The Tax Law of Charitable Giving

BRUCE R. HOPKINS is a senior partner with the firm Polsinelli PC. He is also the author of more than 35 books, including The Law of Tax-Exempt Organizations, Tenth Edition; The Law of Fundraising, Fifth Edition; Nonprofit Law for Colleges and Universities; Nonprofit Governance; and Nonprofit Law Made Easy, as well as the monthly newsletter Bruce R. Hopkins' Nonprofit Counsel, all published by Wiley.

Preface xv Book Citations xxi PART ONE Introduction to the Tax Law of Charitable Giving 1 Charitable Giving Law: Basic Concepts 3 1.1 Introduction to the Charitable Contribution Deduction 3 1.2 Defining Tax-Exempt Organizations 5 1.3 Principles of Charitable Organizations Law Philosophy 8 1.4 Statistical Profile of Charitable Sector 23 1.5 Categories of Tax-Exempt Organizations 28 2 The United States Tax System: An Overview 31 2.1 Concept of Income 33 2.2 Gross Income 34 2.3 Exclusions from Income 35 2.4 Concept of Adjusted Gross Income 36 2.5 Deductions 37 2.6 Standard Deduction 39 2.7 Concept of Taxable Income 39 2.8 Taxable and Nontaxable Entities 41 2.9 Annual Accounting Period 42 2.10 Accounting Methods 43 2.11 Timing 43 2.12 Property 44 2.13 Inventory 46 2.14 Gain 47 2.15 Taxation of Income 53 2.16 Capital Assets, Gains, and Losses 58 2.17 Carryovers and Carrybacks 60 2.18 Alternative Minimum Tax 61 2.19 Depreciation 64 2.20 Capital Gains and Losses Rates 65 2.21 Taxation of Corporate Distributions 65 2.22 Accumulated Earnings and Personal Holding Company Taxes 66 2.23 Tax Credits 66 2.24 Foreign Tax Credits 67 2.25 Federal Tax Law Definition of Marriage 67 PART TWO Basics of Charitable Giving Law 3 Fundamental Concepts 71 3.1 Meaning of Gift 71 3.2 Meaning of Donor 117 3.3 Meaning of Charitable Organization 119 3.4 Public Charities and Private Foundations 131 3.5 Unrelated Business Rules 146 3.6 Factors Affecting Income Tax Deductibility of Charitable Gifts 153 3.7 Charitable Organizations Listing Reliance Rules 155 3.8 Grantor Trust Rules 157 4 Gifts of Money and Property 161 4.1 Gifts of Money 161 4.2 Gifts of Property in General 162 4.3 Gifts of Long-Term Capital Gain Property in General 164 4.4 Gifts of Ordinary Income Property 165 4.5 Certain Gifts of Capital Gain Property 170 4.6 Gifts of Property for Unrelated Use 173 4.7 Variations in Applying Property Rules 177 4.8 Step Transaction Doctrine 178 4.9 Charitable Pledges 184 5 Fundamentals of Planned Giving 187 5.1 Introduction 188 5.2 Appreciated Property Gifts 188 5.3 Planned Gifts: Core Concepts 189 5.4 Charitable Remainder Trusts 191 5.5 Pooled Income Funds 199 5.6 Charitable Gift Annuities 207 5.7 Charitable Lead Trusts 208 5.8 Planned Giving: Other Forms 211 5.9 Planned Giving and Securities Laws 212 PART THREE Charitable Giving in General 6 Timing of Charitable Deductions 217 6.1 Gifts of Money in General 219 6.2 Gifts of Money by Check 219 6.3 Gifts of Money by Credit Card 222 6.4 Gifts of Money by Telephone 222 6.5 Gifts of Securities 223 6.6 Gifts of Copyright Interest 226 6.7 Gifts by Means of Notes 226 6.8 Gifts by Letters of Credit 227 6.9 Gifts of Property Subject to Option 227 6.10 Gifts of Stock Options 228 6.11 Gifts of Credit Card Rebates 230 6.12 Gifts of Tangible Personal Property 231 6.13 Gifts of Real Property 231 6.14 Gifts by C Corporations 232 6.15 Gifts by S Corporations 233 6.16 Gifts by Partnerships 234 6.17 Gifts by Means of Internet 237 7 Percentage Limitations 239 7.1 Introduction 240 7.2 Individual s Contribution Base 243 7.3 Corporation s Taxable Income 243 7.4 Percentage Limitations: An Overview 243 7.5 Fifty Percent Limitation 246 7.6 Thirty Percent Limitation for Gifts of Certain Property 253 7.7 Electable 50 Percent Limitation 257 7.8 General 30 Percent Limitation 263 7.9 Interplay of 50 