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Issues in Charitable Giving

By Paul E. Hammerschmidt, CPA, MS (Taxation) and Christina K. Patten

Some issues in charitable giving are outlined as follows:

Partial Interests

Over the years some taxpayers have wanted to have their cake and eat it too. They’ve wanted to make a charitable contribution and still retain property rights that would entitle them to use the property. Taxpayers are subject to a significant number of restrictions that must be complied with before they are entitled to an income tax deduction for gifts of property to a charity. One of these restrictions generally provides that a taxpayer cannot take a charitable contribution deduction for a partial interest in property, i.e., a gift of less than his or her entire interest in the property [IRC Section 170(f)(3)(A)].

Free Use of Property

Under this rule, taxpayers who permit a charity to use their property without a charge (or a minimal charge) are not entitled to a charitable contribution deduction because they are deemed to have made a contribution of a partial interest in property, which is a nonqualifying contribution. For example, a taxpayer who allows a charity to use space in an office building without charge cannot deduct the rental value of that property. Similarly, a generous donor that allows the charity to auction off the use of their vacation home for a week or two receives no deduction for the fair rental value of that property. In addition, the property owner is deemed to have personally used the property during this period for purposes of the restriction on the rental expenses being claimed if personal use exceeds the greater of 14 days or 10% of the number of days the home is rented at fair rental value.

Recent Gift to MIT From BOSE Founder

In April 2011, Amar Bose, founder of audio technology company Bose Corp., donated most of the privately held firm’s stock to Massachusetts Institute of Technology (MIT). MIT will receive annual cash dividends on the shares when paid by Bose Corp. and use the payments “to sustain and advance MIT’s education and research mission.” Gift restrictions prevent MIT from selling the shares which don’t carry voting rights in the company. MIT is also barred from participating in management and governance of Bose Corp.

While all the details of the gift are not yet available to the public, the concern among some professionals is that the restriction on MIT’s ability to transfer the stock represents a contribution of a partial interest only and therefore is not deductible as a charitable contribution.

Fractional Interest Gifts

An exception to the partial interest rule is for contributions of an undivided portion of a taxpayer’s entire interest in property. Regulations provide that a contribution of an undivided interest will only qualify for a charitable contribution deduction where the charity is given the right, as a tenant in common with the donor, to possession, dominion, and control of the property contributed for the portion of each year that is equal to the organization’s undivided interest in the property [IRS Reg 1.170A-7(b)(1)]. For example, if a taxpayer owns 100 acres of land and makes a contribution of 50 acres to a charitable organization, the charitable contribution is allowed as a deduction under Section 170.

This tenants-in-common interest was affirmed by the court (Winokur v. Commissioner, 90 TC 733, 4/21/1988). For example, a donor with a substantial art collection may be entitled to a charitable contribution deduction by donating a 10% interest of the collection in year one and an additional 10% in year two. The charity would have the right to possess the entire artwork collection for a number of days proportionate to its ownership interest. Gifts of art or other collectibles have been the most common types of fractional interest gifts. The rules for fractional interest gifts are somewhat complex and include limitations of the income tax deduction available for gifts of artwork.

Value of Time or Services

A contributor cannot deduct the value of his or her time or services to a charity. No deduction is allowed for the value of income lost while working an as unpaid volunteer for the charity. A board member or attorney working pro bono, for example, may not deduct the value of their time in connection with services to a charity. These individuals are, however, entitled to a deduction for out-of-pocket expenses they incur in connection with their volunteer efforts for the charity. These expenses would be deductible by the volunteer as charitable contributions.

Out-of-Pocket Expenses Incurred By Volunteers

A practical problem that has been presented by the statutory provisions relates to out-of-pocket expenses incurred by a taxpayer who does volunteer work for a charity. These expenses have always been deductible as contributions. These may include travel and transportation expenses. The problem is that the charity typically does not know about them.

The IRS Regulations provide that the substantiation requirements will be met if the taxpayer:

Has adequate records to substantiate the amount of the expenses, and
Obtains a statement from the donee organization describing the services that the taxpayer provided and indicating whether any goods or services were given in consideration (and, if so, their value). [Reg. 1.170A-13(f)(10)].

This means that a volunteer will have to provide the charity with a statement of the services performed so the charity can then acknowledge those services. The charity need not be advised of the amount of the expenses, but it must be informed of the nature of the work done by the taxpayer that required the expenditure (i.e., preparing letters, attending board meetings, entertaining prospective donors). This may seem like unnecessary paperwork but, unfortunately, it will be required if out-of-pocket expenses are to be deducted by the volunteer.

Also, note that a volunteer cannot deduct payments for child care expenses as a charitable contribution, even if they are necessary to free the volunteer to do the work for the organization.