Charitable Gifts

<div class="Section1"><br /> <br /> <i>Editor&rsquo;s Note:</i>&nbsp;The 50/60&nbsp;percent AGI limits discussed below were increased to 100&nbsp;percent for the 2020 and 2021 tax years in response to the COVID-19 pandemic.<br /> <br /> If an individual makes a charitable contribution to a public charity of real property or intangible personal property, the sale of which would have resulted in long-term capital gain,&nbsp; he is generally entitled to deduct the full fair market value of the property, but the deduction for the gift is limited to the lesser of 30&nbsp;percent of adjusted gross income or the unused portion of the 60&nbsp;percent (50&nbsp;percent prior to 2018) limit (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9065">9065</a>).<a href="#_ftn1" name="_ftnref1">¹</a> <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9068">9068</a> for the rules that apply to gifts of tangible personal property, and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9069">9069</a> regarding gifts to private foundations.<br /> <br /> A deduction denied because it exceeds 30&nbsp;percent of the individual&rsquo;s adjusted gross income may be carried over and treated as a contribution of capital gain property in each of the next five years.<a href="#_ftn2" name="_ftnref2">²</a><br /> <p style="padding-left: 40px;"><i>Example:</i> In 2024, Mr. Copeland had adjusted gross income of $600,000. He made a charitable contribution of long-term capital gain stock worth $200,000 to his church. His deduction is limited to $180,000 (30&nbsp;percent of $600,000). In 2025, Mr. Copeland&rsquo;s adjusted gross income is $700,000. He contributes $100,000 worth of long-term capital gain bonds to the church. He may deduct $120,000 in 2025 ($100,000 plus $20,000 carried forward from 2024), since the total does not exceed 30&nbsp;percent of his adjusted gross income for 2025 ($210,000).</p><br /> An individual may elect to take a gift of long-term capital gain property into account at its adjusted basis instead of its fair market value; if he does so, the income&nbsp;percentage limit for the contribution is increased to 60 (or 50)&nbsp;percent instead of 30&nbsp;percent. However, such an election applies to all such contributions made during the taxable year.<a href="#_ftn3" name="_ftnref3">³</a> The election is generally irrevocable.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> If the charitable contribution is of property that, if sold at the time of the contribution, would result in income that would not otherwise qualify for long-term capital gain treatment (e.g., short-term capital gain), the deduction must be reduced by the amount of gain that would not be long-term capital gain.<a href="#_ftn5" name="_ftnref5">⁵</a> If the entire gain would be income other than long-term capital gain, the allowable deduction would be limited to the taxpayer&rsquo;s adjusted basis in the contributed property.<br /> <br /> Special rules apply to charitable contributions of S corporation stock in determining whether gain on the stock would have been long-term capital gain if the stock were sold by the taxpayer.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Donors making charitable contributions of the long-term capital gain portion of futures contracts must mark the contracts to market as of the dates the contracts are transferred to the donee and recognize the accrued long-term capital gains as income.<a href="#_ftn7" name="_ftnref7">⁷</a> The amount of taxable gain or deductible loss recognized by the transferor at the time of the charitable transfer equals the difference between the fair market value of the futures contract at the time of the transfer and the transferor&rsquo;s tax basis in the futures contract, as adjusted under IRC Section&nbsp;1256(a)(2), to account for gains and losses already recognized in prior tax years under the mark to market rules.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Taxpayers who transferred appreciated stock to charitable organizations in the midst of an ongoing tender offer and merger were taxed on the gain on the stock under the &ldquo;anticipatory assignment of income doctrine&rdquo; where the charitable gifts occurred after the taxpayers&rsquo; interests in a corporation had ripened into rights to receive cash.<a href="#_ftn9" name="_ftnref9">⁹</a> But where taxpayers assigned warrants to four charities after receiving a letter announcing that all issued and outstanding stock of the company would be purchased, the Tax Court held that under Revenue Ruling 78-197<a href="#_ftn10" name="_ftnref10">¹⁰</a> the Service could treat the proceeds of the sales of the warrants by the charities as income to the donors <i>only if</i> at the time the assignments took place, the charitable donees were legally bound or could be compelled to sell the warrants.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <span style="font-weight: 400;">A taxpayer who donated stock to a supporting organization, where the voting rights had been transferred for a business purpose to a third party many years ago, was permitted to claim a charitable deduction.