Percent/Special 30 Percent Limitations 265 7.10 Interplay of 50 Percent/General 30 Percent Limitations 266 7.11 Interplay of Special 30 Percent/General 30 Percent Limitations 268 7.12 Twenty Percent Limitation 268 7.13 Gifts for the Use of Charity 270 7.14 Blending Percentage Limitations 270 7.15 Individuals Net Operating Loss Carryovers and Carrybacks 271 7.16 Rules for Spouses 275 7.17 Information Requirements 279 7.18 Percentage Limitation for Corporations 280 7.19 Corporations Net Operating Loss Carryovers and Carrybacks 283 8 Estate and Gift Tax Considerations 287 8.1 Introduction 287 8.2 Federal Gift Tax 289 8.3 Federal Estate Tax 301 8.4 Unification of Taxes 315 8.5 Generation-Skipping Transfer Tax 316 8.6 Remainder Interests 319 8.7 Ascertainability 329 9 Special Gift Situations 333 9.1 Works of Art 334 9.2 Gems 338 9.3 Inventory 340 9.4 Scientific Research Property 352 9.5 Computer Technology or Equipment 353 9.6 License to Use Patent 355 9.7 Conservation Property 357 9.8 S Corporation Stock 380 9.9 Section 306 Stock 389 9.10 Retirement Plan Accounts 391 9.11 Commodity Futures Contracts 401 9.12 Donors Creations 403 9.13 Charity Auctions 404 9.14 Services 411 9.15 Unreimbursed Expenses 412 9.16 Limitation on Deduction for Expenses Due to Pleasure 418 9.17 Automobile Expenses 422 9.18 Use of Property 422 9.19 Bargain Sales 423 9.20 Property Subject to Debt 429 9.21 Future Interests in Tangible Personal Property 433 9.22 Contributions by Trusts 436 9.23 Partial Interests 444 9.24 Taxidermy 447 9.25 Clothing and Household Items 448 9.26 Charitable Family Limited Partnerships 448 9.27 Motor and Other Vehicles 450 9.28 Intellectual Property 457 9.29 Foreign Tax Credit 462 9.30 Subsistence Whaling Expenses 462 9.31 Public Policy Considerations 463 10 Other Aspects of Deductible Giving 471 10.1 Valuation of Property 472 10.2 Contributions by Means of an Agent 496 10.3 Gifts for the Use of Charity 497 10.4 Conditional Gifts 499 10.5 Earmarking of Gifts for Individuals 505 10.6 Alternative Minimum Tax Considerations 508 10.7 Interrelationship with Business Expense Deduction 509 10.8 Denial of Deduction for Lobbying Activities 510 10.9 Deductible Gifts to Noncharitable Organizations 511 10.10 Reallocation of Deductions 516 10.11 Charitable Giving and Funding of Terrorism 517 10.12 Statute of Limitations 518 10.13 Concept of Trust Income 518 10.14 Penalties 521 10.15 Transactions of Interest 532 PART FOUR Planned Giving 11 Valuation of Partial Interests 541 11.1 Overview of Statutory Law 541 11.2 Standard Actuarial Factors 542 11.3 General Actuarial Valuations 544 11.4 Nonstandard Actuarial Factors 547 12 Charitable Remainder Trusts 551 12.1 Definitions 552 12.2 Charitable Remainder Annuity Trust Rules 566 12.3 Charitable Remainder Unitrust Rules 580 12.4 Issues 598 12.5 Tax Treatment of Distributions 615 12.6 Division of Charitable Remainder Trusts 627 12.7 Early Terminations of Charitable Remainder Trusts 631 12.8 Taxation of Charitable Remainder Trusts 633 12.9 Mandatory Provisions 636 12.10 Private Foundation Rules 637 12.11 Wealth Replacement Trusts 639 12.12 Calculation of Charitable Deduction 646 13 Pooled Income Funds 653 13.1 Definitions 654 13.2 Qualifying Pooled Income Funds 655 13.3 Allocation of Income 661 13.4 Recognition of Gain or Loss on Transfers 665 13.5 Mandatory Provisions 666 13.6 Private Foundation Rules 667 13.7 Pass-Through of Depreciation 668 13.8 Tax Status of Fund and Beneficiaries 669 13.9 Multiorganization Pooled Income Funds 670 13.10 Comparison with Charitable Remainder Trusts 674 13.11 Charitable Contribution Deduction 675 14 Charitable Gift Annuities 677 14.1 Contract as Vehicle Form 677 14.2 Tax Treatment to Donor 678 14.3 Deferred Payment Gift Annuities 679 14.4 Estate and Gift Tax Consequences 681 