At the request of Congress, the Department of Treasury recently issued a report on donor advised funds. Among other things, Congress had asked the Department of Treasury whether donations to a donor advised fund should be tax-deductible, whether such donations should be treated as donations to a public charity, and whether donor-advised funds should have a minimum distribution requirement. The Department of Treasury answered “yes” to the first two questions and “no” to the third, maintaining the status quo.

The full report can be read here: http://www.treasury.gov/resource-center/tax-policy/documents/supporting-organizations-and-donor-advised-funds-12-5-11.pdf.

Under the so-called “check the box regulations” a single member limited liability company (“SMLLC”) is disregarded for federal income tax purposes unless it elects to be taxed as a corporation.  Therefore, where a Section 501(c)(3) organization establishes a SMLLC that does not seek Section 501(c)(3) status or otherwise elect to be taxed as a corporation, the SMLLC is treated as a division of the 501(c)(3) organization for federal income tax purposes.   Strangely, the IRS has declined to rule whether a donation to a SMLLC qualifies as a deductible charitable contribution made to or for the use of a Section 501(c)(3) organization for purposes of Section 170.  The New York State Bar Association recently sent a report to the Treasury and the IRS in support of the position that contributions to such SMLLCs should be eligible for the charitable deduction.   I also believe that this is the appropriate treatment for federal income tax purposes and hope the IRS will be prompted to issue formal guidance soon and finally put this important issue to rest.

The IRS recently issued an Audit Technique Guide to provide guidance to IRS agents for the examination of charitable contributions of conservation easements.  The Guide incliudes a discussion of the general requirements for charitable contributions and additional requirements for contributions of conservation easements.  The Guide provides a good overview for advisors and donors exploring a possible contribution of a conversation easement.

In Home Alone 2, the villains from the first movie have inexplicably broken out of jail and end up in New York. Daniel Stern’s character, Marv, wraps his glove in tape, dips it in a holiday donation receptacle manned by a Santa Claus, and pulls it out covered with coins. 

Harry: That’s very smart, Marv. You bust outta jail to rob 14 cents from a Santa Claus?

Marv: Every little bit helps. Besides, now we’ve got our new nicknames: We’re the Sticky Bandits!

At this point in the movie, only the most prescient (more…)

When a taxpayer makes a charitable donation, he or she must maintain adequate records.  Without such records, the taxpayer is not entitled to a charitable deduction under Section 170 of the Internal Revenue Code.  This situation occurred in Joyce A. Linzy v. Commissioner because the taxpayer, who ironically owned and operated an income tax return preparation business, was unable to provide proper records.

The taxpayer made charitable contributions to Church 1 and Church 2 in 2007.  The contributions to Church 1 totaled $7,500 and were acknowledged by both a letter dated January 1, 2010 and copies of checks, all for amounts greater than $250.  The contributions to Church 2 were evidenced by a tithing statement dated January 1, 2010 which acknowledged that the taxpayer donated a total of $2,255 and included several copies of checks, some of which were for amounts less than $250.

For cash donations less than $250, a canceled check, a receipt or other reliable evidence is considered an adequate record.  To be reliable, the other evidence must show the name of the donee, the date of the contribution and the amount of the contribution.  However, for contributions of cash of $250 or more, the donor must obtain a contemporaneous written acknowledgement of the donation from the donee.   This acknowledgement must, at a minimum, contain a description of the contribution, a statement about whether any goods or services were provided in consideration and a good faith estimate of the value of any such goods or services.  Critical for the taxpayer in the above case, the acknowledgement must be obtained on or before the earlier of: (1) the date on which taxpayer files a return for the taxable year in which the contribution was made; or (2) the due date for filing such return. 

Thus, unfortunately for the taxpayer, the contributions made to Church 1 were not deductible because the letter did not state whether goods or services were received as consideration and it was not received by the proper date. As for the contributions to Church 2, the tithing statement is sufficient evidence for those donations under $250 but does not work for those over $250 because it was also received two years after the appropriate date.

In a recent decision, the Tax Court granted the IRS’s motion for partial summary judgement on the basis that the taxpayer’s appraisal for a non-cash charitable contribution did not satisfy the “qualified appraisal” rules.  Friedberg v. Comm., TC Memo 2011-238 (Oct 3, 2011).  Section 170(f)(11)(C) of the Code denies a charitable deduction for non-cash contributions in excess of $5,000 unless the taxpayer-donor obtains a qualified appraisal of the property and attaches to its return for the tax year of the contribution the information about the property and the appraisal as the IRS requires.   Unfortunately, denial of a charitable deduction for a contribution of valuable property to a charity for failure to satisfy the qualified appraisal and other IRS donation substantiation rules is a common occurrence. 

There are numerous cases and rulings denying the charitable deduction for failure to precisely comply with the IRS substantiation rules, including the qualified appraisal rules.   These cases may seem unfair to individual taxpayers, who are often not represented by a tax professional.  However, these rules were adopted to protect against over-inflated deductions and other abuses.  Therefore, it is critical to carefully follow these rules.

There are consequences to improperly representing that a donation is deductible. Generally, Section 6113 requires non-501(c)(3)s that are seeking donations to conspicuously disclose “that contributions or gifts to such organization are not deductible as charitable contributions for Federal income tax purposes.’” A $1,000 fine is imposed up to $10,000 for the year for failure to include such language. For intentional failure, the daily fine is the greater of $1,000 or 50 percent of the aggregate cost of the offending solicitations–with no maximum for the year. To be clear, this is not advice for pending 501(c)(3)s–that’s another blog topic–but for others. For example, if my (c)(7) social club asked for donations for my kids’ psychological rehabilitation, (more…)

In general, a donor-advised fund exists when the following three criteria exist:

1. the fund is owned and controlled by a public charity;
2. the fund is separately identified by reference to contributions of a donor or donors
3. a donor has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts from the fund

A key to the third point is that the public charity will consider the advice of the donor, but the public charity itself controls all distributions. (more…)

There are numerous programs available in various states where state tax credits are used as an incentive to encourage taxpayers to contribute money or property to a governmental or charitable entity.  For example, under one program, a taxpayer contributes $100 to a charity and is entitled to a state income tax credit of $50.    One issue that is often raised is whether the taxpayer is also entitled to a federal and state charitable income tax deduction.  In IRS Chief Counsel Advice 201105010, it was noted that the tax benefit of a charitable deduction is not regarded as a return benefit that negates a charitable deduction.  The IRS concluded that state tax credits should be treated the same.  Therefore, the taxpayer is entitled to a charitable deduction in the amount of the contribution, and is not reduced by the amount of the state tax credit.  This is helpful guidance.

The IRA Charitable Rollover was reinstated through 2011 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Contributions for the 2010 tax year can be made retroactively through January 2011.