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.

In Rolfs v. Commissioner, 135 T.C. No. 24, the taxpayers donated the lake house they had been living in to an exempt organization but were denied any charitable deduction.  The grounds for the denial were that the lake house’s value did not exceed the benefit the taxpayers received in return.  That return benefit was valued at $10,000.  The lake house was a “typical, albeit modest” lake house.  So, how in the world could you donate such a house and have it not be worth at least $10,000?  (more…)

When charitable pledges come do, some donors scramble to find ways to satisfy the pledge without a negative impact to current cash flow.   A donor’s use of a private foundation to satisfy the pledge is often unattractive since such a transfer could result in self-dealing to the extent the donor’s pledge is considered a legally binding obligation under applicable state law.  However, a transfer from the donor’s IRA in satisfaction of the pledge may represent a viable alternative.  In an Information Letter released August 20, 2010, to Harvey Dale (a well-known tax professor), the IRS concluded that a taxpayer who satisfies a pledge by making a qualified charitable distribution from his or her IRA directly to a charitable organization would not include the distribution in gross income (citing Rev. Rul. 55-410, which provides that the satisfaction of a pledge by means of a donation of appreciated or depreciated property does not give rise to a taxable gain or a deductible loss) – and of course, IRAs are not subject to the self-dealing rules imposed on private foundations.  Therefore, the next time you are faced with a pending pledge and cash flow is tight, you may want to explore satisfaction of the pledge using your IRA.

Life insurance has always been an important part of charitable giving.  Although there are legitimate uses, over the years the IRS has identified certain abuses regarding the use of life insurance in charitable planning.  In our practice, we have seen a recent surge in charitable planning techniques involving life insurance.  Before your charity accepts a gift of life insurance, you should consider several issues, including the following:  (1) the application of Section 170(f)(10), the so-called “charitable split-dollar rules” (which, if applicable, impose an excise tax on the charity equal to 100% of the premium payments), (2) applicable state insurable interest laws, (3) private inurement, private benefit, and excess benefit rules, (4) unrelated business income rules (and debt-financed income rules, to the extent the life insurance was acquired with borrowed funds), (5) the partial interest rules (impacting both the income and gift tax deduction of the donor), (6) I.R.C. § 4944, the jeopardizing investment rules, and I.R.C. § 4941, the self-dealing rules, where the policy owner is a private foundation or split interest trust, (7) possible re-enactment or extension of I.R.C. § 6050V (which required a charity to report its interest in certain life insurance policies – the provision expired in 2008), and (8) potential legislation in response to the Treasury’s April 2010 report on abuses involving ”charity owned life insurance” (ChOLI).  Life insurance often represents a very valuable gift to a charity and most transactions involving life insurance satisfy the rules discussed above.  However, it is important to consider these rules with respect to any gift of life insurance, especially when the gift involves more than merely naming a charity as a policy  beneficiary or a donation of an unencumbered policy to the charity.

In order to be entitled to a charitable deduction for cash donations, a donor must maintain records providing evidence of the donation.  For example, for tax years after August 17, 2006, a donor must maintain a bank record or a written receipt from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution in order to deduct any contribution of cash, check, or other monetary gift (additional rules apply for donations of $250 or more).

The Tax Court re-emphasized the strictness of this requirement in a recent case.  In Fessey v. Comm., T.C. Memo. 2010-191 (Aug. 30, 2010), the taxpayer alleged that he donated $920 in cash in 2004 to a church by way of $20 weekly cash donations made to the church’s offering plate.  The taxpayer provided the Court with a computer printout listing the date, amount, and recipient of his donations.  However, the taxpayer did not produce a receipt or any form of documentary evidence to substantiate his alleged weekly offering plate donations (in 2004, a cancelled check or other reliable written would also have sufficed).  Despite the taxpayer’s supporting evidence (which likely included his testimony), the Tax Court denied the deductions made to the church.

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…)

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…)

Last week, my husband and I attended an event for one of our favorite charities. For a $160 donation, the two of us enjoyed a nice steak and lobster dinner and an open bar. This was a great deal for the charity - since all of the food and drinks had been donated. At the silent auction, I successfully bid on a dinner party for 4, hosted by a famous local chef who donated the item. And I got a great deal on that dinner – it normally goes for $300, and all I paid was $150! My husband won the raffle – for five dollars, he entered for the chance to win all of the money in the pot, and scored a whopping $510! Of course, being the charitable person that he is (and with a bit of urging), he donated the entire amount back to the charity. Finally, after watching the gut-wrenching stories about all of the children who benefit from the charity’s work, we donated an additional $250. If you haven’t figured it out yet, I REALLY like this charity. BUT: for tax purposes, how much did I really donate? The answer isn’t that simple…let’s go one by one: (more…)