Charitable Extenders Legislation Signed into Law by President Obama on December 19, 2014: Retroactively Extends Expiring Charitable Provisions Through December 31, 2014

Charitable Extenders Legislation Signed into Law by President Obama on December 19, 2014: Retroactively Extends Expiring Charitable Provisions Through December 31, 2014

News story posted in IRS Announcements on 23 December 2014| comments
audience: National Publication, Richard L. Fox, Esq. | last updated: 23 December 2014
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Summary

A more detailed look at the Charitable Tax Extenders.

by Richard L. Fox, Esq.

SUMMARY

On December 19, 2014, President Obama signed into law H.R. 5771, the Tax Increase Prevention Act of 2014 (or more simply the “Tax Extenders” legislation), which extends the expiration dates for a wide range of individual and business tax provisions that had previously expired at the end of 2013.  H.R. 5771 was passed by the House of Representatives on December 3rd and by the Senate on December 16th, when it then headed to the President’s desk for signature.  The provisions included in H.R. 5771 are reinstated retroactively for the year 2014 and will expire as of December 31, 2014.

After having left donors and charities alike in the dark regarding the availability of certain charitable planning techniques throughout nearly all of 2014, there is now certainty, albeit not occurring until December 19th, that these techniques can be used for the remainder of 2014.   And, for those donors who, in anticipation of the Tax Extenders legislation being passed retroactive to January 1, 2014, actually engaged in these techniques during 2014 prior to the enactment of H.R. 5771, there is similar certainty that these techniques will now be accorded favorable tax treatment given the retroactive nature of the legislation.  

With the enactment of H.R. 5771, the ever-popular individual retirement account (IRA) charitable rollover provision, a temporary provision originally enacted in 2006 that provides an annual exclusion from gross income up to $100,000 for a qualified charitable distribution (“QCD”) from an IRA, which can be used to satisfy the required minimum distribution (“RMD”), is now effective for the entire 2014 year.  Bills introduced earlier during 2014 that would have made the IRA charitable rollover provision permanent, which has been long-sought by the charitable sector, failed to gain traction, so that the IRA charitable rollover provision remains a mere temporary one expiring on December 31, 2014.  Although there are less than two weeks remaining in 2014, there is still time for individuals who have not yet satisfied their 2014 RMD to make a QCD to charity.  And, if an individual has already made a QCD to charity during 2014 in anticipation of the passage of the Extenders Legislation, the IRA charitable rollover provision will apply to such distribution.  As in prior years when the provision was retroactively extended, there is nothing in H.R. 5771 that allows individuals who have already taken their 2014 RMD to convert such distribution to a QCD.  Thus, there is no “do-ever” option that can be utilized before year-end in such a case, where the IRA charitable rollover provision can be utilized during 2014 by, for example, the RMD being rolled back into the IRA and then contributed to charity or by directly contributing the amount of the RMD previously taken to charity.

In addition to the IRA charitable rollover, H.R. 5771 retroactively extends the following temporary charitable giving provisions through December 31, 2014:

  • The enhanced deduction for contributions of capital gain real property for conservation purposes.
  • The enhanced  deduction for charitable contributions of food inventory.
  • The special basis adjustment to stock of S corporations making charitable contributions of property.

Unlike in prior years where the IRA charitable rollover provision has been extended in two-year increments, only a one-year extension is granted for the charitable giving provisions extended by H.R. 5771.  Thus, donors and charities will once again be left in the dark during 2015 regarding the availability of these charitable giving provisions unless Congress extends them once again during 2015.  

Of note are certain charitable proposals introduced earlier in 2014 that never made it into law.  These include bills allowing charitable contributions from January 1 through April 15 to be deducted for the prior taxable year, making certain temporary charitable giving provisions permanent, and reducing the 2% excise tax on net investment income for most private foundations to 1%.  Thus, none of these provisions found their way into the Internal Revenue Code.  And, of importance to those in the ever-popular donor advised fund (DAF) world, House Ways and Committee Chairman Dave Camp proposal made in early 2014 to require all contributions to a DAF to be distributed to public charities within five years never even made it into a bill, let alone enacted into law, so that there still remains no distribution requirement applicable to DAFs under the Internal Revenue Code.  Chairman’s Camp’s proposal to eliminate Type II and III supporting organizations also failed to gain any traction, so these types of supporting organizations are still permissible. 

