Assignment 2: Tax Framework For Charitable Giving Flashcards
Seek counsel
Always advise client or donor to get independent tax and legal advice
Defer to the client’s independent counsel for the application of tax law to the client’s own situation
Requirements for deduction
A charitable contribution can be deducted for income tax purposes if there is:
- An irrevocable and complete transfer
- Transfer is to a qualified charity
- Made without consideration or benefit to donor
(Exception: Most planned gifts)
Irrevocable & Complete Transfer
- Donor parts with something and charity receives something
- Incomplete transfers:
- Donor retains control over property
- Donor retains a right to its income
- Donor retains the power to revoke
- Donor receives something in return equivalent to the gift
Entire Interest
Donor must transfer his/her entire interest in the property, or no deduction is allowed
Exceptions:
- Gifts of an undivided partial interest in the entire property owned by donor
- Charitable remainder trust
- Charitable lead trust
- Remainder interest in a personal residence or farm
- Qualified conservation easement
- Pooled income fund
Gift of partial and undivided interests
- Donor wishes to give some, but not all, of a particular asset to charity (this could include part of a farm, apartment building, or land without breaking it into parcels, shares, partnership interests–by deducting an undivided partial interest)
- Cash and publicly traded securities are easy to give and receive
- Privately held securities will involve an appraisal, but the donor can give some shares of the stock or partnership interests
- Land can be deeded into parcels, with some kept and some given
Deductible or Not?
Deductible: undivided partial interest
- Give a one-third undivided partial interest as tenants-in-common in a farm, including whatever rights the donor has to the minerals, oil, water, etc.
Not deductible: divided partial interest
- Keep a rental property, but let charity use it
- Give the land, but retain mineral rights
- Give the orchard, but retain right to harvest it
- Give a car, but retain right to drive it
- Give a painting to an art museum for one month, and donor hangs it in their house the other 11 months (donor must transfer complete ownership to the charity within 10 years)
Tangible Personal Property
IRS is less favorable toward rules for art, coins, collectibles and other forms of tangible personal property.
IRS wants to discourage donors from giving partial interest in collectibles while keeping the collection on display in their own home.
E.g. Partial interest in piece of art where the art museum displays it for a period of time, and then it reverts back to the donor. (See Recapture Rules)
Recapture
- Donor must be in the process of transferring the gift completely within 10 years
- If not, the deduction is “recaptured” as taxable ordinary income to the donor with a 10% tax penalty
- When the balance gift is fulfilled, the deduction for the remaining amount is based on the value of the property when the first interest was given
- Donor will not benefit from any appreciation that occurs after the first undivided partial interest was given
Qualified Charities
Pub. 78: IRS publication listing eligible charities
- entity organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster amateur sports competition (but only if no part of its activities involves providing athletic equipment or facilities), or for the prevention of cruelty to children or animals.
- War veterans organization or auxiliary organized in the US
- Domestic fraternal society
- Cemetery company owned and operated exclusively for its members
- Deduction not allowed if the organization has racially discriminatory policies, is communist-controlled, or attempts to influence legislation or participate in political campaigns
Foreign Charities
No income tax deduction for gifts to foreign charities or governmental agencies
Deduction is allowed for a gift to a domestic charity even though all or some funds may be used in foreign country (US charity must control money and approve overseas projects as being within its own exempt purposes–expenditure responsibility)
Gifts to invidivuals
Not deductible
Gifts to charities benefiting individuals are deductible as long as gifts are not earmarked for a specific person, charity retains control, donative intent–donor wanted to benefit charity, not the individual recipient
Gift of services
No deduction allowed for contribution of services
Unreimbursed, out of pocket expenses incurred as a result of volunteering may be deductible (cost of local transportation, purchase of supplies, postage etc.)
Without consideration or benefit
Donative intent: transfers something, receives nothing
Quid Pro Quo: gift is made and donor gets something of value in return (parking spots, free event tickets, free meals, etc.)
