The Tax Law of Charitable Giving: 2019 Cumulative Supplement

By Bruce R. Hopkins

The classic reference for charitable gift regulations, updated for 2019

The Tax Law of Charitable Giving is the leading guide to the law, rules, and regulations governing charitable giving. Author Bruce R. Hopkins is the most respected authority in the field; in this book, he provides a comprehensive update on the latest changes to the law, new Treasury Department regulations, and much more to help lawyers, managers, and development directors in tax-exempt organizations stay up-to-date on all regulations pertaining to charitable gifts. The companion website provides additional tables, appendices, IRS guidelines, and other useful documents to help nonprofits make fully informed decisions about their fund-development programs.

As quickly as tax law evolves, it remains the nonprofit's responsibility to stay up-to-date and compliant with all relevant regulations. This book provides a definitive reference for the latest changes, new laws, and upcoming legislation to provide an accessible one-stop reference.

• Examine the latest changes to the laws surrounding charitable giving
• Learn how the new healthcare tax affects pooled income funds
• Understand the Treasury Department's new regulations for reporting, appraisal, and more
• Access reference tables, IRS guidelines, and other useful documents

Charitable gifts are the cornerstone of the nonprofit organization's support, and American taxpayers give more than any other group worldwide. The rules surrounding these gifts are complex, but compliance is critical to the health of the organization. The Tax Law of Charitable Giving provides an authoritative reference for all aspects of the law, with the most up-to-date information available anywhere.

• Language: English
• Publisher: Wiley
• Release date: Apr 2, 2019
• ISBN: 9781119539339

Book preview

Preface

This is the fifth Preface to accompany the fifth edition of this book. This 2019 cumulative supplement covers developments in the charitable giving law context as of the close of 2018.

This supplement reflects the various changes in, and extensions of, law occasioned by enactment of the Protecting Americans from Tax Hikes Act of 2015, the Tax Increase Prevention Act of 2014, and the informally titled Tax Cuts and Jobs Act (signed into law in late 2017). This latter statute occasioned several law changes discussed in this supplement.

The supplement also encompasses the extraordinary amount of litigation that is taking place in this field, particularly with regard to the giving of conservation easements and the charitable gift substantiation requirements. A section of this supplement has been added to capture the extensive litigation, mostly in the U.S. Tax Court, which is finding the requisite substantiation in gift deeds, amongst peppercorns of consideration and merger clauses.

Other court decisions have recently arisen in the realms of gifts (or ostensible gifts) of conservation and other easements, valuation of property that is the subject of charitable giving, the appraisal requirements, the anticipatory assignment of income doctrine, and application of accuracy-related penalties in the charitable deduction context. There have even been two court opinions denying estates a charitable contribution deduction for distributions for charitable purposes because the amounts were not permanently set aside, as well as a court opinion concerning determination of the value of the remainder interest in a net-income make-up charitable remainder unitrust and finding that donors were not qualified farmers (albeit farmers of a sort) for purposes of the more generous limitations on the annual allowable charitable contribution deduction. Speaking of the charitable deduction, a court opinion inexplicably denied one to a donor, inasmuch as he retained the right to make the gift to another charity!

Going back to basics, the Department of the Treasury was moved to issue a proposed regulation discussing the fundamental concept of a gift. This exercise was undertaken to combat the efforts in some states to circumvent the newly enacted $10,000 cap on the deductibility of state and local taxes by substituting an increased charitable deduction for a disallowed state or local tax deduction. The concept, of course, is that receipt of this tax benefit is a quid pro quo precluding a full charitable deduction.

Final regulations were issued concerning a transaction of interest involving dispositions of assets from charitable remainder trusts. Proposed regulations were issued to implement the exception to the general charitable gift substantiation requirement, by which donee organizations may file information returns with the IRS that report the required information about contributions, only to be withdrawn in the face of public and political outcries. (This statutory exception was subsequently repealed.) Treasury and the IRS even cast certain syndicated conservation easement gifts as listed transactions.

