Mar
29
2017

Charitable Income Tax Deductions: The Rockefeller Edition

Billionaire David Rockefeller passed away this week at the age of 101.  According to Forbes magazine, during his lifetime, the well-known philanthropist gave away nearly $2 billion.

In light of this newsworthy charitable donation, we thought now would be a good time to remind everyone of some of the basic income tax deductions available for gifts to charities.

Section 170 of the Internal Revenue Code (the “Code”) governs income tax deductions for charitable contributions. In the case of an individual making a cash gift to a Section 501(c)(3) organization classified as a “public charity” (such as churches, schools, hospitals, and governmental units), the gift is deductible for federal income tax purposes so long as the aggregate gifts do not exceed fifty percent (50%) of the taxpayer’s adjusted gross income (“AGI”) for the taxable year.

In the case of a contribution of capital gain property to a public charity, a taxpayer can only deduct such contributions up to thirty percent (30%) of the taxpayer’s AGI for the taxable year. The amount of capital gain property contributed is taken into account after all other charitable contributions to public charities. Therefore, if the taxpayer contributes 30% of his or her AGI in non-capital gain assets and 30% of his or her AGI in capital gain assets, the non-capital gain assets will be applied first, then 20% of the capital gain property will be allowed, with the remaining 10% exceeding the taxpayer’s total 50% limit. Any excess contributions will be treated as a contribution in each of the five succeeding taxable years.

If a taxpayer contributes cash to a Section 501(c)(3) organization that is not classified as a public charity, such as to a private non-operating foundation, then the deductions for such contributions may not exceed the lesser of thirty percent (30%) of the taxpayer’s AGI or the excess of fifty percent (50%) of the taxpayer’s AGI for the taxable year over the amount of contributions of cash made to public charities.

If a taxpayer contributes capital gain property to a Section 501(c)(3) organization that is not classified as a public charity, then the amount of the contributions allowable for deduction purposes shall not exceed the lesser of twenty percent (20%) of the taxpayer’s AGI for the taxable year, or “the excess of thirty percent (30%) of the taxpayer’s AGI for the taxable year over the amount of the contributions of capital gain property” to public charities. Contributions of capital gain property to which this twenty percent (20%) limitation apply shall be taken into account after all other charitable contributions. Any excess contributions will be treated as a charitable contribution of capital gain property in each of the five succeeding taxable years.

Sep
28
2016

Recent SEC Settlement Demonstrates FCPA Risks from Charitable Contributions

For just the second time in the Foreign Corrupt Practices Act’s (FCPA) history, a company was charged with FCPA offenses based solely on a charitable contribution that was intended to buy the influence of a foreign official.

On September 20, 2016, Utah-based Nu Skin Enterprises, Inc. paid almost $766,000 to settle SEC charges that it violated the internal controls and books-and-records provisions of the FCPA when Nu Skin’s China subsidiary (the “Subsidiary”) made a $154,000 payment to a charity. The SEC alleged that the charitable donation was to improperly influence a high-ranking Chinese Communist party official to prevent a provincial agency investigation of the Subsidiary.

Click here to read the Alert in full.

Aug
22
2016

Review of Income Tax Deduction Rules for Charitable Gifts

People.com is reporting that Amber Heard, who received a $7 million settlement in her divorce from Johnny Depp this week, is donating the entire $7 million settlement to charities with “a particular focus to stop violence against women” as well as the Children’s Hospital of Los Angeles.

In light of this newsworthy charitable donation, we thought now would be a good time to remind everyone of some of the basic income tax deductions available for gifts to charities.

Section 170 of the Internal Revenue Code (the “Code”) governs income tax deductions for charitable contributions. In the case of an individual making a cash gift to a Section 501(c)(3) organization classified as a “public charity” (such as churches, schools, hospitals, and governmental units), the gift is deductible for federal income tax purposes so long as the aggregate gifts do not exceed fifty percent (50%) of the taxpayer’s adjusted gross income (“AGI”) for the taxable year.

