What Makes Up the Tax Law?

This is an important matter, because it goes to what can be relied upon in trying to answer certain gift planning questions.

The bedrock tax law is the Internal Revenue Code (IRC), which has passed both congressional houses and been signed into law by the president. (The Constitution speaks even more fundamentally to certain tax issues but operates largely in the background of the tax arena.)

The IRC is a series of broad strokes. Congress leaves the details to the Internal Revenue Service (IRS), whose job is to interpret, administer and enforce the IRC. The IRS’s interpretation of the IRC is found in various pronouncements:

  • The Regulations are the principal pronouncement. Here, for example, we find certain date-of-gift rules for charitable gifts and copious detail on charitable remainder trusts (CRTs). The Regulations have the force of law and are presumed to be correct.
  • Other IRC pronouncements include
    • revenue rulings, which have the force of law;
    • revenue procedures, which, for example, contain specimen CRT agreements and which have the force of law;
    • various IRS Publications on a plethora of topics, such as receipt and valuation requirements for charitable gifts, which cannot be relied upon and do not have the force of law: and
    • IRS private letter rulings, which are an important source of information about charitable gift planning but which can be relied upon only by the party who obtained the ruling.

Next time, we’ll begin looking at some important IRS rulings on charitable giving.  After that, we’ll turn to the courts and look at some equally important court opinions on charitable giving.

by Jon Tidd, Esq

Tax Reform Update 09/27/17

Congress and the White House announced today the release of the outline on tax reform they promised for this week. A public press event, “Release of Unified Tax Reform Framework,” is planned for today (Wednesday, September 27, 2017) at 2:15 p.m. ET. It will be live-streamed on speaker.gov/live.

The nine-page document, “Unified Framework for Fixing Our Broken Tax Code,” offers a road map for the goals of a bill aimed at retooling the American tax code.

According to the framework, the goals of a tax reform bill include lowering taxes for small businesses, de-incentivizing overseas jobs and tax breaks for the middle class. The full framework can be downloaded here.

Making the Most Generous Time of the Year Work for Your Organization

As many fundraisers know, the last three months of the year can be the most productive time period for nonprofit fundraising. This may be especially true this year. With record highs in the stock market, charitable giving up and continuing to rise, and tax reform discussions looming, it may be particularly important to encourage more gifts before December 31st this year.

Here are some Sharpe Group articles and posts we’ve shared with a treasure of information on why year-end fundraising is so important and some strategies and tools for making this a banner year for gifts to your organization.

“Planning Your Year-End Fundraising Calendar,” August 2017 Give & Take

“Why Year-End Is the Most Generous Time of the Year,” October 2016 Give & Take

Click here for tools for encouraging year-end giving.

Year-end is also a particularly good time of the year to encourage gifts of stock and gifts from retirement plans.

In addition, here’s an article we published in the December 2015 Give & Take that looks at some science behind charitable giving.

All of us at Sharpe Group wish you luck in your year-end fundraising. Please contact us is you have other questions about year-end or planned giving fundraising.

By Barlow T. Mann

Congressional Outline for Tax Reform Expected Soon

Sharpe Group experts will be monitoring tax reform measures and news as talks continue and legislation is prepared. We’ll be posting updates on this blog.

According to this news story from NBC News which ran on September 14, a Congressional outline should be coming around Sep 25, but legislation is not yet ready to be introduced. Click here to read the full story.

Sign up for our weekly blog for more upcoming updates.

Barlow T. Mann, Sharpe Group COO

A Gift Planning Quiz

Here’s a quiz. Answers next time.

  1. Donor uses highly appreciated stock to pay a legally enforceable pledge. Why isn’t Donor treated as selling or exchanging the stock, so that Donor realizes a capital gain?

Hint:  If an individual pays a debt by transferring appreciated stock to the creditor, the individual is treated as selling or exchanging the stock and does realize gain.

  1. Donor, the CEO of ABC Corporation, a large and publicly traded company, owns some ABC stock that is subject to sale restrictions under S.E.C. Rule 144. Can Donor give this stock to a charity?
  2. The same individual as in #2 owns incentive stock options (ISOs) that allow her to buy ABC shares from ABC at a bargain price. Can she give any of her ISOs to charity?
  3. Donor owns real estate subject to a mortgage, but Donor is not personally liable on the mortgage debt. If Donor uses the real estate to fund a charitable remainder unitrust, will the funding of the trust be treated as a bargain sale?
  4. Donor promises (pledges) to create a $1 million charitable lead annuity trust that will pay $50,000 a year to Charity for 10 years. The annual payments will be used to discharge a previous pledge running from Donor to Charity for which Donor’s name was placed on a room. Will this arrangement violate the self-dealing prohibition?

Note:  If you get this one right you get an A+ on the quiz.

