Two Important Questions

In recent days, I’ve been asked two timely questions:

  1. Is it OK for a college to contribute funds to organizations leading protests for racial justice?
  2. Is it OK for a school to establish a scholarship fund just for members of a certain racial group?

These are questions of law, not policy.

The first question is answered by examining the exact wording of the college’s tax-exempt purposes. This wording is set forth somewhere—maybe in the college’s bylaws, maybe in some document submitted to a government entity (e.g., the IRS application for tax-exempt status or the application to the state for recognition as a nonprofit corporation) or in a mission statement crafted a long time back by some lawyer connected to the college (e.g., the college’s 1970 general counsel).

I prefer to examine the bylaws or a document submitted to a government entity. These are highly unlikely to reflect bias or just one individual’s preferences. A mission statement is less reliable in this regard.

In any event, a charity can spend its funds only in furtherance of its stated tax-exempt purposes. If the call is close, it needs to be made in a written opinion of a competent attorney.

The “formal” answer to the second question is no. Scholarship funds need on paper to skirt race, religion, gender, national origin and single parenthood. Title IX comes into play here as well as some U.S. Supreme Court cases dealing with constitutional issues.

One way to finesse Title IX and constitutional problems is, for example, to set up a scholarship fund to provide for individuals who have a demonstrated interest in African American history (clearly within the realm of an educational purpose).

But caution: Setting up such a fund is not a DIY project. The skills of an expert lawyer are required. In particular, the selection of scholarship recipients needs to follow a basically race-neutral procedure.
 

By Jon Tidd
 

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“I Am Ready for My Closeup, Mr. DeMille”: Planned Giving’s “Moment”

As the country rides out the pandemic while contemplating the meaning of both social unrest and volatile financial markets, many of the nation’s most impactful charities are bracing for reduced philanthropic support. EAB, a higher education and technology consulting firm, surveyed 110 development executives about their predictions for COVID-19’s impact on fundraising. The survey also asked the executives to include their organizations’ responses to it.1 Fortunately, the generosity of prior generations of supporters will provide them a buffer to endure this decline.

However, now with so many individuals under home quarantine, it might be counterintuitively easier to connect with long-time donors and even those newer to an institution. The lockdowns remind us of how social we are.

The Zoom meeting or other videoconferencing platform gives fundraisers a safe medium to connect. While personal one-to-one visits will always be best for forming the deepest connections, virtual meetings have now proven to be another tool.

Of course, the other tried and proven means is through written communications, including newsletters and brochures, which continue to be vital. The June 3rd issue of the Chronicle of Philanthropy, “Planned Giving Is Having a Moment During the Pandemic” by Eden Stiffman highlights how some organizations have communicated to donors with tact and sensitivity as part of staying connected. And the outreach has been productive. The Southern Poverty Law Center received more than 50 new bequest commitments—a significant increase over a similar period from the prior year.

The Response to the Pandemic

The responses to the EAB survey contained three strategies of particular note:2

1. “Increasing planned giving training anticipating an increase in estate giving interest.”
2. “We have adjusted and increased our communications and virtual engagement opportunities … to ensure that we remain top of mind.“
3. “Emphasizing development communications, consistent messaging and attitude of gratefulness in external communication channels.”

We at Sharpe Group could not agree more and have been advising our clients to follow these strategies for decades!

Using Your Most Valuable Expertise

Since planned giving professionals are often the most experienced “experts” in the search for their institutions’ legacy supporters, the current environment is not the time to hide.

Social distancing has given all the opportunity to reflect deeply about the people and institutions that have meant and continue to mean the most. Though the lethality rates of COVID-19 are unknowable, it has inspired the thoughtful to ponder their legacy. And, for some, philanthropy is an important component of it. They can be part of the next generation of future support that enables their favorite charities to rebuild or build up the margin of error in order to endure.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
 

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1. The respondents are anticipating a notable decline. Over forty percent of the respondents anticipate a decline of 10% or more; twenty percent a decline of 20% or more. Million-dollar commitments are most at risk for being delayed or unfunded. Read more here.
2. The details of the EAB survey can be found here.

An Important Tax Court Case About Giving Real Estate

The Guest case shows how to reap benefits from and avoid problems with a real estate gift.

The donor in Guest wrote a letter to Charity stating that he, by the letter, gave two properties to Charity. Wanting the gift but not wanting to be in the chain of title, Charity wrote back to the donor that it accepted the gift and asked that the donor await Charity’s transfer instructions.

