TAX EXEMPT ORGANIZATIONS
I. Calculating the Charitable Deduction
a. Tax exempt charity – Possible charitable deduction; Other exempt organization – No charitable deduction
b. 50%/30% Calculation
c. C corp deduction (not S corp)
d. Process – 11 steps
i. Treas. Reg. § 1.170A-1(c)
1. Start with the FMV of the property donated.
ii. § 170(e)(1)(A)
1. Subtract any potential non-long-term capital gain
iii. § 170(e)(1)(B)(i)(I)
1. Subtract 100% of any potential long-term capital gain if the transfer is a gift of unrelated tangible personal property given to a public charity or to a § 170(b)(1)(F) private foundation
iv. § 170(e)(1)(B)(i)(II)
1. Subtract 100% of any potential long-term capital gain if the transfer is a gift of tangible personal property but (1) is sold, exchanged, or disposed of by the done before the last day of the taxable year and (2) the done has not made a 170(e)(7)(D) certification with respect to the property.
v. § 170(e)(1)(B)(ii)
1. Subtract 100% of any potential long-term capital gain if the transfer is a gift to a private foundation other than one described in § 170(b)(1)(F)
vi. § 170(e)(1)(B)(iii)
1. Subtract 100% of any potential long-term capital gain if the transfer is a gift of a patent, copyright, trademark, trade name, trade secret, know-how, software, or similar property, or applications or registrations of such property
vii. § 170(e)(1)(B)(iv)
1. Subtract 100% of any potential long-term capital gain if the transfer is a gift off taxidermy property by the person who prepared, stuffed, or mounted the property or by a person who paid for preparation, stuffing, or mounting
viii. § 170(b)(1)(A)
1. Limit the amount of contributions to 50% of the taxpayer’s contribution base if they are either to a public charity or to a § 170(b)(1)(F) private foundation. Carryover the remainder of such contributions for five years per §170(d)
ix. §170(b)(1)(B)
1. Limit any contributions to private foundations other than those described in §170(b)(1)(F) to the lesser of:
a. 30% of the contribution base
b. 50% of the contribution base minus the amount from step 8
2. Carry over remainder for five years
x. §170(b)(1)(C)
1. Limit the contributions from step 8 to 30% of the contribution base if they involve capital gain property and Steps 3 through 7 did not cause a reduction. Carry over the remainder for five years. Do not change Step 9, or
2. Elect §170(b)(1)(C)(iii) to apply all capital gain property. If you elect, do not apply the 30% limitation in this Step 10, but go back to steps 4 through 7.
xi. §170(b)(1)(D)
1. Limit the contributions from Step 9 to the lesser of:
a. 20% of the contribution base, or
b. 30% of the contribution base minus the Step 10 amount (if no § 170(b)(1)(C)(iii) election was made).
xii. Carry over the remainder for 5 years
e. Reduction versus limitation
II. Qualifying as a Public Charity
a. Four methods
i. Public safety
ii. One third public support
1. Listed
2. One third public support
3. Ten percent plus facts and circumstances
a. Continuous and bona fide government or public fundraising program
b. How much over ten percent?
c. Diverse sources of support
d. Representative governing body
e. Services continuously available to general public
iii. Section 509 one third public support
1. More than one third may NOT come from:
a. Passive investment income
b. After tax unrelated business taxable income
iv. Supporting organization
1. Organized and operated exclusively for the benefit of, or to perform the functions, or to carry out the purposes of one or more publicly supported organization, §509(a)(3)(A)
2. And is either
a. Operated, supervised or controlled in connection with one or more publicly supported organizations §509(a)(3)(B)(I), or
b. Supervised or controlled in connection with one or more publicly supported organization §509(a)(3)(B)(II), or
c. Is controlled in connection with one or more publicly supported organization §509(a)(3)(B)(III),
3. And not directly or indirectly controlled by a disqualified person, other than a foundation manager or a publically supported organization
4. The organization documents must state that the entity’s purpose is to support one or more specifically identified publically supported organizations. Treas. Regs. § 1.509(a)-4(h)(1)(i)
b. Test
i. Public support/All support
ii. 4-year look-back; status is for current and following years
iii. Public support
1. Total support – Gifts, grants, membership fees, net income from unrelated business even if the business is not regularly carried on, Taxes collected for the benefit of the organization, Free government services provided to organization (but not fees for performing exempt purpose)
2. 2% Rule
3. Unusual gift rule – Rev. Proc. 81-7
a. Not from related person
b. Cash, marketable stock, or related to exempt purpose
c. Unrestricted
4. Governmental contract rules
a. No more than $5,000/1% (see below)
iv. Permitted persons
1. Not disqualified person (§4946)
2. Government unites described in §170(c)(1)
3. Listed organizations
4. Donation is not included in public support to the extent that it exceeds 1% of total support
III. Excise Taxes
a. Private charity – Good public policy/Potential evasion conduit
en a disqualified person and other individuals who are also disqualified persons by reason of their relationship to the first disqualified person
ii. Can only by joining their voting power with that of the foundation,
iii. Cause the organization to engage in a self-dealing transaction with a disqualified person
iii. Mandatory distributions – §4942
1. Tax is 30% on undistributed income
a. Undistributed income = Distributable amount – Qualifying distribution
i. Distributable amount = Minimum investment return (i.e. 5% of the value of noncharitable assets less acquisition indebtedness) + any repayments of previous qualifying distributions + amounts received from the sale or disposition of charitable assets + set aside any amounts that are no longer necessary to achieve the purpose for which the amount was set aside – any taxes imposed
ii. Non-charitable asset = Not directly used or held for the use of the exempt purpose
1. Do not include:
a. Investments that help the charity achieve its exempt purpose (program-related investments)
b. Investments in functionally-related businesses
iii. Qualifying distribution = Amounts paid for charitable purposes
iv. Suitability test (Rev. Rul. 74-450) = Set aside involving relatively long term grants or expenditures that must be make in order to assure the continuity of particular charitable projects (e.g. a plan to erect a building)
v. Cash distribution test
1. Foundation must have made: Aggregate cash or “equivalent” distributions in amounts equal to the sum of 20% of its distributable amount for the first taxable of its “start up” period + Successive annual distributions increasing by 20% per year until the fourth year of its start up period of 53.4942(a)-3(b)(3)
