IRS revises allocation rules for charitable contributions.

For a decade and a half, TEI has been urging the Treasury Department and Internal Revenue Service to revise the rules under section 861 relating to the allocation and apportionment of charitable contributions. The government recently announced plans to amend the regulations to provide a more workable solution.

The current Treasury Regulations--which have been in effect since 1977--provide that deductible charitable contributions will "generally" be considered as not definitely related to any gross income. Consequently, those deductions must be ratably apportioned among U.S. and foreign sources. In certain circumstances, a taxpayer could allocate the deduction to one or mare classes of income.

In 1989, the IRS issued a notice announcing its intent to eliminate the word "generally" from the regulations, thereby requiring a ratable apportionment of the deduction to all classes of income. Two years later, responding to policy and administrative concerns about the 1989 notice, the government issued proposed regulations setting forth special rules for the allocation of charitable contributions solely to U.S.-source income or to foreign-source income, based on where the funds would be used. The proposed regulations proved quite controversial, sparking an outpouring of concern from charitable groups that the proposal would dampen the climate for philanthropy and were inconsistent with the government's efforts to encourage charitable giving and volunteerism. At that time, TEI urged the government to broaden the rules to provide that certain charitable contributions can be allocated to U.S.-source income.

In July, the IRS and Treasury issued new rules conceding that U.S. taxpayers may allocate and apportion all of their deductible charitable contributions to U.S.-source income for purposes of calculating the foreign tax credit. The 1991 regulations were withdrawn at the same time. The new regulations are effective for charitable contributions made on or after July 28, and taxpayers may elect to apply the regulations to all charitable contributions made during a taxable year ending on or after that date.

TEI President ,Judy Zelisko praised the government for recognizing that a theoretically pure approach to the allocation of charitable contributions would not work. "There are sound policy reasons for encouraging humanitarian aid abroad and the new regulations not only provide clear workable rules but also reduce the administrative burdens the old rules imposed on taxpayers," she stated. "We commend the government for its efforts."