Speaking of final regulations, the Department of the Treasury, in mid-2018, issued final recordkeeping and substantiation regulations concerning charitable cash and noncash contributions that must be met for gifts to be deductible for federal income tax purposes. The regulations, in their proposed form, were issued in the summer of 2008. (The final regulations are not dramatically different from the proposal.) This regulation project has been the longest-running entry in the Treasury/IRS Priority Guidance Plan, in the exempt organizations context, for many years.

The IRS has contributed some private letter rulings in the charitable giving area, and an interesting chief counsel advice memorandum concerning the circumstances when a charitable gift may be deductible as a business expense.

The IRS provided a prototype provision that may be included in the governing instrument of a charitable remainder annuity trust, which will be treated as a qualified contingency, enabling the trust to continue to qualify as a charitable remainder annuity trust (CRAT) and sidestep the probability-of-exhaustion test.

Another long-running Priority Guidance Plan project is development of proposed regulations to accompany the donor-advised fund rules enacted in 2006. Treasury is working on these proposed regulations, which will encompass topics far beyond the reach of the underlying statutes. In the meantime, as gifts to these funds continue to increase, so too does the intensity of criticism of them.

Last but not least, charitable giving in the United States exceeded $400 billion in 2017, the first time giving has exceeded that threshold.

My thanks go to my development editor, Brian T. Neill, and Banurekha Venkatesan, production editor, for their assistance and support in connection with this cumulative supplement.

Bruce R. Hopkins

March 2019

About the Author

Bruce R. Hopkins is the principal in Bruce R. Hopkins Law Firm, LLC, in Kansas City, Missouri. He concentrates on the representation of charitable and other nonprofit organizations. His practice ranges over the entirety of law matters involving tax-exempt organizations, with emphasis on charitable giving (including planned giving), the formation of nonprofit organizations, acquisition of recognition of tax-exempt status for them, the private inurement and private benefit doctrines, the intermediate sanctions rules, legislative and political campaign activities issues, public charity and private foundation rules, unrelated business planning, use of exempt and for-profit subsidiaries, joint venture planning, tax shelter involvement, review of annual information returns, fundraising law issues, and Internet communications developments.

Mr. Hopkins served as chair of the Committee on Exempt Organizations, Tax Section, American Bar Association; chair, Section Taxation, National Association of College and University Attorneys; and president, Planned Giving Study Group of Greater Washington, D.C.

Mr. Hopkins is the series editor of Wiley's Nonprofit Law, Finance, and Management Series. In addition to The Tax Law of Charitable Giving, Fifth Edition, he is the author of Bruce R. Hopkins' Nonprofit Law Dictionary; The Law of Tax-Exempt Organizations, Twelfth Edition; Planning Guide for the Law of Tax-Exempt Organizations: Strategies and Commentaries; IRS Audits of Tax-Exempt Organizations: Policies, Practices, and Procedures; The Tax Law of Associations; The Tax Law of Unrelated Business for Nonprofit Organizations; The Nonprofits' Guide to Internet Communications Law; The Law of Intermediate Sanctions: A Guide for Nonprofits; Starting and Managing a Nonprofit Organization: A Legal Guide, Sixth Edition; Nonprofit Law Made Easy; Charitable Giving Law Made Easy; Private Foundation Law Made Easy; Fundraising Law Made Easy; 650 Essential Nonprofit Law Questions Answered; The First Legal Answer Book for Fund-Raisers; The Second Legal Answer Book for Fund-Raisers; The Legal Answer Book for Nonprofit Organizations; and The Second Legal Answer Book for Nonprofit Organizations; and is the coauthor, with Jody Blazek, of The Tax Law of Private Foundations, Fifth Edition; also with Ms. Blazek, of The Legal Answer Book for Private Foundations; with Thomas K. Hyatt, of The Law of Tax-Exempt Healthcare Organizations, Fourth Edition; with David O. Middlebrook, of Nonprofit Law for Religious Organizations: Essential Questions and Answers; with Douglas K. Anning, Virginia C. Gross, and Thomas J. Schenkelberg, of The New Form 990: Law, Policy, and Preparations; also with Ms. Gross, of Nonprofit Governance: Law, Practice, and Trends; and with Alicia M. Beck, of The Law of Fundraising, Fifth Edition. He also writes Bruce R. Hopkins' Nonprofit Counsel, a monthly newsletter, published by John Wiley & Sons.

