Taxpayers and their advisors alike are focused on the potentially massive tax changes being discussed in Congress. As of this writing, it is uncertain what tax reform, if any, will be enacted, whether it will restrict itemized deductions, or whether there will be a carve-out for charitable contributions, as has been discussed. The future of the estate tax similarly remains uncertain; will it be repealed, and if the gift tax remains, what will become of the transfer tax charitable contribution deduction? The estate tax exemption and standard deduction may both be doubled, effectively eliminating charitable contribution deductions for most taxpayers. Meanwhile, there have been a number of new developments affecting charitable giving (some tax related, some not) that should not be overlooked.
Non–Tax Related Developments
It appears that there is an increasing use of nontraditional fundraising and charitable giving techniques. One such method is a commercial co-venture arrangement, wherein a vendor may agree to donate a portion of its sale proceeds to charity. The contents of the commercial co-venture agreement may be regulated by state laws, which are designed to protect consumers and ensure that the vendor fulfills its charitable commitment. State requirements might include the vendor disclosing the percentage of the proceeds that will benefit charity, filing a copy of the commercial co-venture agreement with the charity, or even making annual reports to the state’s attorney general. Compliance with the regulations in each state where the products will be sold may also be required.
A commercial co-venture arrangement is different from an endorsement arrangement, whereby a nonprofit agrees to promote a vendor’s product in exchange for a licensing fee. Some charities might prefer a co-venture arrangement, where they merely receive a contribution, over an endorsement arrangement, which they may view as raising questions regarding conflicts of interest and commercialism. It is advisable that the arrangement be clearly disclosed on the charity’s website, indicating that the charity is merely a recipient of a percentage of the proceeds of the sale and is not making an endorsement or other statement about the product. Ideally, the disclaimer would appear on the packaging.
Crowdfunding—the practice of funding a charitable campaign, or even a personal campaign (such as for emergency medical expenses), by raising many small-dollar amounts from large numbers of people (typically visitors to a crowdfunding internet website)—has grown dramatically in recent years. The size of what is sometimes referred to as the “sharing economy” in 2015 is estimated to be $15 billion and projected to grow to $335 billion by 2035 (“What Is Crowdfunding? The Clear and Simple Answer,” YouCaring.com, http://bit.ly/2AyBH3N). This trend has the potential to transform charitable giving and fundraising.
While some traditional charities are pursuing crowdfunding concepts, there are many individuals using this new approach in various ways. There is considerable uncertainty as to how “contributions” to crowdfunding pages, often called “campaigns,” should be treated. Advisors will need to evaluate the nature of the particular campaign, the terms of service of the website (platform) hosting the campaign, and whether any tax-exempt charities are involved and how. The following are questions to consider:
- Is there a gift tax reporting requirement? This may occur if the gift does not qualify as a charitable contribution for gift tax purposes and does not meet the requirements of a present interest gift.
- Will the gift qualify for the income tax charitable contribution deduction?
- For the campaign’s beneficiary, will the gifts qualify as gifts and not as income for tax purposes?
- For the recipient, will the funds be reachable by medical providers, and if so, would supplemental needs–type planning be advisable?
- For someone sponsoring or creating a campaign (often called the campaign organizer), can the campaign be organized for better tax results for all?
- Will the organizer be deemed the owner of the funds and, if so, what are the tax consequences?
Since at present there is no law specifically addressing these issues, advisors will have to apply general tax theories to the facts at hand. In some instances, alternative and more traditional approaches might be better for the taxpayer.
Estate tax impact on giving.
Many commentators on charitable giving suggest, often without supporting data, that donations are not generally correlated with tax benefits. This refrain has grown in volume with the increase in the estate tax exemption, as well as talk of estate tax repeal. But what are the facts?
In 2010, when the estate tax was temporarily repealed, gross charitable bequests in IRS tax filings totaled $7.49 billion—a 37% drop from the previous year ($11.9 billion). The estate tax returned in 2011, and charitable bequests increased to $14.36 billion (Sahil Kapur, “GOP Plan to Kill Estate Tax Sets Up Charitable Giving Conflict,” FinancialPlanning, Aug. 31, 2017, http://bit.ly/2hk5tka).
The clear message for practitioners is that tax-driven donations remain vibrant, and individuals do want to maximize the tax benefits of charitable giving. While the rising estate tax exemption has obviated the benefits for many, for those affected the relevance of good tax planning remains.
Reasons clients donate.
With the shift of estate planning away from tax minimization to more broadbased and humanistic planning, CPAs should more have frequent conversations about charty with clients. Understanding what motivates people to donate may also guide professionals in how to have these conversations. Rather than focusing primarily on tax benefits, emphasize how the donation may help the individual achieve his philanthropy goals. This different emphasis may help him move forward with charitable planning and also expand the role the estate planner plays.
