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Posted January 4th, 2018

Let’s Look at Some Key IRS Rulings, Part 5

We want now to look at some IRS rulings on pledges (Read Part 4 here). These rulings are important, as will become obvious. First, though, some background on pledges.

  • A pledge is a promise to make a gift or gifts. A promise to do something else, such as to make and keep in force a specified will provision, may be a good and valuable promise, but it isn’t a pledge.
  • A pledge is either enforceable against the donor or the donor’s estate or unenforceable. Enforceability depends on the law of the state that governs the pledge (enforceability varies from state to state). Enforceability has nothing to do with whether the charity would ever sue to enforce a pledge; it’s a matter of law, not policy.

Remember these points.

In Letter Ruling 8230156, an individual proposed paying an enforceable pledge with appreciated property (perhaps appreciated stock). The individual wanted assurance from the IRS that the payment wouldn’t cause him or her to realize capital gain. The individual was concerned because if one pays off a debt with appreciated property, one does realize capital gain (the debtor is deemed to sell the property). IRS ruled no gain would be realized, because according to the IRS an enforceable pledge isn’t a debt for federal income tax purposes.

That’s important and pretty interesting. It clears the way to do what many donors do—satisfy enforceable pledges with appreciated securities. It’s not end of the story on paying enforceable pledges, however, as we’ll see down the road when we consider the use of charitable remainder trusts and charitable lead trusts to pay such pledges.

We’ll dig deeper next time. Meantime, if you have a question about pledges, check with your Sharpe Group representative.

by Jon Tidd, Esq

Read Part 6 here.

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