In the case of a contribution of capital gain property to a public charity, a taxpayer can only deduct such contributions up to thirty percent (30%) of the taxpayer’s AGI for the taxable year. The amount of capital gain property contributed is taken into account after all other charitable contributions to public charities. Therefore, if the taxpayer contributes 30% of his or her AGI in non-capital gain assets and 30% of his or her AGI in capital gain assets, the non-capital gain assets will be applied first, then 20% of the capital gain property will be allowed, with the remaining 10% exceeding the taxpayer’s total 50% limit. Any excess contributions will be treated as a contribution in each of the five succeeding taxable years.

If a taxpayer contributes cash to a Section 501(c)(3) organization that is not classified as a public charity, such as to a private non-operating foundation, then the deductions for such contributions may not exceed the lesser of thirty percent (30%) of the taxpayer’s AGI or the excess of fifty percent (50%) of the taxpayer’s AGI for the taxable year over the amount of contributions of cash made to public charities.

If a taxpayer contributes capital gain property to a Section 501(c)(3) organization that is not classified as a public charity, then the amount of the contributions allowable for deduction purposes shall not exceed the lesser of twenty percent (20%) of the taxpayer’s AGI for the taxable year, or “the excess of thirty percent (30%) of the taxpayer’s AGI for the taxable year over the amount of the contributions of capital gain property” to public charities. Contributions of capital gain property to which this twenty percent (20%) limitation apply shall be taken into account after all other charitable contributions. Any excess contributions will be treated as a charitable contribution of capital gain property in each of the five succeeding taxable years.

Jun
10
2015

Review of Income Tax Deduction Rules for Charitable Gifts

According to area newspaper the St. Louis Post Dispatch, one of St. Louis’ wealthiest families, that of Enterprise Holdings founder Jack Taylor, is making some very large charitable donations this week–a total of $92.5 million to 13 cultural institutions and charities, most local to St. Louis.

In light of this, we thought now would be a good time to remind everyone of some of the basic income tax deductions available for gifts to charities.

Section 170 of the Internal Revenue Code (the “Code”) governs income tax deductions for charitable contributions. In the case of an individual making a cash gift to a Section 501(c)(3) organization classified as a “public charity” (such as churches, schools, hospitals, and governmental units), the gift is deductible for federal income tax purposes so long as the aggregate gifts do not exceed fifty percent (50%) of the taxpayer’s adjusted gross income (“AGI”) for the taxable year.

In the case of a contribution of capital gain property to a public charity, a taxpayer can only deduct such contributions up to thirty percent (30%) of the taxpayer’s AGI for the taxable year. The amount of capital gain property contributed is taken into account after all other charitable contributions to public charities. Therefore, if the taxpayer contributes 30% of his or her AGI in non-capital gain assets and 30% of his or her AGI in capital gain assets, the non-capital gain assets will be applied first, then 20% of the capital gain property will be allowed, with the remaining 10% exceeding the taxpayer’s total 50% limit. Any excess contributions will be treated as a contribution in each of the five succeeding taxable years.

If a taxpayer contributes cash to a Section 501(c)(3) organization that is not classified as a public charity, such as to a private non-operating foundation, then the deductions for such contributions may not exceed the lesser of thirty percent (30%) of the taxpayer’s AGI or the excess of fifty percent (50%) of the taxpayer’s AGI for the taxable year over the amount of contributions of cash made to public charities.

If a taxpayer contributes capital gain property to a Section 501(c)(3) organization that is not classified as a public charity, then the amount of the contributions allowable for deduction purposes shall not exceed the lesser of twenty percent (20%) of the taxpayer’s AGI for the taxable year, or “the excess of thirty percent (30%) of the taxpayer’s AGI for the taxable year over the amount of the contributions of capital gain property” to public charities. Contributions of capital gain property to which this twenty percent (20%) limitation apply shall be taken into account after all other charitable contributions. Any excess contributions will be treated as a charitable contribution of capital gain property in each of the five succeeding taxable years.