If the gift is to be considered a quid pro quo gift, the gift value is reduced by the actual value of the goods or services received (not the cost to the charity)
Quid Pro Quo
- Applies to premiums and “benefit” events
- Should be disclosed in solicitation
- Applies if goods or services are made available, whether or not they are accepted
- Donor can rely on charity’s good faith estimate of their value (unless a donor knows the estimated value is unreasonable)
- Ignore: gifts of unsubstantial value (within limits)
- Token items (coffee mugs, calendars, pens bearing charity’s name or logo)
Charitable deductions: Deductible
- Churches, synagogues, temples, other religious orgs
- Federal, state, local governments (solely for public purpose
- Nonprofit schools and hospitals
- Salvation Army, Red Cross, CARE, Goodwill
- War veterans groups
- Expenses paid for a student living with you, who is sponsored by a qualified org and is enrolled as a FT student in grade 12 or lower
- Gift to Dept of Treasury to pay down public debt
- Allowing a charity to use the donor’s property rent-free (or for a minimal charge); right to use property is treated as contribution of a partial interest
Not Deductible
- Civic leagues, social and sports clubs, labor unions, chambers of commerce
- Foreign orgs (except certain Israeli, Mex, Canadian charities)
- Groups run for personal profit
- Groups whose purpose is to lobby for law changes
- Value of blood given to a blood bank
- Individuals
- Tuition
- Purchase of raffle, bingo or lottery tix
Date of Gift
Gift is complete when donor relinquishes control and delivers to charity
In person--date that charity's rep receives the gift Mail or delivery via USPS--postmark rule Mail or delivery via FedEX, UPS--Date package arrives at the charity's office Credit card--Date charges occur Text messages--date donor send the text message if charged to wireless account Pledges--deductible in year pledge is fulfilled Reissue stock (transfer ownership)--date corporate records change "Street name" stock--date on which transfer is complete Tangible personal property--delivered to charity or transferred to charity's agent (title must be transferred)
Substantiation
Gift acknowledgement requirements for IRS
- Less than $250 (no written acknowledgement needed)
- $250 or more (written acknowledgement–states no goods or services received in exchange of gift; if yes, good faith estimate of gift)
Noncash gifts:
- $500-$5000–donor files Form 8283
- $5,000+–donor files 8283; appraisal required
Noncash Securities:
- Publicly traded–donor files 8283, charity does not sign
- Nonpublicly traded–Over $5000 donor files 8283, charity signs. Over $10,000 appraisal required
Noncash Art:
*$20,000 or more, appraisal required; $50,000 or more statement of value from IRS
Noncash Vehicles/Boat/Airplanes:
*Depends on use; strict requirements
Donee Info Form (8282)
“Tattletale Form”
- filed by charity if it disposes property valued at more than $500 within 3 years of charity acquiring it
- if used by charity, does not file form
- charity provides description of donated property, how that use is related to its charitable purpose, whether it provided certification of that use to donor
- charity discloses price at which property was sold
Qualified appraiser
- Earned appraisal designation or has met min education and experience requirements
- Regularly performs appraisals for compensation
- has knowledge of type of property appraising
- appraisal must be made not more than 60 days before date of contribution
- Appraiser cannot be connected to charity or donor
- Fee cannot be percentage of appraised value of property
Gifts of Securities
Publicly traded securities do not require an appraisal to document their value (valued according to the mean of the high/low selling price on the date of the gift)
Nonpublicly traded securities valued over $5,000 must be reported on Form 8283. Nonpublicly traded securities over $10,000 requires a qualified appraisal
Gifts of Art
Valued at $20,000 or more requires a qualified appraisal
If valued at $50,000 or more, ask IRS for statement of value (user fee of $6,500 for up to three items)
Gifts of Vehicles, Boats, Airplanes
Deduction depends on what the charity has done with the gift:
- Sells it: donor’s deduction is limited to the amount of the gross sales price obtained by the charity
- Uses it: donor deducts FMV subject to AGI limits
Strict substantiation requirements when claimed value is over $500