14.5 Unrelated Business Income Implications 681 14.6 Unrelated Debt-Financed Income Implications 682 14.7 Contrast with Other Planned Gift Methods 683 14.8 Gift Annuities and Antitrust Laws 684 14.9 Gift Annuities and Securities Laws 685 14.10 Charitable Contribution Deduction 685 15 Other Gifts of Remainder Interests 687 15.1 Overview 687 15.2 Contributions of Remainder Interests in Personal Residence or Farm 688 15.3 Undivided Portions of Entire Interests in Property 691 16 Charitable Lead Trusts 701 16.1 General Rules 701 16.2 Income Interest 702 16.3 Income Tax Charitable Deduction 704 16.4 Tax Treatment of Charitable Lead Trusts 705 16.5 Testamentary Use of Charitable Lead Trusts 707 16.6 Percentage Limitation Rules 708 16.7 Private Foundation Rules 709 16.8 Anti-Abuse Rule Concerning Income Interests 710 16.9 Charitable Income Trusts 713 16.10 Comparison with Charitable Remainder Trusts 713 16.11 Valuing Charitable Deduction 714 17 Gifts of and Using Life Insurance 715 17.1 Introduction 715 17.2 Life Insurance Concepts 716 17.3 Charitable Giving and Insurance 719 17.4 Insurable Interest 724 17.5 Unrelated Debt-Financed Income Considerations 727 17.6 Charitable Split-Dollar Insurance Plans 728 17.7 Applicable Insurance Contract Reporting Requirements 735 PART FIVE International Charitable Giving 18 International Giving by Individuals During Lifetime 739 18.1 Introduction 739 18.2 Background 740 18.3 Earmarking and Conduit Restrictions 743 18.4 Control Over Foreign Donees 747 18.5 Summary 749 18.6 Income Tax Treaties 750 19 International Giving by Individuals through Estates 753 19.1 Introduction 753 19.2 Estate Tax Rules 754 19.3 Gift Tax Rules 760 19.4 Charitable Giving by Noncitizen Nonresidents 760 20 International Giving by Corporations 763 20.1 Corporate Gifts to U.S. Charity for Overseas Use 763 20.2 Gifts of Money from Foreign Affiliate of U.S. Parent to Overseas Charity 764 20.3 Gift of Goods or Services to Benefit Foreign Charity 765 20.4 Grants of Funds from U.S. Corporation Related Foundation to Foreign Charity 766 PART SIX Administration of Charitable Giving Programs 21 Substantiation and Appraisal Requirements 779 21.1 Introduction 779 21.2 Substantiation Requirements for Gifts of Money 780 21.3 Substantiation Requirements for Gifts of $250 or More 782 21.4 Substantiation Requirements for Noncash Gifts 792 21.5 Appraisal Requirements 795 21.6 Appraisals and Penalties 805 21.7 Appraisals of Clothing and Household Items 807 21.8 Burden of Proof Rules 807 22 Disclosure Requirements 809 22.1 Disclosure by Charitable Organizations in General 809 22.2 Quid Pro Quo Contribution Rules 814 22.3 Disclosure by Noncharitable Organizations 818 23 Special Events, Corporate Sponsorships, and Donor-Advised Funds 823 23.1 IRS Audit Guidelines 824 23.2 Special Events 828 23.3 Corporate Sponsorship Rules 830 23.4 Donor-Advised Funds 833 24 Reporting Requirements 841 24.1 Gift Reporting by Individuals 841 24.2 Gift Reporting by C Corporations 842 24.3 Gift Reporting by S Corporations 842 24.4 Gift Reporting by Partnerships 842 24.5 Gift Reporting by Donees in General 843 24.6 Gift Reporting in Unrelated Business Context 848 24.7 Reporting of Noncash Gifts in General 851 24.8 Reporting of Gifts of Vehicles 868 24.9 Reporting of Gifts of Intellectual Property 870 24.10 Reporting on Dispositions of Contributed Property 871 24.11 Personal Benefit Contract Reporting Requirements 874 24.12 Split-Interest Trust Filing Requirements 875 25 State Fundraising Regulation 877 25.1 State Regulation in General 877 25.2 Historical Perspective 878 25.3 States Police Power 880 25.4 Basic Definitions 881 25.5 Registration Requirements 882 25.6 Reporting Requirements 882 25.7 Exemptions from Regulation 883 25.8 Fundraising Cost Limitations 884