DISCUSSION

IRA Charitable Rollover

Background

The ever-popular IRA charitable rollover provision provides an annual exclusion from gross income up to $100,000 for “qualified charitable distributions” (“QCD”) from an IRA, thereby removing the multitude of potential negative tax drawbacks traditionally associated with funding lifetime charitable contributions with IRA withdrawals, to the extent of $100,000 per year.[1] Although it was originally enacted only as a temporary measure in 2006, originally set to expire on December 31, 2007, each time the IRA  charitable rollover provision has expired, Congress has extended the provision in two-year increments, although it has never been made permanent.  To the chagrin of donors and charities alike, however, Congress has never extended this temporary provision before it has actually expired at the end of each two-year interval. Instead, the provision has always been extended well after its expiration date, albeit on a retroactive basis. That sequence has left donors and charities in the dark as to whether the IRA  charitable rollover provision would ultimately be available during the tax year after its expiration. For example, the last time the IRA charitable rollover provision expired was on December 31, 2011. The provision was subsequently retroactively reinstated to January 1, 2012, but not until the enactment of the American Taxpayer Relief Act of 2012 (“ATRA”), which was not signed into law by President Obama until January 2, 2013.[2]  Thus, although it was ultimately restated as of January 1, 2012, donors and charities went through all of 2012 without knowing whether the IRA charitable rollover provision would be in effect for that year. This type of congressional action obviously creates difficulties in planning for the use of the IRA  charitable rollover provision. It also detracts from any otherwise very favorable charitable-giving incentive, as donors are much more inclined to donate funds from their IRAs to charity while this provision is actually in effect.[3] Although H.R. 5771, which retroactively extends the IRA charitable rollover provision for the entire year 2014, was not signed by the President until December 19, 2014, this is still a better result than the last time the provision expired, when it wasn’t extended until the year following its expiration.   

The IRA  charitable rollover provision, contained in IRC § 408(d)(8), provides an annual exclusion from gross income up to $100,000 for “qualified charitable distributions” from an IRA.[4]  Thus, individuals qualifying for IRA  charitable rollover treatment (who must have reached age 70½) wishing to make distributions from an IRA  to charity can do so, to the extent of $100,000 per year, without the risk of any tax burden.

Per individual limit.   A taxpayer who owns and maintains multiple IRAs  in a tax year may make qualified charitable distributions from more than one of these IRAs. The maximum total amount that may be excluded for that year by the IRA  owner, however, is $100,000. For married individuals filing a joint return, the limit is $100,000 per individual IRA  owner.[5]

No double deduction. Of course, because it is excluded from gross income, a QCD distribution from an IRA  does not qualify for a charitable income tax deduction; otherwise, there would be the double benefit of gross income exclusion and a charitable income tax deduction.

Reporting requirement. An IRA custodian reports all distributions from an IRA  to both the IRA  owner and to the IRS, including those made directly from the IRA  to charity. According to the Form 1040 Instructions, the IRA  owner then reports all of the distributions on line 15a of Form 1040, but only the taxable distributions on line 15b. Therefore, the charitable IRA gross income exclusion is reported in a manner similar to a traditional rollover, where a person may have received a taxable distribution from a retirement account but avoids any imposition of income tax by rolling over the amount within 60 days to an IRA .