Oct
06
2014

Don’t Get Stuck With a Non-Deductible Conservation Easement

The increasingly popular conservation easement charitable deduction allows a landowner to deduct a portion of the value of a piece of land by limiting the land’s use.  In a typical scenario, a landowner records a conservation easement on the land and then donates the conservation easement to a conservation organization.  The landowner receives an appraisal of the value of (i) the developable land and (ii) the land once the conservation easement has been recorded.  The landowner then deducts the difference as a charitable contribution.  In such a scenario, Section 170 of the tax code allows a deduction as long as the easement is perpetual, made to a qualified organization, and for a valid conservation purpose.

The typical scenario is changing, however, as more and more landowners are holding their property in trust.  When the land is held in trust, it is more difficult to deduct a conservation easement. (more…)

May
12
2014

A 200% Tax on Self-Dealing? And People Think the Estate Tax is High!

With research and drafting assistance provided by our extern from Washington University School of Law, Rachael Lynch.

Now that we’ve scared you with the potentially high taxes for self-dealing in private foundations, what is self dealing?

Self dealing includes any of the following transactions:

1. sale or exchange, or leasing, of property between a private foundation and a disqualified person (click here for a definition of a disqualified person);
2. lending of money or other extension of credit between a private foundation and a disqualified person;
3. furnishing of goods, services, or facilities between a private foundation and a disqualified person;
4. payment of compensation by a foundation to a disqualified person;
5. transfer of income or assets of a private foundation to a disqualified person; and
6. agreement by a private foundation to make any payment to a government official (other than an agreement to hire the official when their government service ends if the service is scheduled to end within 90 days).

There are some exceptions to the rigid definition of self dealing. A disqualified person may

  • Lend money to a foundation without interest or other charge, or
  • Furnish the foundation with goods, services, or facilities without charge, if the proceeds or goods are used exclusively for charitable purposes.
  • Pay compensation (not excessive) to a disqualified person for personal services which are reasonably necessary to carryout out the charitable purpose of the foundation.

Internal Revenue Code section 4941 imposes an excise tax on acts of self-dealing between disqualified persons and private foundations. The disqualified person is subject to a tax of 10% of the amount involved with respect to each act of self-dealing for each year (or part year) in the taxable period. The taxable period begins on the date of the self-dealing transaction and ends on the earliest of:

  1. The date of notice of deficiency,
  2. The date the 10% tax is assessed, or
  3. The date a correction is completed.

The foundation manager is also subject to a tax of 5% for each year in the taxable period (up to $20,000) if the manager knew that the act constituted self-dealing, unless the manager’s participation was not willful and was due to reasonable cause.

If the self-dealing is not corrected within the taxable period, a second tax equal to 200% (no, that’s not a typo) will be imposed on the disqualified person who participated in the act of self-dealing. The foundation manager is also subject to a second tax of 50% (again, not to exceed $20,000) if the manager refuses to agree to all or part of the correction.

If more than one person participates in the act of self-dealing, they will be jointly and severally liable for the tax (meaning, if one person doesn’t pay his or her tax, the others will have to pay it).

Feb
28
2014

Charitable Gifts to Supporting Organizations

As we discussed in our prior post, Review of Income Tax Deduction Rules for Charitable Gifts, an income tax deduction up to fifty percent (50%) of the taxpayer’s adjusted gross income is allowed for gifts to public charities of non-capital gain property and up to thirty percent (30%) for gifts of capital gain property.  These same contribution limits apply to gifts to supporting organizations.

What is a supporting organization?  Supporting organizations are described in Section 509(a)(3) of the Internal Revenue Code as charities that carry out their exempt purposes by supporting other public charities.  A supporting organization generally warrants public charity status because it has a relationship with its supported organization sufficient to ensure that the supported organization is effectively supervising or paying particular attention to the operations of the supporting organization.

(more…)

Jan
10
2014

Review of Income Tax Deduction Rules for Charitable Gifts

zuckerbergThe Chronicle of Philanthropy recently released its list of the Top 10 biggest charitable gifts of 2013 (which is really the Top 15, since 5 gifts tied at 10th place), and do they make me wish I qualified as a charity!

