012 Form 1040. He claimed $180.9 million of charitable contributions flowing through, limited to a $132.4 million deduction for 2012.
2014–2016: IRS examined the 2012 returns and proposed adjustments.
December 20, 2021: IRS issued a notice of deficiency. IRS disallowed the entire $132.4 million charitable deduction and asserted a §6662(h) 40% penalty.
December 30, 2025: Tax Court issued T.C. Memo. 2025-133. Rule 155 computations to follow.
Key Facts
Mr. Barney owned five S corporations that operated postsecondary schools across several states. He held them through a revocable trust that was treated as a disregarded entity for federal tax purposes. He wanted to retire and convert the schools to a nonprofit operation.
He worked with the Center for Excellence in Higher Education (CEHE), an Indiana nonprofit recognized under §501(c)(3). CEHE did not operate schools before the deal.
Closing structure in 2012:
Three S corporations transferred to CEHE for two secured promissory notes totaling $431 million face value.
Two S corporations transferred to CEHE as donations.
The notes required mandatory quarterly prepayments based on a formula tied to revenue or excess cash flow.
CEHE’s ability to participate in Title IV student aid programs mattered because the business depended heavily on Title IV funds.
In 2015, after the Department of Education required a much larger letter of credit than anticipated, CEHE and Mr. Barney restructured the debt. One note was canceled, and the other was reduced to a much smaller principal balance. Mr. Barney tried to use that later restructuring to change the 2012 reporting retroactively.
Statutory or Regulatory Framework
§170 allows a charitable contribution deduction for gifts to qualified charities, including part-sale, part-gift transactions. A bargain sale produces two components: taxable gain on the sale portion and a deduction for the excess of fair market value over consideration received.
§1001 requires gain to be computed using the amount realized. Amount realized includes the fair market value of property received, including promissory notes.
§170(f)(11) imposes heightened substantiation for large noncash contributions, including a qualified appraisal requirement for contributions over $500,000.
§6662 accuracy-related penalties can apply for valuation misstatements, negligence, or substantial understatements. §6662(h) increases the rate for gross valuation misstatements.
Arguments
Taxpayer argued:
The transaction included deductible noncash charitable contributions, including the donated S corporations, and a bargain sale component for the other entities.
The latter note reduction qualified as a purchase price adjustment that should reduce the 2012 gain.
Alternatively, the purchase notes should be treated as contingent debt instruments under Treasury regulations, supporting a lower 2012 amount realized.
The charitable deduction met §170 substantiation rules.
Government argued:
No deductible gift occurred because Mr. Barney did not relinquish dominion and control. He remained CEHE’s sole member and retained significant veto rights as a creditor.
The appraisal was not qualified because it did not address key deal terms and restrictions.
The consideration equaled the value transferred, so no charitable component existed.
The purchase notes should be taken at face value, and the 2015 restructuring could not retroactively change 2012 reporting.
§6662 penalties applied for valuation misstatement and or negligence.
Court’s Reasoning
The court treated the 2012 transfers as a single integrated transaction for bargain sale analysis.
The court rejected the taxpayer’s reported business values as excessive and driven by overly optimistic management projections. The court found that a real third-party buyer would not price the deal off internal projections, given the regulatory and market headwinds in the for-profit college industry and the heavy reliance on Title IV funding.
The court adopted a $300 million collective fair market value for the S corporations, relying primarily on the government’s expert valuation range and selecting the top end as its adopted value.
The court refused to apply the 2015 debt restructuring as a 2012 purchase price reduction. It treated the latter forgiveness as voluntary and driven by the need to protect Title IV participation. It applied annual accounting principles and the claim-of-right doctrine to reject the retroactive adjustment.
The court valued the promissory notes under §1001(b) as property received. It adopted the government rebuttal expert’s conclusion that the notes had a fair market value of $267 million at closing.
With value transferred at $300 million and consideration at $267 million, the court held the transaction produced a bargain sale and supported a charitable deduction equal to the excess.
Result
The court sustained the IRS disallowance in part and overruled it in part. It recognized bargain-sale treatment based on a $300 million value transferred and $267 million consideration. Rule 155 computations will determine the final deficiency or overpayment and whether any §6662 penalty applies.
The Takeaway
This opinion lets the structure work, but punishes sloppy optimism. You can win a bargain-sale treatment and still lose most of your numbers if the valuation rests on rosy projections rather than market reality and a credible note valuation under §1001.