Required distributions. A QCD is taken into account for purposes of the annual RMD to the same extent the distribution would have been taken into account under such rules had the distribution been made to the account holder. Thus, charitable contributions from an IRA to charity count toward satisfying a participant's RMD requirement for the year.[6] As a result, a donor can satisfy his or her annual RMD requirement by donating funds from his or her IRA to charity and, up to $100,000, such amount is excluded from gross income. This treatment of having a charitable distribution count as an RMD should apply even if the IRA charitable rollover provision is not in effect. According to IRS guidance, a transfer from an IRA  to charity not qualifying for the charitable rollover provision is treated as a distribution to the IRA  owner and, then, a contribution by the IRA  owner to charity.[7]

Statutory Requirements

There are six basic requirements for an IRA  distribution to qualify as a QCD under the IRA  charitable rollover provision:

(1) The distribution must be made for only an IRA.

(2) The recipient must be an eligible charitable organization.

(3) The IRA  owner must be at least age 70½.

(4) The distribution must be made directly to charity.

(5) The distribution must otherwise be fully deductible as a charitable contribution.

(6) The distribution must otherwise be included in gross income.

These requirements are discussed in more detail below. If an amount intended to be a QCD is paid to a charitable organization but fails to satisfy the requirements of IRC § 408(d)(8), the amount paid is treated as (1) a distribution from the IRA  to the IRA  owner that is includable in gross income under the rules of  IRC § 408 or 408A, as applicable, and (2) a contribution from the IRA  owner to the charitable organization that is subject to the rules under IRC § 170 (including the percentage limits of  IRC § 170(b)).[8] Following its enactment in 2006, the requirements for meeting the IRA charitable rollover provision were actually the subject of much confusion,[9]  although that confusion was generally eliminated upon the IRS issuing Notice 2007-7, which provides specific guidance in the form of questions and answers with respect to the various IRA charitable rollover provision requirements.

IRAs Only. The distribution must be made only from an IRA.  For this purpose, Simplified Employee Plans (SEPs) and Savings Incentive Match Plans for Employees (SIMPLE plans), which are basically IRAs  that receive employer contributions, as well as IRC §§ 403(b) and 401(k) plans, profit-sharing plans, and pension plans, do not qualify under the IRA  charitable rollover provision.  Many individuals over 70½ years old have large IRA  balances attributable to rollovers from retirement accounts maintained at their former employers, which can be used to make distributions to charity. Where applicable, individuals over 70 ½ years old who do not have IRAs  can take advantage of the IRA  charitable rollover provision by, for example, transferring funds from an existing IRC §§ 401(k) plan into a newly established IRA. Generally, the exclusion for QCD is available for distributions from any type of IRA (including a Roth IRA  described in Section 408A and a deemed IRA  described in  IRC § 408(q)) that is neither an ongoing SEP IRA described in IRC § 408(k) nor an ongoing SIMPLE IRA described in IRC § 408(p). For this purpose, a SEP IRA  or a SIMPLE IRA  is treated as ongoing if it is maintained under an employer arrangement under which an employer contribution is made for the plan year ending with or within the IRA  owner's tax year in which the charitable contributions would be made.

Eligible charitable recipients. The recipient organization must be described in IRC §  170(b)(1)(A), which generally includes organizations commonly referred to as “public charities,” such as churches, hospitals, museums, and educational organizations. Donor advised funds operated by public charities, and supporting organizations, while described in IRC §  170(b)(1)(A), are specifically excluded as eligible recipients of IRA charitable rollover distributions, so that distributions from IRAs  to such entities, including, for example, a donor-advised fund sponsored by a community foundation or a hospital foundation formed as a supporting organization, do not constitute qualified charitable distributions. Also excluded are split-interest trusts, such as charitable remainder and lead trusts, and private nonoperating foundations, as such entities are not described in  IRC § 170(b)(1)(A).

IRA  owner must be at least age 70½. The distribution must be made on or after the date that the IRA holder attains age 70½. Similarly, the exclusion from gross income for qualified charitable distributions is available for distributions from an IRA  maintained for the benefit of a beneficiary after the death of the IRA  owner if the beneficiary has attained age 70½ before the distribution is made.

