Gift Substantiation: Two Recent Tax Court Cases Are Revealing

What they reveal is how tough the IRS and the Tax Court have gotten on gift substantiation . . . gift receipt and “Qualified Appraisal” rules.

The first case involves a gift of real estate to the University of Michigan. The donor was a partnership that had purchased the real estate for $2.5 million. More than one year after purchase, the partnership gave the real estate to the university. The partnership claimed a value of $33 million for the property.

The partnership got an appraisal and filed a Form 8283. For some unknown reason, the Form 8283 failed to state the partnership’s cost basis in the donated property, which was $2.5 million.

Held, this omission, all by itself, was sufficient to knock out the entire $33 million charitable contribution claim(!). RERI Holdings, 149 T.C. #1 (2017)

The second case involves some out-of-pocket cash expenditures made by a volunteer on behalf of a charity (a little more than $1,000 in each of 2012 and 2013). The expenditures related to mileage and the purchase of T-shirts for a youth group. The volunteer had a written mileage log and also a purchase receipt for the T-shirt, but the volunteer didn’t have a gift receipt from the charity.

Held, the failure to obtain a gift receipt (which needed to state whether the charity provided any goods or services to the volunteer in consideration of the expenditures) meant the volunteer was entitled to no federal income tax charitable deduction for the expenditures. Martinez, T.C. Summ. Op. 2017-42

Important Note: Such out-of-pocket expenditures are considered cash contributions to charity and need to be acknowledged accordingly.

For more information on gift substantiation:

Charitable Deductions: Revisiting the Basics” (Give & Take, January 2018)

Taxing Matters: Token Donor Gifts” (Give & Take, October 2015)

Gift Substantiation: The Tail That Wags the Dog” (blog post, September 8, 2015)

Avoiding Charitable Tax Traps” (Give & Take, April 2015)

Or contact your Sharpe Group representative at 901-680-5300, info@SHARPEnet.com.

by Jon Tidd, Esq.

Let’s Look at Charitable IRA Gifts

The Charitable IRA gift is likely to be the gift of choice going forward for many American 70½ and older. “Going forward” means in the wake of the 2017 tax law changes.

One doesn’t need to itemize deductions to save taxes via a Charitable IRA gift (called a “qualified charitable distribution,” or QCD) … given that the QCD isn’t taxed to the donor, and also that the donor avoids having to take a required minimum distribution from the IRA to the extent of the QCD.

There are some problems with the QCD, however. Some examples:

The feds don’t tax the QCD to the donor, but New Jersey does.

The IRS hasn’t issued guidance on when the QCD is complete for federal income tax purposes. For example, lots of IRA custodians make the QCD check payable to a charity but mail the check to the donor … requiring the donor to send the check to the charity. IRS has said this is OK but hasn’t said when the QCD is deemed to be made.

In 2017, one IRA custodian made a check payable to the donor. The donor then proposed completing a QCD by endorsing the check over to a charity. Didn’t work. The check was income to the donor.

IRA check-writing privileges also can cause problems. For example, in December 2017, a donor wrote a check on his IRA account made payable to a charity. The donor hand-delivered the check to the charity also in December 2017. The charity didn’t deposit the check until January 2018, however, because it was short-staffed due to the year-end holidays. This one should be OK, should be a 2017 QCD; but the IRA custodian is going to report it as a 2018 transaction, because that’s all the information the custodian has.

If your organization is going to promote Charitable IRA gifts this year, which may be great idea, it should start doing so well before year-end.

For professional advice on how to market this way of giving, contact your Sharpe Group representative.

By Jon Tidd, Esq

Answers to the Planning Problem

Here’s the gift planning problem from last time.

Don wants his name on Charity’s new clinic building. Charity’s president, Ron, has told Don it will cost him a big chunk of change, $X, in cash or securities or in a combination of both. Don is just about to sign a pledge agreement to this effect when his lawyer whispers something to him.

Don pauses and then says to Ron, “How about if I set up a $Y charitable remainder unitrust for myself and my wife instead. You all will get the entire trust remainder.” ($Y > $X) Don continues, “My wife and I will take a 7% payout for 10 years. Then you’ll get the money.”

Ron says, “Let me talk to my people. I’ll get back to you.”

Ron, who is clueless about such an arrangement, goes back to his office and calls Julie, Charity’s planned giving director. Ron describes to Julie his conversation with Don and asks Julie to prepare a written briefing on the matter. Julie, by the way, is a knowledgeable and experienced gift planner.

As Ron tells Julie, Don proposes to make a pledge of $Y, get his name on the clinic building and pay the pledge over 10 years using a 7% unitrust.