Next, Charity approached a real estate investment group (the “K Group”). Charity and the K Group made a deal. Charity would instruct the donor to deed the two properties to the K Group who would sell the properties and remit the sale proceeds to Charity.

In fact, that’s what happened. The matter wound up in the tax court, which considered two basic questions: Had the donor made a charitable gift? If so, when did the donor make the gift?

The court held that [1] the donor did make a charitable gift and [2] the donor made the gift when he deeded the two properties to the K Group.

To understand this holding, one must grasp that the federal tax law doesn’t always follow state law. Under state law, the donor never transferred the properties to Charity … Charity never received a deed from the donor. Under federal tax law, however, the gift was formed by the exchange of letters and the donor’s transfer to the K Group pursuant to Charity’s instructions.

So, the donor got a charitable deduction, and Charity was never in the chain of title. A terrific outcome.

Caution: Don’t try this “at home.” A Guest transaction requires expert handling by a skilled tax lawyer.

By Jon Tidd

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Mixed Results for Giving in 2019

The first quarter of 2019 began with the DOW and other stock market indexes seeing a significant decline. There were growing concerns over the economy, which created a challenging environment for charitable giving. By mid-year, half of the charitable organizations indicated their fundraising results were flat or down compared to the previous year. The economy and stock markets both improved in the second half of 2019, and income, net worth and GDP increased accordingly.

Though charitable giving appeared to enjoy a rebound, would it be enough to make up for the slow start during the first half of the year?

Three recently released reports show mixed results for charitable giving in 2019. They include: The Fundraising Effectiveness Project (FEP), research established by the Association of Fundraising Professionals and the URBAN Institute; The Charitable Giving Report, conducted by the Blackbaud Institute; and Giving USA 2020: The Annual Report on Philanthropy for the year 2019, published by the Giving USA Foundation and researched by the Indiana University Lilly School of Philanthropy at IUPUI. Together, the three reports provide an intriguing look at charitable giving for 2019, particularly gifts from individuals. Based on each report, giving from individuals either fell 1.4%, grew 1% or grew 4.7%. A few of the highlights of each report are included below:

The Fundraising Effectiveness Project Report (AFP & the URBAN Institute):

  • 2019 donor revenue was 98.64% of 2018.
  • Small, medium and large contributions fell, 1.1%, 1% and 1.4% respectively.
  • Most of the gift revenue came from donors of $1,000, totaling 84.47%.
  • Total number of donors fell 3%.

The Charitable Giving Report (Blackbaud Institute):

  • Charitable giving grew 1% in 2019.
  • Online giving was 8.7% of total fundraising.
  • Gifts to large organizations fell 0.7%. Giving increased 3.2% for medium and 2.2% for small organizations.
  • The average age of U.S. donors was 63.
  • December was the most generous month, and about one-third of giving occurred in the final three months of the year.

Giving USA 2020: The Annual Report on Philanthropy for the year 2019 (Giving USA Foundation):

  • Total charitable giving from individuals, bequests, foundations and corporations was an estimated $450 billion, an increase of 4.2% (2.4% adjusted for inflation) over the prior year.
  • Giving by individuals totaled an estimated $310 billion, rising 4.7% (2.8% adjusted for inflation) in 2019.
  • Giving by foundations rose slightly to $76 billion, an increase of 2.5% (0.7% adjusted for inflation).
  • Giving by charitable bequests was estimated at $43 billion and was basically flat for the year, HOWEVER BEQUEST REVENUE WAS THE FASTEST GROWING SOURCE OF GIFT REVENUE BETWEEN 2017 AND 2019, RISING 9.5% AND OVERALL TOTALING MORE THAN $120 BILLION IN CURRENT DOLLARS.
  • Giving by corporations saw the largest increase of just over 13% totaling $21 billion (an increase of 11.4% when adjusted for inflation).
  • All in all, 2019 turned out to be a pretty good year for giving after a relatively bad start.
    Additional information may be located at:

    By Barlow Mann, General Counsel

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Real Estate-Funded Gift Annuities

Some individuals who own real estate like the idea of swapping the real estate for a gift annuity. Especially if they’ve grown tired of managing the property and see the gift annuity as a good way of replacing the income the property provides.

This can be a good deal for the donor. And a bad deal for the charity. Why a bad deal? Because the charity assumes a lot of risk.

The chief risk is that when the charity sells, it won’t realize nearly what it expected to realize.

The donor may be OK with the charity agreeing to base the annuity payment on the amount it receives from selling the property.