Distributions must be made directly to charity. The distribution from the IRA  to the charity must be made “directly by the trustee,” such that the distribution must be made payable directly from the IRA  to the charity. If a check is made payable to the IRA  owner and then endorsed over to the charity, it will not qualify. Where, however, a check from an IRA  is made payable to a qualified charitable organization and delivered by the IRA owner to the charitable organization, the payment to the charitable organization will be considered a direct payment by the IRA  trustee to the charitable organization.

A distribution to a charity will qualify as a qualified charitable distribution only if the “entire distribution would be allowable under section 170” as a charitable deduction. Thus, any quid pro quo benefit received by the account holder in return for the distribution, such as the fair market value of a dinner or other benefit that is not disregarded under IRC § 170, disqualifies the entire distribution, not just the benefit portion, from IRA charitable rollover treatment. The requirement that the entire distribution be allowable as a charitable deduction also prevents the funding of a pooled income fund or a charitable gift annuity from an IRA  from being considered a qualified charitable distribution, notwithstanding that the charity receiving the distribution is a public charity under IRC § 170(b)(1)(A).

Further, under  IRC §  170(f)(8), no charitable deduction is allowed for any contribution of $250 or more, unless the donor obtains a contemporaneous written acknowledgement, which must disclose the value of any goods or services provided by the charity in return for the contribution. Thus, to constitute a qualified charitable distribution, the donor must obtain a written acknowledgement indicating that no goods or services were received in return for the contribution. When making a distribution from an IRA  for which charitable rollover treatment is sought, donors will be best served by first advising the charity that:

(1)       A distribution will be made from the donor's IRA  to the charity, which is intended to constitute a “qualified charitable distribution” under  IRC § 408(d)(8).

(2)       No goods, services, or benefits of any kind are to be provided by the charity to the donor or any other party in consideration for the distribution.

(3)       Upon its receipt of the distribution, the charity must provide an acknowledgement to the donor, acknowledging the amount of the distribution and that no goods, services, or benefits of any kind were or will be provided to the donor or any other party in consideration for the distribution from the IRA .

Distribution must otherwise be included in gross income. A distribution to charity from an IRA will qualify as a qualified charitable distribution only to the extent that the distribution would have otherwise been included in the account owner's gross income if such distribution had been withdrawn. Thus, only the taxable portion of any IRA distribution can qualify as a qualified charitable distribution. Of course, where a nontaxable distribution is made to a charity from an IRA, the account holder would not be subject to tax on the distribution (as such amount is not included in gross income), but would also be entitled to a charitable income tax deduction under IRC § 170(a). This would be the case, for example, with a Roth IRA, where a distribution that would otherwise not be taxable, as is generally the case, is distributed directly to charity. Where, however, a distribution from a Roth IRA would be taxable because it is made within the five-tax-year period, the distribution can be a qualified charitable distribution provided all other requirements for such treatment are met, including the donor having attained age 70½. Under a special and favorable rule under the charitable rollover provision, distributions from an IRA  to charity are deemed to come first from the taxable portion of the IRA, thereby maximizing the tax-free dollars left behind.

Example. Blake, who is age 75, has an IRA  with a balance of $100,000, consisting solely of deductible contributions and earnings. The entire IRA  balance is distributed directly to an organization described in  IRC § 170(b)(1)(A) that is not a donor advised fund or a supporting organization, for which Blake receives no benefit in return. But for the IRA  charitable rollover provision, the entire distribution of $100,000 would be includable in Blake's gross income. Accordingly, under the IRA  charitable rollover provision, the entire distribution of $100,000 is a qualified charitable distribution. No amount is included in Blake's gross income as a result of the distribution, and the distribution is not taken into account in determining the amount of Blake's charitable deduction for the year.