</span><a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; See IRC &sect;&nbsp;170(b)(1)(C); Treas. Reg. &sect;&nbsp;1.170A-8(d)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&sect;&nbsp;170(b)(1)(C); Treas. Reg. &sect;&nbsp;1.170A-10(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&sect;&nbsp;170(b)(1)(C)(iii), 170(e)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; <i>Woodbury v. Comm.,</i> 900 F.2d 1457, 90-1 USTC &para;&nbsp;50,199 (10th Cir. 1990), aff&rsquo;g, TC Memo 1988-272.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;170(e)(1)(A); Treas. Reg. &sect;&nbsp;1.170A-4(a).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;170(e)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; <i>Greene v. U.S.</i>, 79 F.3d 1348 (2d Cir. 1996).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; <i>Greene v. U.S.</i>, 185 F.3d 67, 84 AFTR 2d 99-5415 (2d Cir. 1999).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; See <i>Ferguson v. Comm.</i>, 174 F.3d 997 (9th Cir. 1999).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; 1978-1 CB 83.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; <i>Rauenhorst v. Comm</i>., 119 TC 157 (2002).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; Let Rul. 200108012.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> To qualify as a charitable remainder unitrust, the trust must pay its unitrust amount to the noncharitable beneficiary at least annually. The unitrust amount for fixed percentage CRUTs may be paid within a reasonable time <i>after</i> the close of the year for which it is due if either of the following occur: (a) the character of the unitrust amount in the recipient’s hands is income under IRC Section 664(b)(1), (2), or (3); or (b) the trust distributes property (other than cash) that it owned as of the close of the taxable year to pay the unitrust amount, and the trustee elects to treat any income generated by the distribution as occurring on the last day of the taxable year for which the amount is due. Additionally, for fixed percentage CRUTs that were created before December 10, 1998, the unitrust amount may be paid within a reasonable time after the close of the taxable year for which it is due if the percentage used to calculate the unitrust amount is 15 percent or less.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.664-2(a)(1)(i).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A charitable contribution is allowable as a deduction only if verified as required under regulations.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A charitable deduction is not allowed for any contribution of a check, cash, or other monetary gift unless the donor retains a bank record or a written communication from the charity showing the name of the charity and the date and the amount of the contribution.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS has issued guidance on how charitable contributions made by payroll deduction may meet the requirements of IRC Section&nbsp;170(f)(17). The Service clarified that unlike IRC Section&nbsp;170(g)(8), which only applies to contributions of $250 or more (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8059">8059</a>), IRC Section 170(f)(17) applies to <i>any</i> contribution of a cash, check, or other monetary gift. For a charitable contribution made by payroll deduction, a pay stub, Form W-2, or other employer-furnished document that sets forth the amount withheld for payment to a donee organization, along with a pledge card prepared by or at the direction of the donee organization, will be deemed to be a written communication from the donee organization for this purpose.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;170(a)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;170(f)(17), as added by PPA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Notice 2006-110, 2006-51 IRB 1127.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Ordinarily, the trust is not taxed on its income.<a href="#_ftn1" name="_ftnref1">¹</a> Under prior law, the trust lost its tax-exempt status for any year in which it had unrelated business taxable income (UBTI). The old rule caused the loss of the CRT&rsquo;s exemption for even one dollar of UBTI. TRHCA 2006 modified the excise tax on unrelated business taxable income of charitable remainder trusts and changed the loss-of-exemption rule. The current law imposes a 100&nbsp;percent excise tax, but leaves the CRT&rsquo;s exempt status intact.<a href="#_ftn2" name="_ftnref2">²</a> The excise tax is allocated to corpus and does not reduce the taxable income of the trust.<a href="#_ftn3" name="_ftnref3">³</a> <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8100">8100</a> regarding how distributions from a charitable remainder trust are taxed to a beneficiary.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;664(c)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;664(c), as amended by TRHCA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.664-1.