Topping the list at Number 1 were Mark Zuckerberg of Facebook, and his wife, Priscilla Chan, who gifted $992.2 million of Facebook shares to the Silicon Valley Community Foundation. Number 2 on the list were Nike Chairman Phil Knight and his wife, Penelope Knight, who made a $500 million pledge to the Oregon Health and Science University Foundation.

The list continues:

3. Michael Bloomberg: $350 million pledge to Johns Hopkins University
4. Charles B. Johnson: $250 million pledge to Yale University
5. Stephen Ross: $200 million pledge to University of Michigan
6. Muriel Block: $160 million bequest to Yeshiva University
7. John Arrillaga: $151 million pledge to Stanford University
8. Irwin and Joan Jacobs: $133 million pledge to Cornell NYC Tech
9. Charles Munger: $110 million pledge to University of Michigan

And tying for the number 10 spot,

David Koch: $100 million pledge to New York-Presbyterian Hospital
Frank McCourt: $100 million pledge to Georgetown University
Ronald Perelman: $100 million pledge to Columbia Business School
T. Denny Sanford: $100 million pledge to University of California at San Diego
Stephen Schwarzman: $100 million pledge to Tsinghua University in Beijing
Deborah Joy Simon: $100 million pledge to Mercersburg Academy

While the rest of us may not have the ability to make charitable donations of this magnitude (or maybe you’re the lucky reader who does!), we thought this might be a good time to review some of the basic income tax deductions available for gifts to charities.

Section 170 of the Internal Revenue Code (the “Code”) governs income tax deductions for charitable contributions. In the case of an individual making a cash gift to a Section 501(c)(3) organization classified as a “public charity” (such as churches, schools, hospitals, and governmental units), the gift is deductible for federal income tax purposes so long as the aggregate gifts do not exceed fifty percent (50%) of the taxpayer’s adjusted gross income (“AGI”) for the taxable year.

In the case of a contribution of capital gain property to a public charity, a taxpayer can only deduct such contributions up to thirty percent (30%) of the taxpayer’s AGI for the taxable year. The amount of capital gain property contributed is taken into account after all other charitable contributions to public charities. Therefore, if the taxpayer contributes 30% of his or her AGI in non-capital gain assets and 30% of his or her AGI in capital gain assets, the non-capital gain assets will be applied first, then 20% of the capital gain property will be allowed, with the remaining 10% exceeding the taxpayer’s total 50% limit. Any excess contributions will be treated as a contribution in each of the five succeeding taxable years.

If a taxpayer contributes cash to a Section 501(c)(3) organization that is not classified as a public charity, such as to a private non-operating foundation, then the deductions for such contributions may not exceed the lesser of thirty percent (30%) of the taxpayer’s AGI or the excess of fifty percent (50%) of the taxpayer’s AGI for the taxable year over the amount of contributions of cash made to public charities.

If a taxpayer contributes capital gain property to a Section 501(c)(3) organization that is not classified as a public charity, then the amount of the contributions allowable for deduction purposes shall not exceed the lesser of twenty percent (20%) of the taxpayer’s AGI for the taxable year, or “the excess of thirty percent (30%) of the taxpayer’s AGI for the taxable year over the amount of the contributions of capital gain property” to public charities. Contributions of capital gain property to which this twenty percent (20%) limitation apply shall be taken into account after all other charitable contributions. Any excess contributions will be treated as a charitable contribution of capital gain property in each of the five succeeding taxable years.

Jan
08
2014

Investment Funds Maintained by Charitable Organizations

Section 3(c)(10)(A)(ii) of the Investment Company Act of 1940 generally exempts a private investment fund from registering as an investment company if it is maintained by a charitable organization and is organized and operated exclusively for religious, education, benevolent, fraternal, chartable or reformatory purposes (“Permitted Purposes”) for the collective investment and reinvestment of certain assets.  Recently, the SEC provided new guidance to alleviate concerns related to the use of this exemption.

The SEC’s Division of Investment Management clarified that a private investment fund that is a legal entity distinct from the charitable organization[1] maintaining the fund and that is organized and operated for the purpose of earning investment returns for charitable organizations will be able to use the exclusion under Section 3(c)(10)(A)(ii).  A fund must still conform to the other conditions Section 3(c)(10) and the staff’s corresponding existing no-action positions.