Mr. Hopkins earned his JD and LLM degrees at George Washington University National Law Center, his SJD degree at the University of Kansas School of Law, and his BA at the University of Michigan. He is the Professor from Practice at the Kansas University Law School, where he teaches courses on nonprofit and tax-exempt organizations, including the charitable giving rules. Mr. Hopkins received the 2007 Outstanding Nonprofit Lawyer Award (Vanguard Lifetime Achievement Award) from the American Bar Association, Section of Business Law, Committee on Nonprofit Corporations. He is listed in The Best Lawyers in America, Nonprofit Organizations/Charities Law.

Book Citations

Throughout this book, four books by the author (in some instances, as coauthor), all published by John Wiley & Sons, are referenced as follows:

The Law of Fundraising, Fifth Edition (2013): cited as Fundraising

The Law of Tax-Exempt Organizations, Twelfth Edition (2019): cited as Tax-Exempt Organizations

The New Form 990: Law, Policy, and Preparation (2009): cited as New Form 990

The Tax Law of Private Foundations, Fifth Edition (2018): cited as Private Foundations

The first, second, and fourth of these books are annually supplemented. Also, updates on all of the foregoing subjects (plus The Tax Law of Charitable Giving) are available in Bruce R. Hopkins' Nonprofit Counsel, the author's monthly newsletter, also published by John Wiley & Sons.

PART ONE

Introduction to the Tax Law of Charitable Giving

Chapter 1 Charitable Giving Law: Basic Concepts

Chapter 2 The United States Tax System: An Overview

CHAPTER ONE

Charitable Giving Law: Basic Concepts

§ 1.3 Principles of Charitable Organizations Law Philosophy

*§ 1.4 Statistical Profile of Charitable Sector

§ 1.3 PRINCIPLES OF CHARITABLE ORGANIZATIONS LAW PHILOSOPHY

p. 14, note 37. Insert following existing text:

In a situation where a partnership intended to make $4.75 million in charitable contributions but the gifts were, due to a clerical error, made by means of a business corporation's checks and the matter was corrected, a court refused to uphold the IRS's disallowance of the deduction, declaring that [t]o disallow a charitable deduction simply because of a clerical error goes against the liberal policy of encouraging charitable giving (Green v. United States, 2016 WL 552964 (W.D. Okla. 2016)). Likewise, Green v. United States, 2015 WL 1482508 (W.D. Okla. 2015), rev'd on other ground, 880 F.3d 519 (10th Cir. 2017).

§ 1.4 STATISTICAL PROFILE OF CHARITABLE SECTOR

p. 23, second complete paragraph, seventh line. Delete in the following and substitute below.

p. 23, second complete paragraph, last line. Delete 2012 and insert 2016; delete $316 and insert $390.

*p. 26, second and third complete paragraphs. Delete and substitute:

Charitable giving in the United States in 2017 is estimated to have totaled $410.02 billion.¹²⁰ Giving by individuals was an estimated $286.65 billion, by foundations was $66.9 billion, by bequest was $35.7 billion, and by corporations was $20.77 billion.

Giving to religious organizations was $127.37 billion, education $58.9 billion, human services $50.06 billion, foundations $45.89 billion, to health institutions $38.27 billion, public-society benefit organizations $29.59 billion, international affairs $22.97 billion, arts and culture $19.51 billion, and environmental and animal organizations $11.83 billion.

NOTES

120 These data are from Giving USA 2018, published by the Giving USA Foundation, and researched and written under the auspices of the Lilly Family School of Philanthropy at Indiana University.