Example. Jeffrey is also age 75 and has an IRA  with a balance of $100,000. His IRA  consists of $20,000 of nondeductible contributions and $80,000 of deductible contributions and earnings. In a distribution to an organization described in  IRC § 170(b)(1)(A) that is not a donor advised fund or supporting organization, $80,000 is directly distributed from the IRA, for which Jeffrey receives no benefit. But for the IRA  charitable rollover provision, a portion of the distribution from the IRA  would be treated as a nontaxable return of nondeductible contributions. The nontaxable portion of the distribution would be $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Accordingly: Under pre-IRA charitable rollover law, $64,000 of the distribution ($80,000 minus $16,000) would be includable in Jeffrey's income. Under the IRA charitable rollover provision, notwithstanding the pre-IRA charitable rollover tax treatment of IRA distributions, the distribution is treated as consisting of income first, up to the total amount that would be includable in gross income (but for the IRA  charitable rollover provision) if all amounts were distributed from the IRA. The total amount that would be includable in income if all amounts were distributed from the IRA is $80,000. Thus, the entire $80,000 distributed to the charitable organization on Jeffrey's behalf is treated as includable in income and is a qualified charitable distribution. No amount is included in Jeffrey's income as a result of the distribution, and the distribution is not taken into account in determining Jeffrey's charitable deduction for the year. In addition, the $20,000 remaining balance in the IRA is treated as Jeffrey's nondeductible contributions.

Extension of IRA Charitable Rollover Under H.R. 5771

Section 108 of H.R. 5771 retroactively extends the IRA charitable rollover through December 31, 2014 by the following provision:

SEC. 108. EXTENSION OF TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR CHARUITABLE PURPOSES.

  1. In General.--Subparagraph (F) of section 408(d)(8) is amended by striking ``December 31, 2013'' and inserting ``December 31, 2014''.
  1. Effective Date.--The amendment made by this section shall apply to distributions made in taxable years beginning after December 31, 2013.

Although there are less than two weeks remaining in 2014, there is still time for individuals who have not yet satisfied their 2014 RMD to make a QCD to charity.  And, if an individual has already made a QCD to charity during 2014 in anticipation of the passage of the Extenders Legislation, the IRA charitable rollover provision will apply to such distribution.   As in prior years when the provision was retroactively extended, there is nothing in H.R. 5771 that would allow individuals who have already taken their 2014 RMD to convert such distribution to a QCD.  That is, there is no “do-ever” option that can be utilized before year-end, where the IRA charitable rollover provision can be utilized during 2014 by, for example, the RMD being rolled back into the IRA and then contributed to charity or by directly contributing the amount of the RMD previously taken to charity.

Enhanced Deduction for Contributions of Capital Gain Real Property for Conservation Purposes

In order to encourage contributions of real property for conservation  purposes, the Pension Protection Act of 2006 (PPA) made several favorable changes to the percentage  limitation rules under IRC § 170(b) applicable to “qualified conservation  contributions” by individuals. In the case of farmers and ranchers operating as either a sole proprietorship or closely held corporation, even more favorable treatment was made available, as it was possible for qualified conservation contributions to shelter all of a farmer's or rancher's taxable income. These changes, found in IRC § 170(b)(1)(E) and which applied to contributions made in taxable years beginning in 2006 (including before the enactment of the PPA) or 2007, enhanced the qualified conservation  contribution, particularly with respect to farmers and ranchers who have limited annual incomes but own property having significant conservation value.  Although originally enacted as a temporary measure, subsequent to the enactment of the PPA, the favorable percentage  limitation changes for qualified conservation contributions under the PPA have been retroactively extended several times, including until December 31, 2013 under the American Taxpayer Relief Act of 2012 and now until December 31, 2014 under H.R. 5771.  Of course, given the complexities and transactional work involved in making a qualified conservation contribution, unless it has already taken place during 2014 in anticipation of its retroactive extension or is very close to completion at this point (and can be completed prior to the end of 2014), the retroactive extension of this provision through December 31, 2014 doesn’t provide much of a benefit. Specifically, the provision is extended under Section 106 of H.R. 5771, which provides:

SEC. 106. EXTENSION OF SPECIAL RULE FOR CONTRIBUTIONS OF CAPITAL GAIN REAL PROPERTY MADE FOR CONSERVATION PURPOSES.

(a) In General.--Clause (vi) of section 170(b)(1)(E) is amended by striking ``December 31, 2013'' and inserting ``December 31, 2014''.