  1. Extra credit: Donor wants to create a sizable gift annuity at Charity for the express purpose of paying for a table at Charity’s upcoming gala dinner. Any tax problems here?

Join us next time for the answers to this quiz and see how you scored.

by Jon Tidd, Esq

How Do Bargain Sales Work?

A bargain sale is a sale to charity at a bargain price. The classic example is a sale of real estate to a charity at a price below fair market value (FMV).

Or supposedly below FMV. Charities need to be cautious when offered real estate at a supposed bargain price, unless the charity wants the real estate for its own purposes. Cautious because the “donor” may be inflating the property’s value or trying to offload a problem. These concerns usually vanish when the charity wants the property to further its mission.

In a true bargain sale (i.e., a sale truly at a bargain price), there are two tax consequences to the donor-seller: [1] the ability to claim a charitable deduction for the bargain element in the sale; and [2] the realization of gain if the asset in question has appreciated in value. Here’s an explanation of how the numbers work:

Concept: Assume we know:  FMV, the donor’s basis in the asset (B), and the selling price (SP).

The bargain element in the sale, for which the donor-seller may claim a charitable deduction, is FMV – SP.

The gain realized by the donor-seller is given by this formula:

Gain realized = (SP/FMV) x (FMV – B)

Example:  Assume FMV = $500,000; B = $300,000; and SP = $250,000. Donor-seller may claim a federal income tax charitable deduction (subject to all the usual limitations and valuation requirements) of $500,000 – $250,000, or $250,000.

Donor-seller realizes a gain equal to:

($250,000/$500,000) x ($500,000 – $300,000)

Which is equal to (1/2) x $200,000, or $100,000.

Bargain sales are relatively uncommon, except for gift annuities. A gift annuity funded with a noncash asset is a bargain sale of the asset and is treated as such, the only “twist” being that the realized gain is generally spread over the donor’s “life expectancy.”

by Jon Tidd, Esq

Let’s Take a Look at Charitable Bequest Planning, Part 3

Read Part 2 here

Charitable bequests fall into three categories:

  1. a bequest of a specific dollar amount
  2. a bequest of a portion of the donor’s residuary estate
  3. a bequest of a specific asset

The specific dollar bequest should be paid by the executor relatively early in the settling of the donor’s estate. So should the bequest of a specific asset. These two types of bequest take priority over residuary bequests and are inferior only to debts, expenses and taxes.

Residuary bequests are usually paid in installments by the executor. The final installment is often eaten into by legal and accounting fees.

What causes a delay in estate distribution? There can be any number of reasons. Some of the more common reasons are:

  • There’s a lawsuit involving the estate, which is hanging things up.
  • The executor is having difficulty disposing of a major asset, typically real estate.
  • The executor is a no-show.
  • The executor is wrangling with the charity over the terms of an endowment agreement.
  • Some asset (e.g., an IRA payable to the estate) is causing the executor to sit tight because of tax or other legal uncertainty.

Executors always want the charity the sign a receipt, release and re-funding agreement in connection with an estate distribution to the charity. These agreements are commonplace, but a charity should not agree to refund more than the charity receives from the estate.

If you have a question about your estate settlement process or would like to arrange a review, contact Sharpe Group by clicking here.

by Jon Tidd, Esq


Sharpe Group has several donor communication tools to help you inform your constituency about giving through wills, including booklets and brochures: How to Make a Will That WorksGiving Through Your WillHow to Protect Your Rights With a Will37 Things People “Know” About Wills That Aren’t Really SoQuestions & Answers About Wills and BequestsHow a Will Works for YouThe State Has Made Your Will, Has Congress Changed Your Will? and You Never Need to Change Your Will Unless …

In addition, Sharpe Group experts can tailor articles for Newsletters and Gift Planning Website clients.

Let’s Take a Look at Charitable Bequest Planning, Part 2

Read Part 1 here.

Charitable bequests by the wealthy are often made not only to carry out a philanthropic objective but also to save taxes and maybe also to achieve some other purpose. For example, wealthy individuals often leave wealth to a private family foundation both to avoid estate taxes and to provide downstream heirs who sit on the foundation board with the opportunity to learn about philanthropy.

The federal estate tax generally allows for an unlimited charitable deduction, which in a sense makes the federal estate tax voluntary. To the writer’s knowledge, states that impose an estate or inheritance tax also allow unlimited “death tax” charitable deductions.

But the federal estate tax charitable deduction can be lost through faulty planning. Some examples:

The charitable deduction is allowed for leaving a specified amount to qualified charities to be selected by the donor’s executor but not for allowing the executor to determine how much shall go to charity.

The charitable deduction can be lost if the bequest to a charity is so restricted that there’s a real possibility, as of the date of death, that the charity will reject the bequest. Even if down the road the charity’s board votes to accept the bequest as restricted.

