The "assignment-of-income" doctrine, which requires a donor to pay a capital-gains tax on a gift from proceeds of an asset already sold, typically applies to stock, such as shares in a family business.
But donors also can use that doctrine to avoid a capital-gains tax on gifts of land.
Consider Thomasine Hayes of Winston-Salem, N.C. The 82-year-old graduate of Meredith College in Raleigh had planned in her will to leave to the women's school the family farm of roughly 100 acres in the eastern part of the state that she and her brother and sister inherited after their father died in 1949.
Last August, however, Mrs. Hayes decided she wanted some extra income, so she sold an option on the land to a developer -- specifying that the land be used to replace housing lost to Hurricane Floyd in 1999 and the flooding it caused in eastern North Carolina.
She then learned that she could have handled the deal differently by creating a charitable trust. She also learned that, even had she created a trust, her sale of the .option still would have required her to pay a capital gains tax on the land, which is worth nearly $600,000.
So rather than agreeing to the de to renew the option when it expired in December, Mrs. Hayes created a charitable remainder unitrust. She donated the land to the trust and, as trustee, sold the developer a new option.
Pending rezoning of part of the land, the trust will sell the land to the developer, which will develop a $41 million project consisting of 281 homes to be sold for $75;000 each to replace housing lost to Floyd.
Mrs. Hayes will receive income from the trust during her lifetime. At her death, Meredith College will receive the trust assets, which will fund scholarships in her parents' names for students in Kinston and northeastern North Carolina.
"The lesson," said Winston-Salem lawyer Ran Bell, who represents Meredith and works in the tax section of Womble Carlyle Sandridge and Rice, "is to make the gift before the sale of the asset is a certainty -- before you've sold an option on land or, with stock, before a majority of the shareholders have agreed to a final deal."
Efforts to increase the tax deduction for retirees who take money from their retirement plans to make charitable contributions are being closely watched by backers who hope support by President Bush will translate into Congressional approval for the change.
Backers include a loose coalition representing higher education, community foundations, health care, charities and the planned giving community.
The proposed change, which supporters believe could prompt a surge in charitable giving, is favored by the tax-writing committees in Congress but has failed to win approval in each of the past two sessions.
Current tax rules, which limit itemized deductions, require retirees to treat as taxable income any funds they withdraw from a retirement plan and contribute to charity. They also give no deduction to non-itemizing retirees -- whose only source for making charitable contributions may be their retirement plan.
The proposed change, which would increase to age 70 years from age 59 years the minimum age of eligible taxpayers, would give retirees in both cases the equivalent of a full charitable deduction. Under the proposal, funds taken from a retirement plan and donated to charity would not be considered income for tax purposes.
And non-itemizers could instruct their retirement plans to write checks to charities directly from their accounts, thus avoiding having to report it on their tax returns.
While. no estimates are available on the level of contributions that the change might generate, "it seems that current law is prohibiting a fairly significant amount of charitable giving;' said Matt Hamill, senior. associate at the Institute for Higher Education Policy in Washington, D.C.
Jeffrey Comfort, director of planned giving at Georgetown University and immediate past president of the National Committee on Planned Giving, said that, if passed, the potential legislation "could have a huge impact on charities and donors and could be the most important tax legislation impacting philanthropy in recent history."
Creating a uniform method for valuing planned gifts is the focus of a study under way by the National Committee on Planned Giving. The goal of the study, which should be completed next year, is to create valuation standards that are widely known, accepted and consistently used by people involved in gift planning.
"It's confusing for donors, donor advisers, volunteer leaders and administrations of charitable institutions to have planned gifts valued differently by charities," said Georgetown's Comfort, who is chairman of a task force overseeing the study.
While no uniform standards exist, the standard used by many people involving in planned giving is the IRS charitable deduction value. Developing uniform standards is important, said Comfort, because huge discrepancies in the way charities currently value planned gifts can create confusion for donors, charities and advisers.
"The task force aims to create a standard that would provide consistency," he said.
Standards developed by the task force will involve the way planned gifts are valued, not the way in which charities count planned gifts as part of their campaigns, which typically are internal policy matters related to public recognition.
The study is being conducted in three phases. First, a survey developed last year was distributed early this year to randomly selected members of NCPG's 110 regional councils, which have about 12,000 members That survey aims to collect demographic information about the members and their organizations, and to identify and assess their current practices in valuing gifts.
This spring, based on the results of the survey, the task force will begin to analyze current practices and try to develop model valuation standards that would give "fair and real valuations" for all types of planned gifts.
In 2002, the task force will publish and distribute the standards.
Books and mortar
Donor-advised funds, used for years by community foundations and more recently by big financial institutions, are catching on at colleges and universities. At Harvard, for example, donor-advised funds have grown to about $35 million since the school began using them in 1997.
Once considered "the poor man's private foundation," a donor-advised fund is a commingled charitable account, or component fund of public charity or community foundation, working roughly like a private foundation. But, it is managed by a public institution and receives more favorable tax treatment.
Harvard manages its donor-advised funds in its endowment but accounts for them separately.
Charles Collier, senior philanthropic adviser at Harvard explained the case of the CEO of a major financial institution, whose annual salary and bonus last year were roughly $10 million. He had planned to make gifts over five years to a program at Harvard and to an independent school where his wife serves on the board.
But to take advantage of a late-year surge in the value of his company's stock that meant a huge bonus for him in 2000, he opted in December to create a donor-advised fund of about $2 million that still will let him spread both gifts over five years.
The donor enjoyed an immediate deduction of up to 30 percent of his Year 2000 adjusted gross income, Collier said, compared to a deduction of no more t an 20 percent that he could have taken by making the same gift to a private foundation.
The donor also can control how much money is released to the two schools, and when, over five years. And because the money in the fund is invested in Harvard's endowment, the value of the gift could grow over the five years.
Finally, because the gift consisted of stock in the donor's company, he was able to avoid the capital-gains tax he would have had to pay because of the appreciation in the stock's value.
While Harvard is the legal donee of the gift from he CEO, terms of the fund allow him and his wife to direct half the principal away from Harvard and to other causes, specifically the independent school.
Todd Cohen is editor and publisher of Nonprofitxpress, an online newspaper at www.npxpress.com.
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|Title Annotation:||"assignment-of-income" doctrine and capital gains tax on donations|
|Publication:||The Non-profit Times|
|Date:||Feb 15, 2001|
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