There’s a problem with this idea, however. The problem stems from the fact that a gift annuity arrangement is a contract, and a contract is not formed until there is a meeting of the minds. If the annuity payment is to be based on the amount the charity receives from selling, there is no meeting of the minds until after the sale occurs.

This means that for tax purposes the donor hasn’t made a completed transfer to the charity until there’s a sale, which exposes the donor, on audit, to any gain realized on the sale.

If a charity is willing to assume the risk, is willing to agree up-front to a specific annuity payment regardless of how much it gets from selling, there are a couple of ways to diminish the risk:

One is to issue a deferred payment gift annuity, deferred for, say, one or two years. This buys the charity time.

Another is for the charity to get its own assessment of the property’s real value and then to discount this value, say, by 10- or 20%. This provides a value cushion.

Personally, I wouldn’t agree to issue the annuity except in extraordinary circumstances … such as an ideal property in a strong and rising real estate market and a great donor. Even then, I’d strongly prefer a flip unitrust to a gift annuity.

By Jon Tidd
 

Giving Real Estate Imprinted Publications

Need something quickly or have a tight budget? Sharpe’s stock booklets and brochures are the most cost-effective solution. Read more about imprinted publications to learn how to add your organization’s logo and contact information to the front and/or back of one of our standard publications.

Giving Real Estate

A companion piece to Giving Securities, this booklet emphasizes the many gift opportunities open to those who own highly appreciated real property. Donors in areas with rapidly increasing real estate values or who hold the majority of their wealth in real property will benefit from Giving Real Estate.

Click here to learn more about ordering this booklet.

Note About the CARES Act

If you have recently ordered, or have been considering, Sharpe Group’s Giving Real Estate booklet, we are making a complimentary insert available highlighting charitable provisions in the CARES Act to include in mailings to your donors.

Click here to learn more.

Questions & Answers About Giving Real Estate

Questions & Answers About Giving Real Estate provides answers to some of the most commonly asked questions about giving real estate, including types of real estate one can give, how to continue to live at the property once donated and the advantages of making a real estate gift.

Click here to learn more about ordering this brochure.

 

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How the IRS Discount Rate Affects Gift Calcs

The IRS discount rate (7520 rate) has a big effect on charitable remainder annuity trust (CRAT), charitable lead annuity trust (CLAT) and gift annuity calculations but has almost no effect on unitrust calculations.

CRAT calculations: The 7520 rate adversely affects two CRAT calculations: [1] the charitable remainder calc and [2] the 5% probability calc … because the 7520 rate is the CRAT’s assumed earnings rate. The less the CRAT is assumed to earn, the less the charitable remainder beneficiary is projected to receive and the sooner the CRAT is projected to run out of money.

CLAT calculations: A low 7520 rate boosts the CLAT payout value, which increases the CLAT’s tax leverage.

Gift annuity calculations: A low 7520 rate lowers the charitable contribution; but it increases the tax-free portion of the gift annuity payments. It also increases the capital gain that’s realized if the annuity is funded with appreciated stock.

Bottom Line: A low 7520 rate is good for cash-funded gift annuities set up by individuals who don’t itemize.

Unitrust calculations: The value of a charitable remainder unitrust (CRUT) remainder is almost unaffected by the rate, as seen from this table (recipient is aged 70):
 

 
The table shows there is little to be gained by electing a prior month’s higher 7520 rate in the case of a CRUT. What’s mainly achieved is the hassle of filing a 7520 rate election with the tax return on which the CRUT is first reported.

The reason the CRUT remainder value is almost unaffected by the 7520 rate is that the 7520 rate is not the assumed earnings rate of a CRUT. The 7520 rate only bears on how the payout frequency affects the CRUT remainder value.

The payout frequency has a larger effect on the remainder value than does the 7520 rate. The greater the frequency, the lesser the remainder value.

By Jon Tidd
 

Sharpe Personalized Publications

Every donor communications plan requires informational, motivational and educational content for different types of gifts. Sharpe Group publications offer your donors up-to-date information on gift structures that may help them give more than they thought possible.

Use Sharpe Group’s online platform to personalize and order printed brochures targeted to your donors–uniquely styled with colors and images that brand your organization’s message and mission.

Choose an accent color and cover image from the provided selections, or upload your own image and your full-color logo to create a brochure that aligns with your fundraising strategy and fits your organization.
 

Click here to learn more.