The charitable deduction can be lost when the bequest is to a trust intended to be a charitable remainder trust (CRT) if the language creating the trust fails to meet the requirements of a CRT.

These are just a few of many examples that could be given. Which means the lawyer who drafts the donor’s will should know at least the basics of the estate tax charitable deduction.

Something important to know about the estate tax charitable deduction is that it’s not subject to some of the major rules applicable to the income tax charitable deduction. These major rules include [a] the rules requiring a “qualified appraisal”; [b] the rules applicable to gift receipts for lifetime donations; and [c] the unrelated use rule, which applies to lifetime donations of tangible personal property.

We’ll continue drilling down into the important subject of charitable bequests next time.

By Jon Tidd, Esq

Read Part 3 here

Let’s Take a Look at Charitable Bequest Planning, Part 1

Lots of questions. Here are a few:

Is the federal estate tax a concern?

  • Is state law a planning consideration?
  • Does the donor want to bequeath a specific dollar amount or a specific asset or a percentage of his or her residuary estate?
  • Does the donor want to create a restricted endowment?
  • Does the donor want to provide an income to a survivor, such as his or her spouse?

The writer of this blog is a traditionalist who uses the term “bequest” to mean a gift by will. Which potentially raises another important question:

Is there anyone in the picture (son or daughter, for example) who may well challenge the validity of the donor’s will?

If there is, great care needs to be taken, depending on the likely nature of a challenge. For example, if capacity is likely to be an issue, the donor may want to be examined by a physician before making his or her will. In this area—where a will contest may loom—a key player is the donor’s lawyer, and the donor must rely on his or her lawyer to establish a bulwark against a challenge to the will.

One thing’s for sure: a charity should be very careful about suggesting language for the donor’s will, out of fear that a future challenger of the will may use the suggested language as evidence of undue influence. Any such suggested language should be provided with the caveat that the language is merely suggested and is provided for the independent consideration of the donor’s lawyer.

There’s a flip side to this discussion of will contests that’s important to mention. It’s that in some situations, charitable beneficiaries may wish to challenge a deceased donor’s will. This can happen when predators got to a vulnerable donor late in life and got him or her to make a last-minute will change in favor of the predators and to the charitable beneficiary’s detriment.

More about bequests and bequest planning next time.

By Jon Tidd, Esq

Read Part 2 here. 

Sharpe Group has several donor communication tools to help you inform your constituency about giving through wills, including booklets and brochures: How to Make a Will That WorksGiving Through Your WillHow to Protect Your Rights With a Will37 Things People “Know” About Wills That Aren’t Really SoQuestions & Answers About Wills and BequestsHow a Will Works for YouThe State Has Made Your Will, Has Congress Changed Your Will? and You Never Need to Change Your Will Unless …

In addition, Sharpe Group experts can tailor articles for Newsletters and Gift Planning Website clients.

Let’s Take a Look at Gift Annuities, Part 3

There’s one more gift annuity topic we need to consider: the application of federal securities laws to a gift annuity program. This is a two-part discussion.

Part 1 is the fact that the 1995 Philanthropy Protection Act (“PPA”), which grew out of a Texas gift annuity transaction, applies federal securities laws to certain planned gift arrangements, including gift annuities. Specifically, the 1995 PPA provides that a charity’s “reserve fund” for gift annuities must be described to gift annuity donors in a disclosure statement. The 1995 act does not prescribe the contents of the disclosure statement; and charities are all over the lot in terms of their CGA disclosure statements.

Part 2 is potentially a much bigger deal. Part 2 is the fact that, in 2009, the Ninth Circuit Court of Appeals held in Warfield v. Bestgen that gift annuities being marketed by a certain charity were “investment contracts” for federal securities law purposes. This meant each and every gift annuity issued by the charity was a registrable security. This holding goes far beyond and has far greater implications for gift annuity programs than the 1995 PPA.

Why did the Ninth Circuit hold this? The holding is based on how the gift annuities were being marketed. The marketing brochures did discuss how the “residue” remaining when annuity payments terminated would be devoted to the donor’s charitable purposes. This was no problem, of course.

The marketing brochures also played up the gift annuity payment rates, income tax savings and capital gains tax benefits in investment-oriented language. The Ninth Circuit said these tax and financial inducements appealed to the investment “appetite” (my word) within the prospective donor.

Appealing to such “appetite,” according to the Court, is largely what makes a security a security. [The other elements of a security are (a) the pooling of assets for investment purposes, which occurs within a CGA reserve fund; and (b) the expectation of profit, which can and sometimes does come to fruition when gift annuity recipients live beyond “life expectancy.”]

So, there we have it … so far. If you are unsure about the approach your organization is taking to market gift annuities, check with your Sharpe Group rep. It might be a good reality check.

by: Jon Tidd