The New York Times reported that when wealthier donors, defined as those with incomes higher than $90,000 per year, received a message that framed charitable giving as an opportunity for individual achievement, they were significantly more likely to donate than when they received a message that stressed common goals. Donors also gave more when they were asked to come forward and take individual action than when they were asked to join their community and support a common goal (Ashley V. Whillans, Elizabeth W. Dunn, and Eugene M. Caruso, “How to Get the Wealthy to Donate,” May 12, 2017, http://nyti.ms/2i101n0).
The upshot of all this is that practitioners will serve individuals’ charitable objectives by helping them address personal nontax objectives rather than general income tax objectives, especially if the standard deduction and estate tax exemption are doubled (as proposed).
Recent Tax-Related Rulings
Incomplete gift eliminates deduction.
The Fakiris case (Fakiris v. Comm’r, Docket No. 18292-12, TC Memo 2017-126) addressed whether a charitable donation was complete. The sales contract for the theater donated to the recipient charity prevented it from selling that property during the five-year period after obtaining the deed, and the seller/donor had the right during that period to transfer the theater to another charity. These conditions survived the transfer of the deed to the donee; as a result, the donor/seller retained dominion and control over the theater property, the donation was deemed an incomplete gift, and the charitable contribution deduction was disallowed.
In addition, the taxpayer/donor failed to reduce the deduction at all for the sales price. Because the transaction was characterized as a bargain sale under the Treasury Regulations [a transfer of property which is in part a sale or exchange of the property and in part a charitable contribution, as defined in section 170A-4(c)], the taxpayer should have reduced the donation claimed by the proceeds.
Private foundation excise tax.
A charitable remainder trust (CRT) avoided the private foundation excise rules under Internal Revenue Code (IRC) section 4947(a)(2) because the grantor/donor did not claim any charitable contribution deduction for income or gift tax purposes (PLR 201713002 and 201713003, Mar. 31, 2017). The IRC section 4941 prohibitions against self-dealing, as well as the section 4945 rules governing taxable expenditures, generally apply to a CRT, but only if a deduction is allowed. Commentator Larry Katzenstein speculated as to the rationale for this unusual approach as follows: “Perhaps what they were trying to accomplish was to avoid gain on sale of a highly appreciated asset in a transaction that would have otherwise violated the self-dealing rules—a sale by the trust to a family member or other disqualified person. … Or perhaps the plan was to have the stock redeemed by a corporation in a transaction which would have otherwise been a self-dealing transaction because the corporation was a disqualified person as defined in Code section 4946 and a redemption offer to all shareholders was either undesirable or not practical for other reasons” (PLRs 201713002 & 201713003 Illustrate the Interplay Between Code Sections 664 and 4947,” Leimberg Information Services Charitable Planning Newsletter, May 15, 2017).
Net income makeup charitable remainder uni-trust (NIMCRUT).
A recent PLR held that a trust did not qualify as a CRT because it was not properly operated as a NIMCRUT (PLR 201714002, Apr. 7, 2017). It distributed more than its annual net trust income to the beneficiary holding a unitrust interest. The court found that termination of the failed CRT would trigger excise taxes.
Election to treat trust donation as applicable to prior year.
The IRS granted leniency and permitted a trust a 120-day extension to elect to treat a charitable contribution as made during a prior year. The IRS found that the trustee acted reasonably and in good faith, and granting the extension did not prejudice the government’s interests (PLR 201720003, May 22, 2017).
A distribution of an LLC that owned a note from a disqualified person to a private foundation (i.e., the taxpayer who organized the foundation) did not trigger a self-dealing problem (PLR 201723005, June 9, 2017). The founder made a gift through a revocable trust of nonvoting interests in a new limited liability company; the IRS held that this transfer would not constitute an act of self-dealing under IRC section 4941 because the LLC wrapper around the note provided only nonvoting interests to the foundation. If the foundation had directly received the underlying note, the transfer would have been problematic [Treasury Regulations section 53.4941(d)-1(b)(5)]. The transfer was deemed unproblematic because the private foundation would not control the LLC due to lack of any voting power.
The exchange of investment assets of a CRT for units in the endowment of a charitable beneficiary was found acceptable (PLR 201729014, Jul. 21, 2017).
An LLC was denied a charitable contribution deduction for donating a remainder interest in real estate since it did not provide data on the donor’s adjusted basis (RERI Holdings I, LLC, et al v. Comm’r., Docket No. 9324-08, 149 T.C. No. 1, Jul. 5, 2017).