 

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We’ve Received the PPP Funds … Now What? (The “All Things Considered” Edition)

I’ve got my memories
Always inside of me
But I can’t go back
Back to how it was
I believe you now
I’ve come too far
No I can’t go back
Back to how it was

Created for a place I’ve never known

This is home
Now I’m finally back to where I belong
Where I Belong
Yeah, this is home
I’ve been searching for a place of my own
Now I’ve found it
Maybe this is home
This is home

Switchfoot (This Is Home)

(Bob speaking) One of my favorite shows on public radio is “All Things Considered.” I couldn’t help but think of that title when I was writing this blog.

Just to recap, our previous blog on this subject outlined considerations for applying for a PPP loan. Many nonprofits did just that and now are faced with what to do with the funds.

As with any big money decision facing a nonprofit, there are many angles the executive team should consider. We’ve laid out what we believe are the most important considerations:

Consider the legal implications and required compliance that accompany the PPP funds.

Compliance will be important in order to have a portion of the loan forgiven. The wording states that the organization must have the ability to prove that their current economic uncertainty makes the loan request necessary to support their ongoing operations.

Because the signatory on the application affirms that the applicant needs the money, we would recommend, at a minimum, your nonprofit document your understanding and analysis of the “need” for the PPP funds. Currently, the SBA officials are saying there will be some form of an audit of the need at certain amounts. Documentation should include a review of the funds and their use as well as include the reasoning behind the need.

Further, we would recommend discussing your findings on the use and compliance of the PPP funds with your auditor, banker and board of directors. As we’ve said before, communication with experts and leadership is essential.

Consider the ethical/moral questions you may face by taking the PPP funds.

(Bob speaking) I’ve recently had a discussion with two prominent churches who applied for and received the PPP funds. In both cases, the churches grappled with the ethics of their decision to apply for—and then receive—the funds. In both instances, the churches brought these decisions to their ruling authorities.

The same process should be considered by nonprofits; your board and/or leadership should play a prominent role in the decision whether to accept the PPP funds.

I’ve also spoken with several nonprofit CFOs who decided not to apply for PPP loans on the basis that some employees may not agree with the application and could be vocal about it. In these cases, they determined taking the loan was not worth the risk.

Which brings us to our last consideration…

Consider the potential reputational risk that goes along with taking the PPP funds.

As noted in recent media articles, the reputational risk that could result from negative media should be quantified in making your decision and how you communicate it to your staff and donors.

While it is difficult to fully quantify the reputational risk, one option could involve polling key constituents and board members as to how they would view the organization accepting the funds. Taking the time to reach out for others’ opinions allows your organization to make decisions that are not in a vacuum.

At Sharpe, we have 50-plus years of reputational, relational and technical experience working exclusively with the nonprofit sector. If your organization needs expert counsel in developing an ongoing strategy, we can assist.

 
By Bob Mims, Sharpe Group CFO, and Tom Grimm, Sharpe Group Senior Consultant
 

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Using 20/20 Hindsight for Future Planning: What Nonprofits Should Be Doing Now, Part 2 of 2

The first part of this article was featured in the latest issue of Sharpe Group’s bimonthly newsletter Give & Take. Click here to read it.

Here, I will further explain the provisions of the CARES Act as they relate to nonprofits and then offer ideas to help you evaluate whether your current planned giving strategy is designed to help your organization through future crises.

Engage banking experts for guidance

With the passage of the CARES Act, which provided economic relief to both individuals and businesses, including nonprofits, the time is now to explore whether your nonprofit can receive its share of the benefits. There are four provisions that may apply to your organization, and, as always, it is best to seek guidance from experts,

Paycheck Protection Program (PPP)—not your average type of loan: the forgivable kind

    What is it?

      o Total of $349 billion available to eligible businesses (including nonprofits).

      o Program is administered through local lenders (banks) by the Small Business Administration (SBA).

    • Who is eligible?

      o Nonprofits with fewer than 501 employees.

      o Any affiliations that control the organization must be included with the number of employees in the eligibility count.

    • How much can you receive?

      o Up to $10 million available, computed as two-and-a-half months of payroll costs.

      o Employee compensation for the purposes of the computation is capped at $100,000.

    • How can you spend it?

      o Compensation to any individual up to $100K.

      o Paid sick or medical leave.

      o Insurance premiums.

      o Mortgage interest and rent.

      o Utility costs.

      o Other interest payments.

Economic Injury Disaster Loan Emergency Advance (EIDL)

    What is it?

      o Administered through the SBA.

      o For temporary losses following a statewide economy injury declaration.

      o Losses experienced as a direct result of the COVID-19 outbreak qualify.

