The “Dirty Dozen”
The IRS “2005 Dirty Dozen” list, a countdown of the most serious tax scams last year, includes one item of particular interest to gift planners. Number 9 on the list of tax scams is “Abuse of Charitable Organizations and Deductions.” This listing is in response to the increased use of tax-exempt organizations to shield income or assets from taxation.
For example, the IRS cites situations where a taxpayer transfers assets or income to support a tax-exempt organization or donor advised fund, but maintains too much personal control. The problem? The donor receives a tax deduction without transferring a commensurate benefit to charity. The IRS also notes the abuse of conservation easement contributions, such as contributing a historical facade easement to charity when alteration of the facade is already prohibited under local law.
In December 2005 the IRS released a revised form 8283 for reporting non-cash charitable contributions. The new form has several new provisions, but the change that is likely to affect the largest number of taxpayers deals with “qualified vehicle” donations. Beginning in 2005 or 2006, taxpayers are required to attach with their tax return Form 1098-C or other acknowledgment from the donee organization. If the charity then sells the donated vehicle, the donor’s tax deduction may be limited to the gross proceeds from the sale. The IRS was concerned that many taxpayers had been claiming inflated deductions compared to the benefit that the charity received upon the sale of the vehicle. The new rule applies to contributions of boats, airplanes, automobiles, or other motor vehicles.
Another significant revision to Form 8283 deals with charitable contributions of property valued at more than $500,000. In such cases, the taxpayer must attach a qualified appraisal of the property to his or her return. If the donated property is art, a copy of the appraisal must be included for such contributions in excess of $20,000. A deduction for a gift of patents, and other intellectual property, is limited to the fair market value or cost basis of the property, whichever is less.
As we go to press, a number of legislative and tax matters affecting nonprofits remains in limbo. This spring, Congress was unable to fully reconcile the House and Senate versions of the 2005 tax bills under consideration. Many had hoped that provisions favorable to charity would be included in the final legislation. That was not the case. It is still possible that some of these provisions may be passed later in the year. There has been increased talk about including reforms designed to correct some of the abuses identified in the charitable sector. Thus it appears that any charitable package in the future legislation is likely to include both charitable reform and incentives.
Reforms might include: penalizing participation in tax shelters; increased reporting and auditing of unrelated business income tax; restrictions on contributions to, or payments from, certain donor advised funds.
Charitable incentives that have been discussed include; limited tax-free transfers from IRAs to charity (note, there would be no charitable deduction for such a transfer and the provision would only apply to IRAs, NOT 401(k)s, 403(b)s, or other retirement plans); a limited non-itemizer charitable deduction for gifts in excess of a prescribed floor; clarification on charitable contributions of conservation easements.
At this point, it is anyone’s guess as to what might be included in the way of charitable reforms or incentives in any pending legislation. The tax legislation package passed last month did not include the charitable incentive or reform measures and it is not clear at this time whether they will be included in later legislation.
In any event, the provisions which would enhance or restrict certain types of charitable gifts seem to be of a targeted nature designed to eliminate questionable activities while encouraging other types of charitable gifts.