The IRS just released “Frequently Asked Questions” regarding its one-time relief for charities that face automatic revocation of tax-exempt status for failure to file Form 990, Form 990-EZ, or Form 990-N. As we discussed in our July 26 post, the IRS is providing limited relief to small charities that failed to file Form 990-EZ or Form 990-N for the past three years. The IRS estimates more than 300,000 charities may lose their tax-exempt status but is giving charities until October 15, 2010 to file the delinquent Form 990-EZ or Form 990-N and maintain tax-exempt status. The IRS released the Frequently Asked Questions, which may be accessed by clicking here, to provide additional information regarding this one time relief.

Charitable organizations receive all types of donations, including cash,  personal property, and even business interests.  Often times, the charity is so excited about a potential gift that no diligence is completed prior to acceptance, and failure to complete diligence on gifts can turn out to be costly.    Take gifts of real property – these are very common and can be financially beneficial to a charity.  However, without completing diligence, the charity may find that it now owns a superfund site.   Another not-so-obvious example is a donation of stock.  Although most donated stock is marketable, certain types of stock, including stock in an S corporation (usually small, family owned corporations), are not.  This post explores the implications of a charity accepting gifts of S corporation stock.  

Subchapter S corporations can only have certain types of shareholders.  Generally, these “permissible shareholders” include individuals (who are not nonresident aliens), estates, certain trusts, and certain exempt organizations.  We will focus on the permissible exempt organization shareholder. (more…)

Many small and medium sized charities are run almost entirely by volunteers and have little or no paid staff. It is not unusual for such charities to inadvertently fail to timely file Form 990 or Form 990-EZ. The IRS imposes a penalty of $20 a day for failure to timely file Form 990 or Form 990-EZ. The IRS will send a penalty letter to late-filing charities imposing the penalty with interest. Where the charity can show reasonable cause, however, we have had success convincing the IRS to abate and refund the late-filing penalty. For example, if the charity has a history of compliance, is run by volunteers (or has little or no paid staff), and puts procedures in place to ensure future compliance, the IRS has been willing to abate and refund the penalty. Although there can be no guaranty, if your charity is faced with a late filing penalty, contact your trusted advisor and inquire whether your charity may be able to demonstrate reasonable cause and seek penalty abatement.

About two years after buying our latest family car, we had the manufacturer repair the video of the car’s DVD player.  (We once drove cross-country without this working and it was a tryyyyyyying experience; I’m not sure how my parents did it.  Of course, lots of things were different back then: not only did we not wear our seatbelts in the van, the seatbelts were stuffed down in the seat so as to not be in our way.  We often travelled with more passengers than there were seatbelts anyway, so perhaps by removing any chance at safety for all of us, my parents were tipping their hat at the principle of fairness.  Or perhaps they knew that until someone put TVs in cars, their only chance for driving sanity lay in us distracting ourselves with games, like Twister and hide-and-go-seek.  After the DVD player’s video was repaired, I couldn’t get the audio to work.  I was a little irritated and asked the manufacturer if they could fix that too; they asked if I had “performed all the trouble-shooting steps contained in the manual.”  I suddenly found myself closer to embarrassment than irritation as I responded, (more…)

Last week, I posted about the income tax deductibility limitations for gifts of cash to a public charity versus a private foundation.  Today:  the same analysis but for long-term, capital assets that have a fair market value at the date of the donation higher than the donor’s cost basis in the property.

In general, the AGI* deductibility limitation for gifts of long-term holdings of appreciated assets made to public charities (or “50% charities”) is reduced to 30% unless the donor elects to step down the deductible contribution base of the long-term capital gain property from fair market value to cost basis. Therefore, in general, gifts of long-term appreciated marketable securities to a public charity can be deducted at their fair market value on the date of the gift, subject to the 30% AGI deduction limitation, and any overage may be carried over for up to five additional tax years, but if the donor elects to limit the deduction to the donor’s basis in the property as opposed to fair market value, the donor may increase the deductibility limitation to 50% of AGI.

If long-term capital-gain property is contributed to a foundation (a “30% charity”), deductions are limited to the property’s cost basis, and not fair market value if it exceeds basis.

An exception to this reduction rule applies to contributions of “qualified appreciated stock”. “Qualified appreciated stock” is defined as any stock of a corporation (1) for which market quotations were readily available on an established securities market as of the date the stock is contributed and (2) that was capital-gain property (i.e., a capital asset, the sale of which on the date of contribution would have resulted in the realization of long-term capital gain). The stock of any corporation is considered to be “qualified appreciated stock” only to the extent that the cumulative amount of such stock contributed by the taxpayer (and certain taxpayer related parties) to all private foundations that are not 50% charities does not exceed 10% of the value of all outstanding stock of the corporation. Shares of open-end mutual fund stock which the mutual fund must redeem at net asset value upon an investor’s demand are “qualified appreciated stock” where the net asset value of the shares is quoted on a daily basis in a newspaper of general circulation throughout the U.S. (more…)

Maybe it’s a little premature, as it’s still summer in most of the country, but as we approach year end, perhaps it’s a good time for a refresher on the charitable donation income tax limitations.  Personally, I’m not at the stage of my wealth lifetime where these issues apply to me.  However, I aspire to have issues like these to worry about someday.  For those of you already there, or for those of you who have clients or donors who are, here is a reminder of the deduction amounts and limitations for gifts of cash to a public charity versus a private foundation.

In general, gifts of cash made to public charities receive the most favored tax treatment. These organizations are generally referred to as “50% charities” because the AGI* percentage limitation for income tax deductions applicable to charitable contributions to these organizations is 50%. These organizations are favored because of their “public” nature. Contributions in excess of the AGI limitation applicable to 50% charities may be carried over for deduction for up to five succeeding tax years. Therefore, gifts of cash to public charities are deductible at full value up to 50% of your AGI, and any overage may be carried over for five additional tax years.

Gifts of cash made to most private foundations receive less favored tax treatment. These organizations can be referred to as “30% charities” because the AGI limitation applicable with respect to charitable contributions to these organizations is the lesser of (i) 30% of the taxpayer’s AGI for the taxable year or (ii) the excess of 50% of the taxpayer’s AGI for the taxable year over the amount of the allowable charitable contributions made to 50% charities. Contributions in excess of the AGI limitation applicable to 30% charities may be carried over for deduction to the five succeeding tax years. Therefore, gifts of cash to a Foundation are deductible at full value up to 30% of your AGI, and any overage may be carried over for up to five additional tax years.

Next week:  donations of appreciated assets. (more…)

I’ve noticed a trend in our estate planning practice — an increasing interest in establishing private non-operating foundations. This is interesting given the advantage that donor-advised funds provide over foundations, most notably the reduced administrative burdens on a family who opt for donor-advised funds over foundations. There are also extremely well run donor-advised funds to pick from, funds with great track records and high customer satisfaction ratings. So what is the reasoning? I think it stems from a desire of a parent to teach philanthropy to their children, grandchildren, and possibly great-grandchildren. Family members are typically on the board of directors of the foundation so they are forced to come together and make decisions about how grants are made. The hope is having family members convening in one place and spending time discussing charitable gifts will provide a springboard for other charitable giving. Even though the foundation document typically provides family members with fairly easily methods of terminating the foundation, at least a vehicle is in place for family philanthropy that can last generations.