A charitable freeze technique that used a complex contribution formula was considered by the Ninth Circuit Court of Appeals in Petter v. Commissioner, No. 10-71854 (2011). The charitable freeze is a technique that readjusts a simultaneous gift/charitable contribution combo if the IRS successfully challenges a valuation of the gift, shifting additional value from the gift component to the charitable contribution component to eliminate any gift taxation resulting from the challenge.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of estate planning in Advisor’s Journal, see What Next? ILITs and Estates under 5MM (CC 11-114).

For in-depth analysis of estate freeze techniques, see Advisor’s Main Library: E—Estate Planning For The Family Business.

Why is this Topic Important to Wealth Managers? This blogticle reviews the general requirements for the deductibility of donations for federal income tax purposes. Our goal is to provide information for wealth mangers to stay current on relevant topics including charitable contributions.

The Internal Revenue Code allows for deductions for federal income tax purposes of contributions or gifts made to or for the use of an organization that qualifies as a federally tax-exempt organization. [1]

For a charitable contribution to be deductible, the charity must receive some benefit from the donated property; [2] and  the donor cannot expect to receive some economic benefit (aside from the tax deduction) from the charity in return for the donation. [3]

However, a charitable deduction is not allowed for any contribution of a check, cash, or other monetary gift unless the donor retains a bank record or a written communication from the charity showing the name of the charity and the date and the amount of the contribution. [4]

Charitable contributions of $250 or more (whether in cash or property) generally must be substantiated by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization. [5]

For contributions of property other than money, the taxpayer is generally required to maintain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property. The value need not be stated on the receipt. [6]

A deduction for a contribution of property with a claimed value exceeding $500 will generally be denied to any individual, partnership, or corporation that fails to satisfy the property description and appraisal requirements. [7]

However, there are two exceptions to the general rule. Under the first exception, the appraisal requirements, for property valued at more than $5,000 and at more than $500,000, do not apply to readily valued property, such as cash and publicly traded securities. Under the second exception, the general rule does not apply if it is shown that the failure to meet the requirements is due to reasonable cause and not to willful neglect. [8]

As a general matter, in order for contributions to be deductible, the organization must qualify at the time of the contribution. Thus, it is the responsibility of an organization receiving contributions to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements under the Code in order for grantors and contributors to have the assurance that their contributions at the time made are deductible.

Generally, Publication 78 lists organizations that have received a ruling or determination letter from the IRS stating that contributions by grantors or contributors to the listed organization (or to the listed central (or parent) organization and those local (or subordinate) units covered by the group exemption letter) are deductible as provided in § 170.

Moreover the law has been interpreted so that grantors and contributors may generally rely on an organization’s ruling that the organization is described until the IRS publishes notice of a change of status (for example, in the Internal Revenue Bulletin or Publication 78), unless the grantor or contributor was responsible for, or aware of, the act or failure to act that results in the organization’s loss of public charity status. [9]

Tomorrow’s blogticle will discuss insurance topics related to estate and gift tax planning.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] See IRC Sec. 170.

[2] See Winthrop v. Meisels, 180 F.Supp. 29 (DC NY 1959), aff’d 281 F.2d 694 (2d Cir. 1960).

[3] See Stubbs v. U.S., 70-2 USTC ¶9468 (9th Cir.), cert. den. 400 U.S. 1009 (1971).

[4] IRC Sec. 170(f)(17), as added by PPA 2006.

[5] IRC Sec. 170(f)(8)(A).

[6] Treas. Reg. §1.170A-13(b)(1).

[7] IRC Sec. 170(f)(11)(A)(i).

[8] IRC Sec. 170(f)(11)(A)(ii).

[9] See generally Temporary Regulations §§ 1.170A-9T(f)(5)(ii) and 1.509(a)-3T(e)(2), 73 Fed. Reg. 52,528 (Sept. 9, 2008).

Your clients look to you for competent advice in planning their charitable giving; now imagine the horror of hearing that the gift you so carefully planned can’t be deducted due to a simple paperwork mistake. Although the IRS sometimes forgives innocent mistakes, others are unforgiveable, as illustrated in recent IRS email advice.

The IRS took a hard line with the taxpayer, who made what would otherwise qualify as a tax deductible charitable gift. The problem was that the taxpayer “failed to obtain a contemporaneous written acknowledgment” from the charitable organization. In its advice the IRS said it will deny the taxpayer’s charitable deduction even if the taxpayer takes remedial measures and the charity amends its Form 990 (Return of Organization Exempt from Income Tax) to acknowledge the donation and include the information required by the Code.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of charitable deductions in Advisor’s Journal, see Qualified Charitable Distributions from an IRA (CC 11-03) & IRS Takes Qualified IRA Charitable Distributions off the Table for 2010 (CC 11-15).

For in-depth analysis of the charitable deduction under Section 170, see Advisor’s Main Library: B6—The Income Tax Charitable Deduction—I.R.C. §170.

As reported earlier this month in Advisor’s Journal [Qualified Charitable Distributions from an IRA (CC 11-03))], a qualified charitable distribution (QCD) of up to $100,000 made from an IRA will not be included in the taxpayer’s gross income, as long as the contribution is made directly from the trustee to a public charity or conduit private foundation when the account owner is at least 70½ years old.