Questions & Answers:

  • Q. Will the gift arrangement work as Ron describes it to Julie?
  • A. No. Don would be making a legally enforceable pledge and then setting up a CRT to pay the pledge with the CRT remainder. That would be prohibited self-dealing, as we’ve seen.
  • Q. Could the gift arrangement work as Don describes it to Ron?
  • A. Yes. It is OK to make an enforceable pledge to create a CRT. Such a pledge, however, leaves open what the charity will receive from the CRT. An unanswered question is whether Don could make an additional “backstop” pledge to ensure that Charity receives at least $Y. I think it is possible to craft such a pledge.
  • Q. In retrospect, why should Julie have joined the meeting between Don and Ron?
  • A. Ron, like many charity presidents, is a “big picture” thinker. He’s not the right person to nail down a big naming pledge where tax law details are critically important. Julie, a “detail person,” should have been at the meeting, at which she would have been a much better listener than Ron.

Both charity and donor should seek advice from a specialist on complicated gift matters.

by Jon Tidd, Esq

Planning Problem

Now that we know all about pledges (Click to read Part One, Two, Three, Four, Five, Six), a gift planning problem.

Don wants his name on Charity’s new clinic building. Charity’s president, Ron, has told Don it will cost him a big chunk of change, $X, in cash or securities or in a combination of both. Don is just about to sign a pledge agreement to this effect when his lawyer whispers something to him.

Don pauses and then says to Ron, “How about if I set up a $Y charitable remainder unitrust for myself and my wife instead. You all will get the entire trust remainder.” ($Y > $X) Don continues, “My wife and I will take a 7% payout for 10 years. Then you’ll get the money.”

Ron says, “Let me talk to my people. I’ll get back to you.”

Ron, who is clueless about such an arrangement, goes back to his office and calls Julie, Charity’s planned giving director. Ron describes to Julie his conversation with Don and asks Julie to prepare a written briefing on the matter. Julie, by the way, is a knowledgeable and experienced gift planner.

As Ron tells Julie, Don proposes to make a pledge of $Y, get his name on the clinic building and pay the pledge over 10 years using a 7% unitrust.

Questions:

  1. Will the gift arrangement work as Ron describes it to Julie?
  2. Could the gift arrangement work as Don describes it to Ron?
  3. In retrospect, why should Julie have joined the meeting between Don and Ron?

Answers next time.

By: Jon Tidd, Esq

Let’s Look at Some Key IRS Rulings, Part 6

We continue looking at IRS rulings on pledges (read Part 5 here). First up is a 1981 Revenue Ruling, Rev. Rul. 81-110.

The facts here are that Party A made a legally enforceable pledge to a charity. Subsequently, Party B paid the pledge.

Focusing on the fact that Party B’s payment relieved Party A of a legal obligation, the IRS ruled that:

• Party B’s payment was functionally a payment (a gift) to Party A.
• Therefore, Party B was not entitled to a charitable deduction for the payment.
• Party A was entitled to the charitable deduction for the payment.

Note how the IRS re-configures the transaction for federal income tax purposes. Is the IRS allowed to do this? The answer is yes. In fact, the reconfiguration of transactions according to their substance is one of the IRS’s primary tools.

This ruling, all by itself, appears to throw cold water on third-party payment of enforceable pledges.

• Yet the IRS has said it’s OK to use an “IRA rollover” distribution to pay an enforceable pledge.
• And at the very end of 2017, the IRS announced it was leaning toward allowing DAF distributions to be used to pay enforceable pledges.

Stay tuned.

by Jon Tidd, Esq

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.

Let’s Look at Some Key IRS Rulings, Part 4

Before we leave our discussion of third-party buyers (buyers-in-the-wings), we need to look at one more IRS ruling, a private ruling from 1994 (LTR 9452026).

Read Part 1 here.

Read Part 2 here.

Read Part 3 here.

This is a good one. The facts are that an individual proposed transferring both securities and a valuable musical instrument to a charitable remainder annuity trust (CRAT). The individual wanted assurance from the IRS that if and when the CRAT sold the musical instrument, which was highly appreciated, he (the individual donor) wouldn’t be considered to have sold the instrument.

Why is this a good one? Because as a practical matter, the trustee of the CRAT is going to want to sell the musical instrument in order to meet the CRAT’s payout obligation. The trustee, however, was under no legal obligation to sell.

Given these facts, IRS ruled that the individual donor would not be deemed to sell the musical instrument when the instrument was sold by the CRAT. Meaning the donor wouldn’t realize any gain on the sale.

What we see here is important. The IRS is drawing a distinction between a legal obligation to sell and a clearly anticipated future sale. Anticipated not because the CRAT agreement requires the trustee to sell but because the trustee naturally is going to want to sell. (I understand the musical instrument was a Stradivarius violin, and the eventual buyer was a symphony orchestra.)