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> The Service has privately ruled that a taxpayer would not recognize gain or loss as a result of transferring stock from a qualified plan to a charitable remainder unitrust upon his separation from service. Furthermore, the taxpayer would receive an income tax charitable deduction, subject to the income percentage limits, for the contribution of the stock to the CRUT in an amount equal to the fair market value of the stock at the time of the transfer less the value of the taxpayer’s remainder unitrust interest.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  See Let. Ruls. 200215032, 200202078, 200038050, 199919039.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Split-interest charitable trusts are required to file the form required by the Secretary of the Treasury each year. Historically this has been Form 1041-A, Trust Accumulation of Charitable Amounts. PPA 2006 eliminates the current exception that exempted such trusts from filing the form if all of the net income of the trust was distributed currently. The exception continues to apply to non-charitable trusts that must file Form 1041-A as a result of claiming a deduction under IRC Section 642(c).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr /><br /> <br /> <b><strong><strong>Planning Point:</strong></strong> </b>This change impacts charitable remainder trusts, charitable lead trusts, and pooled income funds. It remains to be seen whether Treasury will create a new form for split-interest charitable trusts or continue to use Form 1041-A.<br /> <br /> <hr /><br /> <br /> In addition, the penalty for failure to file the form (required by IRC Section 6034(a)) is $10 for each day the form is late. The maximum penalty that may be imposed is $5,000. However, for certain large trusts with gross income in excess of $250,000, the penalty is $100 per day up to a maximum of $50,000.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Form 1041-A is subject to public inspection. However, information regarding the noncharitable beneficiaries of charitable split-interest trusts is not subject to public inspection.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 6034, as amended by PPA 2006.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 6652(c)(2)(C), as amended by PPA 2006.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 6104(b), as amended by PPA 2006.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The regulations provide that if the only trustee is the grantor, a noncharitable beneficiary, or a related or subordinate party to the grantor or the noncharitable beneficiary, a CRUT&rsquo;s &ldquo;unmarketable assets&rdquo; (defined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8093">8093</a>) must be valued by <i>either</i> an &ldquo;independent trustee&rdquo; or by a &ldquo;qualified appraisal&rdquo; from a &rdquo;qualified appraiser.&rdquo;<a href="#_ftn1" name="_ftnref1">¹</a> An &ldquo;independent&rdquo; trustee&rdquo; is a person who is <i>not</i> the grantor, the grantor&rsquo;s spouse, a noncharitable beneficiary, or a party who is related or subordinate to the grantor, the grantor&rsquo;s spouse, or the noncharitable beneficiary. However, a <i>co-trustee</i> who is an &ldquo;independent&rdquo; trustee may value the trust&rsquo;s unmarketable assets.<a href="#_ftn2" name="_ftnref2">²</a> For an explanation of the application of the Chapter&nbsp;14 special valuation rules to CRUTs, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="938">938</a>.<br /> <br /> <span style="font-weight: 400;">The Service has ruled that a CRUT was not disqualified even though the grantors were also the sole trustees because the trust instrument provided that the trust could only accept, invest in, and hold assets with an objectively ascertainable market value.</span><a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.664-1(a)(7).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.664-1(a)(7).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Let. Rul. 200029031.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If a taxpayer underpays his tax because of a substantial valuation misstatement of property donated to charity, he may be subject to a penalty of 20 percent of the underpayment attributable to the misstatement.<a href="#_ftn1" name="_ftnref1">¹</a> However, this penalty applies only if the underpayment attributable to the misstatement exceeds $5,000 ($10,000 for a corporation other than an S corporation or a personal holding company).<a href="#_ftn2" name="_ftnref2">²</a> A “substantial valuation misstatement” exists if the value claimed is 150 percent or more of the amount determined to be correct.<a href="#_ftn3" name="_ftnref3">³</a> If the value claimed is<br /> 200 percent or more of the amount determined to be correct, there is a “gross valuation misstatement,” which is subject to a 40 percent underpayment penalty.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <span style="font-weight: 400;">For guidance on the circumstances under which the disclosure on a taxpayer’s return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under IRC Section 6662(d), <em>see</em> Revenue Procedure 2005-75.</span><a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 6662(a), 6662(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  <em>See</em> IRC § 6662(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 6662(e)(1)(A), as amended by PPA 2006.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 6662(h)(2)(A)(i), as amended by PPA 2006.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  2005-50 IRB 1137.<br /> <br /> </div>