(b) Contributions by Certain Corporate Farmers and Ranchers.-- Clause (iii) of section 170(b)(2)(B) is amended by striking ``December 31, 2013'' and inserting ``December 31, 2014''.

(c) Effective Date.--The amendments made by this section shall apply to contributions made in taxable years beginning after December 31, 2013.

Under this special relief, qualified conservation contributions are subject to their own separate percentage  limitation under which such contributions are allowed “to the extent the aggregate of such contributions does not exceed the excess of 50 percent of the taxpayer's contribution base over the amount of all other charitable contributions.” Thus, the 30% limitation on contributions of capital  gain  property no longer applies to qualified conservation contributions, as a 50% limitation now applies to such contributions. Moreover, this percentage limitation regime applicable to qualified conservation  contributions is very favorable with respect to the priority and carryover rules under IRC § 170. Contrary to a contribution subject to the 50% limitation under IRC § 170(b)(1)(A), such as a contribution of cash to a public charity, the deduction for qualified conservation  contributions is taken into account after all other charitable contribution deductions that are otherwise allowable. Thus, current year contributions to all other organizations, and presumably any carryover from a prior year, are deducted prior to qualified conservation  contributions. This is a particularly favorable ordering regime because any unused deduction attributable to qualified conservation  contributions may be carried over for up to fifteen taxable years, rather than the five-year carryover period that applies to all other contributions. Of particular note is that a carryover of a qualified conservation contribution during the fifteen-year carryover period is subject to the same special treatment in the carryover year, notwithstanding that such treatment may not apply to a current year contribution made in the carryover period. 

Example.  An individual with a contribution base of $100,000 makes a qualified conservation  contribution of property with a fair market value of $80,000 and makes other charitable contributions subject to the 50% limitation of $60,000. The individual is allowed a deduction of $50,000 in the current taxable year for the non-conservation  contributions (50% of the $100,000 contribution base) and is allowed to carryover the excess $10,000 for up to five years. No current deduction is allowed for the qualified conservation  contribution, but the entire $80,000 qualified conservation contribution may be carried forward for up to fifteen years as a contribution subject to the 50% limitation.

In the case of an individual who is a “qualified farmer or rancher” for the taxable year of the contribution, the percentage  limitation for qualified conservation  contributions is increased to 100% of the donor's contribution base over the amount of all other allowable charitable contribution deductions. In the above example, if the individual is a qualified farmer or rancher, in addition to the $50,000 deduction for non-conservation  contributions, an additional $50,000 for the qualified conservation  contribution would be allowed and $30,000 would be carried forward for up to fifteen years as a contribution subject to the 100% limitation.

Enhanced Charitable Deduction for Contributions of Food Inventory

The class of taxpayers eligible for the enhanced contribution deduction under IRC § 170(e)(3) was extended to all taxpayers that make contributions of food  inventory  from any trade or business,[10] provided, however, the food is “apparently wholesome food” and the requirements of IRC § 170(e)(3) are otherwise satisfied.[11] This provision was originally effective for contributions of food  inventory  made after August 28, 2005, and before January 1, 2006, but has subsequently been extended, now through December 31, 2014 under H.R. 5771, specifically under Section 126:

SECTION 126. EXTENSION OF ENHANCES CHARIRTABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY

(a)  In general.--Clause (iv) of section 170(e)(3)(C) is amended by striking December 31, 2013 and inserting December 31, 2014.

(b) Effective date The amendment made by this section shall apply to contributions made after December 31, 2013.