This ruling represents graduate-level gift planning. Such planning involves [a] attention to detail and [b] knowing where the IRS has drawn lines in the sand. As to detail, note that securities were transferred to the CRAT in addition to the musical instrument.

These were publicly traded securities—liquid assets. The securities bought the CRAT trustee time. Time to arrange for an orderly sale, time to avoid the need for a quick sale, of the musical instrument. This was a very good bit of fine tuning. It facilitated the IRS’s ruling the way it did.

Next time, we’ll switch gears and begin to look at some IRS rulings on pledges.

by Jon Tidd, Esq

Read Part 5 here.

The Finish Line: Tax Law Update 12/22/17

Contrary to some news reports this week predicting a delay in the signing of the Tax Cuts and Jobs Act of 2017, President Trump officially signed the bill into law today. See “Trump Signs Tax Bill Into Law” from The Hill.

Now what?

Sharpe Group’s new white paper details how the new tax law will impact charitable giving. Click here to download.

We have a library of donor communication tools that are being updated with the latest tax law. Now may be a good time to refresh your Sharpe library. More info coming soon.

In addition, Sharpe Group experts are producing a new 16-page booklet with all the information your donors need to know. “Your Guide to Effective Giving After Tax Reform” will be available for orders in the coming weeks. We’ll post a preview of the content soon.

Our next Gift Planning Seminar is coming up January 22-23, 2018 in Memphis, TN. Get a first look at the impact of the new tax law on major and planned gifts at “Integrating Major and Planned Gifts”. Click here for more information and to register.

Check back here for updates on the availability of donor communication tools.

Are We There Yet? Tax Law Update 12/21/17

The hotly debated tax law has now been passed by Congress. It will be sent to the President’s desk to be signed. There is currently some discussion on when exactly President Trump will sign the bill. It has been expected that he would sign it before Christmas. However, some reports now say he may wait until the start of the new year for strategic budget reasons.

As with the entire tax reform process, it’ll be another “Stay tuned” moment. At the end of this post are a couple of articles which explain the possible delay in signing.

Click here to download our new white paper for our analysis on how the new tax law will impact charitable giving. In addition, this article from wealthmanagement.com has a helpful visual for what is in the tax law.

No Tax Cuts for Christmas? Trump Might Delay Bill Signing” (CBS News)

It Is Unclear When Trump Will Actually Sign the Bill” (Bloomberg Politics)

 

The Bottom of the Ninth: Tax Law Update 12/19/17

President Trump has promised Americans tax reform for Christmas. And, so far, it seems it’ll be a gift he can deliver. As of this posting, GOP leaders believe they have the votes in the Senate and House to pass the tax bill, which underwent a number of significant changes. Click here to download our new white paper detailing the bill expected to be passed and how nonprofits might help donors navigate the complicated waters.

So, what’s next?

Again, as of this posting (the process has taken more twists than an episode of Law & Order), it appears the House is on track to pass the bill today (Tuesday, December 19). From there, the bill will be sent to the Senate for voting on Wednesday, December 20. If it passes the Senate, it will go to President Trump’s desk to be signed, which he is expected to do by the end of this week.

Update 12/19/17, 1:40 p.m.- the House just voted to pass the tax bill: https://www.house.gov/. The bill will now go to the Senate for vote. They could vote on it as early as tonight and, if passed, send to President Trump tomorrow.

Update 12/19/17, 3:50 p.m. – House must vote for tax bill again. http://thehill.com/blogs/floor-action/house/365670-house-will-have-to-vote-for-tax-cut-bill-again. Passage by Senate now not expected until Wednesday. 

Update 12/20/17, 8:00 a.m. – Senate voted last night to pass the tax bill. http://abcnews.go.com/Politics/republicans-expected-pass-tax-reform-measure/story?id=51870650. Bill goes back to House for second vote today.

Update 12/20/17, 10:25 a.m. – House is voting on tax bill now.  http://houselive.gov/ 

Update 12/20/17, 11:58 p.m. – The House has officially voted to pass the tax reform bill. It now will go to President Trump’s desk. He is expected to sign it before the end of the week.

But if there’s anything we’ve learned in 2017, it’s that nothing is sure until it happens.

We’re staying on top of all the twists and turns and will be prepared with all the information you need, as well as tools to help you communicate to your donors who to make the most of their giving in light of tax reform, including the white paper linked above and a booklet to send to donors (coming soon).

Stay tuned, and in the meantime, here are some good articles you might explore for more details.

What’s In – and Out of – the Final Republican Tax Bill” (The Atlantic)

GOP on Precipice of Major End-of-Year Tax Victory” (The Hill)

This Week: Congress Braces for Tax and Spending Showdown” (The Hill)