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Charitable deductions and UBIT.

Sec. 501(c)(7) organizations can save tax dollars when replacing member-related assets. Often, during renovations, assets are discarded or sold at far below their fair market value (FMV). When this occurs, organization exempt from income tax under Sec. 501(a), particularly country clubs, should consider donating the items to a qualified charity or selling the assets at their FMV with the gross proceeds going to charity.

Sec. 501(a) organizations are required to pay tax on unrelated business income (UBI). Generally, UBI is income generated by an activity regularly carried on that is not directly related to the organization's exempt function. Special rules apply for organizations exempt under Sec. 501(a)(7), (9), (17) and (20) to include investment income as UBI.

Sec. 512(b)(10) provides for a charitable contribution deduction, as allowed by Sec. 170, not to exceed 10% of UBI computed before such deduction. The qualifying deduction need not be directly connected to the unrelated trade or business generating the UBI. The charitable contribution must, however, be made to an unrelated charitable organization.

Generally, the amount of a charitable deduction for property other than money is the property's FMV, reduced by the rules of Sec. 170(e)(1) (relating to appreciated property). For ordinary income property, Sec. 170(e)(1) reduces the donated property's FMV by the amount of ordinary income that would have resulted if the asset had been sold. Ordinary income property includes inventory, capital assets held less than one year and Sec. 1231 assets, but only to the extent that the depreciation recapture rules require ordinary income recognition. An increased deduction is available under Sec. 170(e)(3) for contributions of inventory and depreciable property to a public charity for the care of the ill, the needy or infants. Sec. 170(e)(3) does not, however, change the reduction in FMV due to the depreciation recapture rules.

While the Sec. 170(e)(1) limitation reduces the charitable deduction for depreciated property, there are still benefits to be derived from such contributions. To eliminate additional computations for tentative alternative minimum tax and adjusted current earnings adjustments, many organizations are using the longer lives and straight-line depreciation methods of the alternative depreciation system. The longer depreciable lives mean a smaller amount of depreciation recapture recognized as ordinary income on disposition and a larger charitable deduction.

Often, a depreciation deduction need not be claimed on Form 990-T, Exempt Organization Business Income Tax Return, and tax depreciation calculations are not required for Form 990, Return of Organization Exempt From Income Tax, reporting purposes. There may be a question of the tax basis of an asset donated to charity. In such cases, a statement electing the use of the adjusted depreciation system should routinely be attached to the Form 990-T to establish a higher tax basis when the assets are sold or donated.

If it is determined that the assets are fully depreciated, the organization might consider an outright sale of the assets and a corresponding cash donation to charity. Sec. 512(a)(3)(D) provides for the nonrecognition of gain from the sale of exempt function property, provided that other exempt function property of equal or greater value is purchased within a replacement period beginning one year before the sale and ending three years after the sale. Most organizations would not find this restriction a problem since replacement assets are constantly being purchased. Thus, selling unwanted assets at FMV, followed by a cash contribution to a qualified charity, will reap tax benefits for a Sec. 501(c)(7) organization. Planning for the disposition of unwanted assets will make more funds available to both the charity and the exempt organization.
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Title Annotation:unrelated business income tax
Author:Loftus, Cynthia
Publication:The Tax Adviser
Date:Sep 1, 1992
Previous Article:The 100% penalty.
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