<div class="Section1"><br /> <p class="PA">Annual valuation (which is required for charitable remainder unitrusts and not permitted for any other charitable trust) increases the flexibility of a CRUT considerably. It permits the donor to make additional contributions to the trust, thus providing a certain degree of control over the amount of the resulting payment stream. Assuming the trust investments perform reasonably well, the variable payments provide a hedge against inflation. In contrast, a charitable remainder <em><span class="italic">annuity</span></em> trust provides a fixed payment amount, and additional contributions to the trust are not permitted.</p><br /> <br /> </div>

<div class="Section1"><br /> <br /> A charitable remainder unitrust provides to a noncharitable beneficiary a variable payment stream based on an annual valuation of the trust assets, with an irrevocable remainder interest to be paid to or held for the benefit of a charity. The payout must be a fixed&nbsp;percentage of not less than 5&nbsp;percent nor more than 50&nbsp;percent of the net fair market value of the trust assets, and is paid at least annually to the noncharitable beneficiary or beneficiaries.<a href="#_ftn1" name="_ftnref1">¹</a> Since the trust is valued annually, the donor may make additional contributions to the trust. To qualify as a charitable remainder trust, a trust must meet the definition of, and function exclusively as, a charitable remainder trust from the time the trust is created.<a href="#_ftn2" name="_ftnref2">²</a> Thus, if a trust does not qualify as a charitable remainder unitrust at its inception, it never will.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS denied both trust and CRUT status to an entity that was proposed to be established by an S corporation essentially to receive its profits and make distributions to its owners. The Service ruled that the proposed entity would not qualify as a trust under Treasury Regulation Sections 1.301.7701-4(a), 1.301-7701-4(c), or as a valid CRUT.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <p style="text-align: center;"><strong>10&nbsp;percent Remainder Interest Requirement</strong></p><br /> The value of the remainder interest (i.e., the charitable deduction) must equal at least 10&nbsp;percent of the net fair market value of the property as of the date it is contributed to the trust.<a href="#_ftn5" name="_ftnref5">⁵</a> The value of a remainder interest for this purpose is calculated using the IRC Section&nbsp;7520 interest rate, which is published every month by the IRS. The calculation of the deduction can be made using the current rate or either of the previous two months&rsquo; rates. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8099">8099</a> for an explanation of the calculation of the deduction.<br /> <br /> If a transfer to an existing charitable remainder unitrust does not meet the 10&nbsp;percent remainder interest value requirement, the contribution will be treated as if it were made to a separate trust; thus, the existing CRUT will not become disqualified by a contribution that does not meet this requirement.<a href="#_ftn6" name="_ftnref6">⁶</a> It appears that the separate trust will be taxed as a complex trust, since it will not meet the requirements for a CRT.<br /> <br /> <span style="font-weight: 400;">The Service privately ruled that reducing the unitrust payment&nbsp;percentage for additional contributions to ensure that the value of the charity&rsquo;s interest would be no less than 10&nbsp;percent of the fair market value of the additional property would not cause the CRUT to be disqualified <i>if</i> the total annual unitrust payment&nbsp;percentage for the additional contribution did not fall below 5&nbsp;percent annually.</span><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&nbsp;664(d)(2)(A); Treas. Reg. &sect;&nbsp;1.664-1(a)(1). (But see Let. Rul. 200108035, where a split-payout was approved).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&nbsp;1.664-1(a)(4).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; See, e.g., Let. Rul. 200122045.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Let. Rul. 200203034.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;664(d)(2)(D).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; See IRC &sect;&nbsp;664(d)(4).<br /> <br /> </div></div><br />