    • How much can you receive?

      o Up to $2 million.

      o $10,000 in emergency grants (forgivable) of advance payments while organization’s application is pending.

    • How can you spend it?

      o Paying fixed debts.

      o Payroll.

      o Accounts payable.

      o Other bills that cannot otherwise be paid.

Payroll tax relief (generally cannot be used if your organization uses the PPP)

    • Who is eligible?

      o Nonprofits that have suspended operations (fully or partially) due to government order related to COVID-19 and that suffer greater than 50% reduction in year-over-year quarterly gross receipts.

    • How much can you receive?

      o 50% of the wages (max of $5K/employee) who are not working because of the closure during the period of March 13, 2020, to December 31, 2020.

      o Nonprofits with fewer than 101 employees may claim a credit for employees who continue to work.

Other emergency relief (designed to help nonprofits with greater than 500 employees up to 10,000 employees)

    • The Treasury is directed to implement a loan program that has an interest rate no higher than 2% per year with no payments due the first six months.

    • Funds received must be used to retain at least 90% of the organization’s workforce through September 30, 2020.

Evaluate your planned giving strategy

Now is the time to develop a clear vision of the role of planned giving in your organization’s future. When thinking about planned giving, you should consider the following:

    • Who is eligible?

      o Long-term donors are usually your best prospects.

    • How long until we see a return on our investment?

      o Consistent investment in planned giving over time is essential as planned gifts begin to mature over a six to 10-year period, on average.

    • The million-dollar question: How much can we expect to receive?

      o Up to 100% of a donor’s estate, but usually a portion of it.

      o It is common to receive more dollars from unknown bequest intentions than from those that are known in advance.

      o Average bequests are often around $50,000 nationally

    • How can we spend it?

      o Donor intent prevails on the method of spending.

      o Unrestricted dollars may be spent on operations/programs.

      o Careful consideration should be taken on allocating a portion of planned gifts to endowments.

Build a successful planned giving program for the long-term

Whether you are starting a planned giving program or looking for ways to maximize the success of your existing program, there are questions you can ask yourself to evaluate its effectiveness:

    • Does your organization currently have a planned giving program?

    • How might your organization efficiently invest in a planned giving assessment?

    • Can part or all of your planned giving program be outsourced? Or, should you hire someone dedicated to the planned giving role? How can you find that person?

If you have a mature planned giving program, are you redoubling your efforts to communicate and listen to your donors during this crisis and after?

As we all continue to navigate through these uncertain times, Sharpe continues to draw on our 50+ years of experience in assisting nonprofits in their fundraising efforts. We would be honored to assist your organization in developing a long-term strategy for the future. Contact us for more information.
 
By Bob Mims, Sharpe Group CFO

 
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The Value of Stewardship, Part 2 of 2: Hang a Lantern on Your Problem … Before the Donor Does

Background

In the May/June issue of Give & Take, The Value of Stewardship, Part 1 of 2: First Do No Harm showed how the acceleration of a bequest intention stewarded unsatisfactorily in the eyes of the donor led to its revocation. What is the nature of the risk to the charity when a donor makes a transformational gift during lifetime and dies shortly thereafter? The gift has been paid in full, the estate administered without objection. The heirs were very supportive of the philanthropic goals. What could possibly go wrong? Let’s examine an interesting case.

Michael Moritz was a nationally prominent corporate lawyer at a global law firm. A grateful scholarship recipient, generous donor and a member of the university’s foundation, he made, in 2001, the largest gift at that time ($30.3 million) to endow four faculty chairs and make 30 annual scholarship awards. The university showed its gratitude by naming its law school after him. Sadly, our donor didn’t live long thereafter, killed less than a year later by a hit and run driver.

The controversy

It took nearly 15 years for the controversy to emerge even though the widow had succeeded her husband on the foundation board. The donor’s son, an alumnus and lawyer, learned the endowment had declined almost 28% from its initial value. The goal of awarding 30 scholarships was not met. The son and his mother also objected to the charging of fees up to 1.3% for fundraising purposes, including the wooing of other donors. Finally, the heirs, without much bargaining power after the conclusion of the administration of the estate, began litigation to reopen the estate.

The university maintained that the son had no authority to enforce the contract; evidently, only the attorney general of Ohio does. The university maintained there was no need for the gift agreements to include references to development fees since the fees were lawful and authorized by the foundation board. Furthermore, the donor’s long-time involvement with the foundation necessarily meant he knew of the existence of the charges against all endowments to cover the development expenses of a multiyear comprehensive capital campaign. As of this writing, the Mortiz family is appealing a decision preventing it from reopening the estate. The Mortiz family says, “We love [the school]. But we can’t sit by and see a $30 million (fund) go to zero.” 1

Planning pointers

There are lessons for both donors and charities.

