Charitable Gifts

Charities benefit most of all from public policy, both state and federal, that encourages charitable giving. For the nonprofit and its advisors, its strategy must be to offer the greatest tax benefits to its donors while maximizing its realization of donated funds.

z1_colorul_summer_cabins_bordergap.pngInternal Revenue Code (“IRC”) Sec. 170 (and its corresponding Regulations) provides the greatest tax incentive for charitable giving. It states, as a general rule, that “[t]here shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.”  Therefore, a charitable gift which reduces the amount which would have been subject to state and federal incomes taxes without the gift, may reduce the cost to the taxpayer of making the gift.

Another tax benefit arises through the gift of appreciated assets, because when they are given to a charity, this appreciation generally goes untaxed. Such a donation provides two potential benefits to the donor. First, in the case of certain assets, the contribution may be deducted at their fair market (appreciated) value, so that the donor avoids tax on the appreciation. And second, as in the case of all deductions, the reduction in other taxable income yields further savings. The gift of appreciated assets probably rewards the taxpayer with the lowest after-tax savings available.

z1_sepia_river_and_rowboats_bordergap.pngOne of the ways in which such transactions are carried out is to donate an asset that is about to be sold to a charitable entity, which then finishes off the sale. Because the donor hasn’t personally sold the asset, no tax is due on the eventual sale. And, of course, the charity itself doesn’t pay any tax on the sale either. While it is not true of all such assets, in many cases the donor may be entitled to a deduction equal to the fair market value of the asset. However, it is essential that the impending sale not have reached a point where the donor has actually acquired the right to receive payment before the contribution to the charity is complete. Otherwise, the donor will be deemed to have been the actual seller, who then merely contributed the sale proceeds to the charity. This outcome could be disastrous for a taxpayer, and no such arrangement should be commenced without an awareness of this issue.

In the case of contributions by estates and trusts, IRC Sec. 642(c) provides that, as a general rule, “[i]n the case of an estate or trust (other than a trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined without regard to section 170(c)(2)(A)). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulations.”

z2_lurid_ave_giants_bordergap.pngGift and estate taxes are generally referred to as “transfer” taxes, to be contrasted with “income” taxes. It is the privilege of transferring property to someone else that is taxed, not the earning of that property or its value. Not surprisingly, charitable contributions may also be used as deductions to reduce the amounts of these transfer taxes.

IRC Sec. 2055 provides that the gross estate shall be entitled to deductions for all bequests, legacies, devises, or transfers to any government entity for exclusively public purposes; to any corporation which fits the description set forth in IRC Sec. 501(c)(3); to the trustees of a fraternal society or lodge, for purposes in accord with Sec. 501(c)(3); or a veteran’s organization incorporated by Act of Congress, where no part of the net earnings which inure to the benefit of any private shareholder or individual. Sec. 2031(c) provides for an estate (but not gift) tax deduction for conservation easements.

z_brookdale_lodge_bordergap.pngWith respect to lifetime taxable gifts, IRC Sec. 2522 provides that a deduction shall be allowed generally to the same organizations as the estate tax rule, with a few minor differences.

This is a very complex area of law, and issues such as timing, type and character of property, valuation, deduction limitations, etc., must also be addressed.