One benefit of taking a QCD is that it can qualify as a required minimum distribution (RMD). For the taxpayer who does not have a financial need for the distribution, making a QCD is an opportunity to take the RMD—avoiding the severe tax penalties for not taking the distribution—while excluding the distribution from taxable income.

But because the QCD provision lapsed during 2010, taxpayers who took an RMD during 2010 are out-of-luck.  

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Author: William H. Byrnes & Benjamin S. Terner                 

Why is this Topic Important to Wealth Managers? Discusses charitable contributions for individuals.  May assist wealth managers plan client contributions made to charities this year.    

Generally a deduction is allowed to “individuals, corporations and certain trusts for charitable contributions made to qualified organizations, subject to percentage limitations and substantiation requirements.” [1]

The law allows for such charitable contributions as itemized deductions, as “an incentive to encourage charitable contributions”, to certain charitable organizations.  [2]

Assuming all other factors equal, “it is usually better for the donor to make a charitable gift during life than at death, because the gift can generate an income tax charitable deduction for the donor.” [3]

How much is the deduction?

The charitable contribution income tax deduction for an individual taxpayer can be classified as not to exceed 50 percent or not to exceed 30 percent of the taxpayer’s adjusted gross income (AGI), depending on the donee charity. [4]

For a discussion of Adjusted Gross Income or AGI, see AdvisorFX—Deductions in Determining Adjusted Gross Income and Taxable Income.

In addition, “[a]fter application of these limits, the charitable contribution deduction is also subject to the overall phase-out of itemized deductions.” [5]

Other additional factors which may limit the deduction include, but are not limited to,

• The amount of the donor’s contribution base, or the adjusted gross income, without regard to any net operating loss carryback to the year.
• Whether the contributed property is ordinary income property, capital gain property, or neither;
• Whether the property will be used to further the charity’s exempt purpose; [6]

Some of the common donees under the 50% category, include but are not limited to,

• churches
• educational organizations
• organizations providing medical or hospital care or medical education or research
• certain governmental units
• certain private foundations [7]

The two charts presented below are adopted from “Estate Planning & Wealth Preservation: Strategies & Solutions” [8] and can be used to determine the above limitations on the deductibility of outright gifts to charities. The lowest amount deductible applies.
_____________________________________________________
Type of Gift                                         Percentage of Contribution
                                                                 Base Deductible
_____________________________________________________
Gift to 50 percent charity (except long-term         50 percent
  capital gain property)

Gift of long-term capital gain property to 50        30 percent, or 50 percent
  percent charity                                                              if deduction is limited to basis *

Gift to 30 percent charity (except long-term         30 percent
  capital gain property)

Gift of long-term capital gain property to 30        20 percent
  percent charity
______________________________________________________

* see below

• Property for Which Deduction Is Limited to Basis
• Gift to 50 percent charity, if the donor has elected to limit the deduction of long term capital gain property to basis, as a tradeoff for the 50 percent-of-contribution-base limit.
• Property which would generate short-term capital gain or ordinary income if it were sold.
• Gift of tangible personal property to 50 percent charity, if the charity will
    not use the property in its exempt purpose.

For additional discussion on charitable contributions see AdvisorFX—The Income Tax Charitable Deduction—I.R.C. §170

Tomorrow’s blogticle will continue to discuss relevant topics to wealth managers. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 34 Am. Jur. 2d Federal Taxation ¶ 18950.

[2]AdvisorFX.  AUS Main Libraries, Section 19. Income Taxes, B6—The Income Tax Charitable Deduction—I.R.C. §170, Citing, 26 U.S.C. §170.  http://www.advisorfx.com/articles/default.aspx?action=35&filename=f19_1_8_3280.htm.  Last Accessed 11/25/2010. 

[3] Kathryn G. Henkel.  Estate Planning & Wealth Preservation: Strategies & Solutions

P 32.02 INCOME TAX DEDUCTION FOR CHARITABLE GIFTS-GENER AL  1999 WL 1017736, 1 (W.G.&.L.). 2010. 

[4] See 26 U.S.C. 170(b)(1)(A); 26 U.S.C. 170(b)(1)(B).

[5] AdvisorFX. B6—The Income Tax Charitable Deduction—I.R.C. §170.

[6] Kathryn G. Henkel.  Estate Planning & Wealth Preservation: Strategies & Solutions

[7] 26 U.S.C. 170(b)(1)(A).

[8] Kathryn G. Henkel. P 32.02 INCOME TAX DEDUCTION FOR CHARITABLE GIFTS-GENER AL  1999 WL 1017736, 1 (W.G.&.L.).

Charitable contributions offer an opportunity to do good in the community while reaping tax benefits, but the tax benefit of a charitable contribution can be jeopardized by poor planning.  Especially challenging can be the structuring of contributions by complex trusts as illustrated by the recently released IRS ruling, ILM 201042023. 

There, a trust’s charitable contribution deduction was limited to the trust’s basis in the property;  a deduction was not permitted for unrealized appreciation of the donated property.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the benefits of charitable giving, see Use Charitable Giving to Enhance Family Business Succession Planning (CC 10-76).

For in-depth analysis of the use of charitable giving in estate planning, see Advisor’s Main Library: F�Estate Planning Through Charitable Contributions.

We invite your questions and comments by posting them below or by calling the Panel of Experts