A. Any fees charged against the income and/or principal of the gift should be clearly communicated, especially for transformational gifts. Charities should be prepared to reduce or eliminate their fees for gifts over a certain amount. A gift acceptable policy should make clear whether the institution has the authority or discretion to depart from regular policy.

B. At a minimum, annual reporting should explain the use of the funds consistent with the gift agreement, including scholarships provided, research supported and professorial salaries paid. An excellent practice would be to designate successor recipients of this and any other communications. Counsel for the donor and heirs should insist on this provision to provide legal standing should issues arise about the gift’s administration.

C. At a minimum, annual reporting should explain how the invested funds compared its benchmark returns.

D. Notwithstanding the depth of involvement and legal sophistication of the donor, it is appropriate to create a record of what the donor agreed to so family members and heirs can be assured all the details of a gift agreement were understood and agreed to by the deceased donor.

 
By Professor Christopher Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 
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1. See Moritz family challenges Ohio State University for using percentage of endowments to woo more gifts

An Era of Heightened Scrutiny Arising for Donor Advised Funds?

One of the lesser known aspects of a donor advised fund (DAF) is the advisory privilege on investments.1

Presently there are no regulations under sec. 4966 of the Internal Revenue Code (Code) providing guidance. The practice of charities sponsoring DAFs has been to maintain legal ownership and control of the assets after receipt. Failure to do so risks the deductibility of the contribution.

A case winding its way through the United States District Court of the Northern District of California (Court) might ultimately decide when the advisory privilege has crossed the line and endangers the deductibility of a contribution. In December of 2017, the Fairbairns contributed $100 million of lightly traded public stock to the Fidelity Charitable Gift Fund (Fidelity). They were concerned about liquidating all the stock representing 10 percent of the company especially in light of Fidelity’s policy to “sell as soon as practicable.”

Fidelity sold all of the stock during a short period of time. The value of the gift turned out to be closer to $70M.

Fairbairns sued, alleging that they were encouraged to contribute to Fidelity on its promises to employ state-of-the-art techniques to liquidate large blocks of stock and allow them to advise on a price limit.

Fidelity argued that the Fairbairns’ claiming of a charitable income tax deduction on the 2017 return bars them from directing the timing of and the amount of the gifted shares to be liquidated. Fidelity argued that the Fairbairns’ claim of misrepresentation would mean it did not have the exclusive control over the gifted asset as required under Sec. 4966 of the Code.

The Court rejected Fidelity’s argument characterizing the Fairbairns’ instructions as conditions issued prior to the time of the donation and not subsequent to the donation. The Court further noted the legislative history accompanying the codification of the DAF under Sec. 4966 of the Code does not distinguish between a legally enforceable promise made at time of contribution and one made after the donation. Nor did a 2011 Treasury Report to the Congress on Donor Advised Funds.2

The danger to the donor of a lost or diminished income tax deduction arises when the right of advise¬ment becomes interpreted as a legal right of direction able to be legally enforced. While that argument of Fidelity was dismissed during its hearing on its motion for summary judgment, the Court’s order doesn’t preclude it from being raised at trial. The risk to the Fairbairns is winning the argument of enforceable promises that a court interprets as preventing Fidelity from ever having dominion and control. While that may not be a likely or even a correct result, it would be a Pyrrhic victory for the Fairbairns.

For a more detailed discussion of this case, please see my article in the April issue of Trusts & Estates entitled Fairbairn v. Fidelity Investments Charitable Gift Fund: Plaintiffs’ Day in Court Still Possible But Will Victory be Pyrrhic?
 

By Professor Christopher Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 

 
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1. Internal Revenue Code, sec. 4966 (d) (2)(A)(iii).
2. See The Joint Committee on Taxation, Pension Protection Act of 2006, Title XII: Provisions Relating to Exempt Organizations, 2006 WL 4791686 and www.treasury.gov/resource-center/tax policy.Documents/Report-Donor-Advised-Funds-2011.pdf. at p. two. The 2011 report notes “In the case of a DAF, the donor is explicitly permitted to advise the sponsoring organization about how the donated funds should be invested and/or disbursed to other charities, but such advice is subject to the DAF sponsoring organization’s ultimate discretion and control.” Notice there is no distinction for when these rights of recommendation exist.