Under this provision, which is contained in IRC § 170(e)(3)(C), any taxpayer, whether or not a C corporation, engaged in a trade or business may claim the enhanced deduction otherwise provided under IRC § 170(e)(3) for donations of food  inventory. All other requirements of IRC § 170(e)(3) must be met, however. For taxpayers other than C corporations, the total deduction for donations of food  inventory  in a tax year may not exceed 10% of the taxpayer's net income for the tax year (without regard to the food  inventory  deduction) from all sole proprietorships, S corporations, or partnerships (or other non–C corporation entity) from which contributions of food  inventory are made.  The deduction for contributions of food  inventory  from any trade or business is available only for food that qualifies as “apparently wholesome food.”  “Apparently wholesome food” is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.[12]

Special Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property

In a change benefiting shareholders of S corporations, the Pension Protection Act of 2006 (PPA) eliminated the disparity in treatment between an S corporation shareholder and a partner in a partnership by limiting the reduction of an S corporation shareholders stock tax basis attributable to a charitable contribution of appreciated property by the S corporation to the shareholder's allocable share of the tax basis in the contributed property. If an S corporation or partnership makes a charitable contribution of money or property to a qualified charity, each shareholder and partner takes into account his allocable share of the contribution, as reflected on Schedule K-1, in determining his own income tax liability. Prior to the PPA, where an S corporation made a contribution of appreciated property deducted at fair market value, IRC § 1367(a)(2)(B) required that a shareholder's tax basis in the S corporation stock be reduced by the amount of the charitable deduction reflected on the shareholder's Schedule K-1, even if the deduction was based on the fair market value of the contributed property. This treatment could subsequently lead to substantial negative tax consequences to the shareholder. For example, where an S   corporation makes a charitable contribution of appreciated property for which a fair market value deduction is claimed, the shareholder would be subsequently taxed on the appreciation inherent in the contributed property upon the disposition of the stock (upon liquidation or sale), since the tax basis in the S   corporation   stock was required to be reduced by the allocable share of the contribution deduction (based on fair market value), rather than merely the allocable share of the basis of the contributed property. Further, the reduction in the S corporation stock tax basis by the allocable share of the contribution deduction may prevent the deductibility of future losses passed through to the shareholder, as loss deductions are limited to the tax basis in the S   corporation   stock. This treatment is contrary to the treatment of partners in a partnership, where the tax basis of each partner's interest in the partnership is reduced only by the partner's share of the basis in the property, without regard to whether the deduction for the charitable contribution is based on the property's fair market value. Under the PPA, IRC § 1367(a)(2) was amended to provide that the amount of a shareholder's basis reduction under IRC § 1367(a)(2)(B) attributable to charitable contributions by the S   corporation   is equal to the shareholder's allocable share of the tax basis of the contributed property, thereby putting an S corporation   shareholder on par with a partner of a partnership making a charitable contribution.

Example. An S corporation with two individual shareholders makes a charitable deduction of capital gain property having a fair market value of $100,000 and an income tax basis of $25,000. Assuming the fair market value of the property is otherwise deductible under IRC § 170, each shareholder will have a pass-through charitable deduction equal to $50,000, but will only reduce the basis of his S   corporation stock by $12,500 (assuming that the basis of the S  corporation  stock is at least $12,500, as the basis of the stock can never be less than $0). Prior to the PPA, each shareholder's basis of his S corporation stock would have been reduced by the entire amount of the $50,000 pass-through charitable contribution deduction (assuming the basis of the S corporation stock is at least $50,000). This favorable change in the law, which originally applied to contributions made by S  corporations in taxable years beginning in 2006 (including before the enactment of the PPA) or 2007, had been contained in the number of prior bills but never became operative until the PPA. By placing S corporations on parity with partnerships, the PPA removed the negative basis implications that have historically applied to contributions of appreciated property by S corporations, which have acted as a deterrent in promoting charitable contributions by S   corporations.

Under the Tax Extenders and Alternative Minimum Relief Act of 2008 (enacted on October 3, 2008), this favorable basis provision applicable to charitable contributions of appreciated property by S corporations, previously set to expire on December 31, 2007, was extended through December 31, 2009. Although originally set to expire on December 31, 2007, this favorable basis provision has been extended several times, including  until December 31, 2013 under the American Taxpayer Relief Act of 2012.  Now, it has been retroactively extended for the entire 2014 taxable year under Section 137 of H.R. 5771, which provides as follows:

137.  EXTENTION OF BASIS ADJUSTMENT TO STOCK OF S CORPORATIONS MAKING CHARITABLE CONTRIBUTIONS

(a) In general.--Paragraph (2) of section 1367(a) is amended by striking December 31, 2013 and inserting December 31, 2014.