The staff recognized that a fund technically might not be “organized and operated exclusively” for Permitted Purposes, even though its proceeds are used exclusively for Permitted Purposes.  The staff, however, confirmed that they believe this is the type of entity that Congress intended to be exempt from Section 3(c)(10) because the fund will be used solely for the investment of permitted assets of charitable organizations that, in turn, will use the proceeds for Permitted Purposes.

In addition to the proscribed requirements, the staff has based no-action relief for funds seeking to rely on Section 3(c)(10)(A)(ii) on a number of related representations, which include:

(i) no part of the net earnings of the fund will inure to the benefit of any private shareholder or individual,

(ii) each investor will be a Section 501(c)(3) organization,

(iii) each investing organization will only invest funds over which it has immediate, unrestricted and exclusive use, benefit and enjoyment, and

(iv) on an annual basis, the fund will provide a written report on its financial condition and results of operation, including audited financial statements.

For more information, please speak with Elizabeth Kemery Sipes, Mark Weakley, another member of our Fund Formation Team or your Bryan Cave contact(s).



[1] A charitable organization means an organization described in Section 170(c)(1)-(5) or Section 501(c)(3) of the Internal Revenue Code.

Oct
16
2013

IRD, IRD, IRD is the Word: IRD Consequences of IRA Distribution to Charities

From TrustBryanCave.com

Once again, the Internal Revenue Service reminds us in PLR 201330011 that a distribution from an IRA to a residuary beneficiary will not result in recognition of IRD (also known as income in respect of a decedent) to the estate or trust, as only the residuary beneficiary will recognize the IRD.

Here the Decedent’s Estate was the beneficiary of the Decedent’s IRA. Under the provisions of the Decedent’s Will, his Estate poured over to his Revocable Trust on his death. His Revocable Trust provided that each of two Charities were to receive a percentage of the residue of his Trust, and further provided that the Trustee could satisfy this percentage gift in cash or in kind and also could allocate different assets to different residuary beneficiaries in satisfaction of their percentage interest in the trust residue.

Of course, the IRA constitutes income in respect of a decedent (IRD), and pursuant to IRC § 691 (a)(2) and Reg. § 1.691(a)-4(b)(2), the transfer of an item of IRD by an estate, such as by satisfying an obligation of the estate, will cause the estate to recognize the IRD, but if the estate transmits the item of IRD to a specific legatee of the item of IRD or to a residuary beneficiary (emphasis added), only the legatee or the residuary beneficiary will recognize the IRD.

When an IRA is assigned by an estate to a charity to satisfy a pecuniary bequest to that charity, the Service has taken the position in CCA 200644020 (issued November 3, 2006) that the estate must recognize the IRD, and that the estate is not entitled to a DNI (“distributable net income”) distribution deduction for that charitable distribution so that the IRD does not flow out to the charity. But when an estate is payable to 4 charities and the estate assigns the IRA to the charities, the assignment of the IRA to the four remainder beneficiaries does not cause the estate to recognize the IRD (PLR 200826028).

Here the result was the same as in PLR 200826028, even though the IRA was payable in the first instance to the estate and the estate was payable to the trust and the trust was then distributable only in part to charities. The fact that the executor and trustee joined together to allocate the IRAs to the charities and the non-IRD assets to the non-charitable beneficiaries did not cause the estate or the trust to have to recognize IRD, because the disproportionate distribution was authorized under the trust instrument and the distribution was to residuary beneficiaries.

Here the executor and trustee wanted to get the IRAs to the charities, because the distribution period for required minimum distribution purposes would have been limited to 5 years if the Decedent was under age 70 ½ or to the Decedent’s remaining life expectancy if the Decedent was over age 70 ½. In either event, any non-charitable beneficiary would not have been able to use his or her own life expectancy because the Decedent’s estate was the beneficiary of the IRA. Even if the trust was the beneficiary, having charities as countable beneficiaries would have eliminated the trust as a look-through trust, with the resulting short distribution period.

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