CHAPTER TWO

The United States Tax System: An Overview

§ 2.5 Deductions

(b) Personal Expense Deductions

*(c) Itemized Deduction Limitation

*§ 2.6 Standard Deduction

§ 2.7 Concept of Taxable Income

*(a) Personal Exemption

§ 2.15 Taxation of Income

*(a) General Rules

*p. 32, note 1, second line. Delete and substitute:

Overview of the Federal Tax System as in Effect for 2018 (JCX-3-18 (Feb. 8, 2018)). Also, The Taxation of Individuals and Families (JCX-41-17, Sep. 12, 2017, prepared in connection with a tax reform hearing before the Senate Committee on Finance on Sep. 14, 2017).

p. 32, note 2, lines 4 and 5. Delete No. 13-05061 (D.C. Cir., Feb. 11, 2014) and substitute 742 F.3d 1013, 1014 (D.C. Cir. 2014).

§ 2.5 DEDUCTIONS

(b) Personal Expense Deductions

p. 38, note 18. Insert following existing text:

This section provides an income tax charitable contribution deduction for individuals and corporations; it does not, however, apply with respect to charitable contributions made by estates or certain trusts (Reg. § 1.170A-1(j)(1)). Estates and certain trusts are, however, afforded an income tax charitable deduction for amounts actually paid during a tax year for charitable purposes (IRC § 642(c)(1)) and for amounts permanently set aside for charitable purposes (IRC § 642(c)(2)). Cf. §§ 9.22, 9.22A. Charitable deductions are also available in the gift tax and estate tax contexts (see § 8.2(k), text accompanied by notes 48–72; § 8.3(b), text accompanied by notes 104–120).

*(c) Itemized Deduction Limitation

p. 39, first paragraph. Delete (including footnote) and insert:

For tax years beginning in 2018, the overall limitation on itemized deductions²⁰ is suspended for tax years beginning after December 31, 2017, and before January 1, 2026.²⁰.¹

*§ 2.6 STANDARD DEDUCTION

p. 39, note 21. Delete text and substitute:

IRC § 63(c). For tax years beginning after December 31, 2017, the standard deduction is increased to $24,000 (for joint filers and surviving spouses), $18,000 (for unmarried individuals with at least one qualifying child), and $12,000 (for single filers) (Tax Cuts and Jobs Act, Pub. L. No. 115-97, 115th Cong., 1st Sess. (2017) § 11021; Rev. Proc. 2018-18, 2018-10 I.R.B. 392 §§ 2.04, 3.14). This deduction will be indexed for inflation in tax years beginning after December 31, 2018. The increased standard deduction amounts are scheduled to expire after December 31, 2025.

p. 39. Insert as fourth paragraph:

Charitable organizations are distressed over the projected loss of contributions, expected by reason of the near-doubling of the standard deduction, beginning in 2018, and the marginal tax rate reductions. Some economists are predicting that charitable giving will decline by $13 to $20 billion annually, as a consequence of this law change.²¹.¹ The Department of the Treasury and the IRS, on August 13, 2018, issued proposed regulations providing rules stating the lack of availability of federal income tax charitable contribution deductions when the transferors of money or other property to one or more charitable organizations receive or expect to receive a state or local tax credit;²¹.² the government, in the preamble accompanying this proposal, observed that the increase in the standard deduction will result in 90 percent of taxpayers not claiming any itemized deductions.

§ 2.7 CONCEPT OF TAXABLE INCOME

*(a) Personal Exemption

p. 40, note 23. Delete text following first period and substitute:

A temporary dollar amount of $0 has been set for the personal exemption deduction, for tax years beginning after December 31, 2017, and before January 1, 2026. Rev. Proc. 2018-18, 2018-10 I.R.B. 392 §§ 2.05, 3.24. Tax Cuts and Jobs Act, Pub. L. No. 115-97, 115th Cong., 1st Sess. (2017) § 11041.

§ 2.15 TAXATION OF INCOME

*(a) General Rules

p. 54. Delete heading and insert:

There is a temporary modification to the tax rate tables for tax years beginning after December 31, 2017, and before January 1, 2026. The beginning and ending dollar amounts for the brackets have been changed. The new rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.⁶⁷.¹

The income tax rates for individuals for 2018⁶⁷.² are:

If taxable income is … The tax is:

aRev. Proc. 2017-58, 2017-45 I.R.B. 489 § 3.01, tables 1–3. Table 4 contains the tax rates for married individuals filing separate returns.

p. 55, last paragraph. Delete text following second sentence.

p. 56. Delete text.

p.