(b) Effective date.--The amendment made by this section shall apply to contributions made in taxable years beginning after December 31, 2013.

Certain Charitable Proposals Not Becoming Law in 2014

Of note are certain charitable proposals introduced earlier in 2014 that never made it into law.  This includes the America Gives More Act of 2014, H.R. 4719, which would have made permanent the IRA charitable rollover provision, the enhanced deduction for conservation easements, and the enhanced deduction for food inventory contributions.  H.R. 4719 also would have allowed charitable contributions from January 1 through April 15 to be deducted for the prior taxable year and would have reduced the 2% excise tax on income for most private foundations to 1%.  H.R. 4719 passed the House on July 17, 2014, but never made it beyond that point.  The Supporting America’s Charities Act, H.R. 5806, which provided for the same permanency of such provisions, failed on the House floor on December 11, 2014. Of importance to those in the ever-popular donor advised fund (DAF) world, House Ways and Committee Chairman Dave Camp tax reform proposal issued in early 2014 would have required all contributions to a DAF to be distributed to public charities within five years never even made it into a bill, let along enacted into law, and there still remains no distribution requirement applicable to DAFs under the Internal Revenue Code.  Chairman’s Camp’s proposal to eliminate Type II and III supporting organizations also failed to gain any traction, so these types of supporting organizations are still permissible. The proposal would have limited the amount of charitable contributions allowed to be deducted to an amount in excess of 2 percent of adjusted gross income.

COMMENTS

After having left donors and charities alike in the dark regarding the availability of certain charitable planning techniques throughout nearly all of 2014, there is now certainty, albeit not occurring until December 19th, that as a result of enactment of H.R. 5771, the temporary provisions allowing (1) IRA charitable rollovers, (2) the enhanced deduction for contributions of capital gain real property for conservation purposes and food inventory and (3) the special basis adjustment to stock of S corporations making charitable contributions of property, are retroactively extended through December 31, 2014.  As a result, these techniques are available for the remainder of 2014 and, for those donors who, in anticipation of the Tax Extenders legislation being passed retroactive to January 1, 2014, actually engaged in these techniques during 2014 prior to the enactment of H.R. 5771, there is similar certainty that these techniques will now be accorded favorable tax treatment given the retroactive nature of the legislation.   As in prior years when the IRA charitable rollover provision was retroactively extended, there is nothing in H.R. 5771 that would allow individuals who have already taken their 2014 RMD to convert such distribution to a QCD.   Thus, there is no “do-ever” option that can be utilized before year-end in such a case, where the IRA charitable rollover provision can be utilized during 2014 by, for example, the RMD being rolled back into the IRA and then contributed to charity or by directly contributing the amount of the RMD previously taken to charity.  Given the complexities and transactional work involved in making a qualified conservation contribution, unless it has already taken place during 2014 in anticipation of its retroactive extension or is very close to completion at this point (and can be completed prior to the end of 2014), the retroactive extension of this provision through December 31, 2014 doesn’t provide much of a benefit. Unfortunately, as in prior years, H.R. 5771 is only an extension of temporary charitable provisions through the end of 2014 as, despite efforts by the charitable community, none of these provisions were made permanent and therefore, expire on December 31, 2014.  Thus, donors and charities will once again be left in the dark during 2015 regarding the availability of these charitable giving provisions unless Congress once again takes action. 



[1] The IRA  charitable rollover provision was enacted under the Pension Protection Act of 2006 (PPA), and is contained in Section 408(d)(8) of the Internal Revenue Code of 1986, as amended. For a discussion of the potential negative tax drawbacks of funding lifetime charitable giving with IRA  withdrawals, see Fox, “Charitable Incentives and Limitations of the Pension Protection Act,” Estate Planning Journal (November 2006).

[2] Congress passed ATRA on 1/1/2013, the day before the President signed it into law.

[3] For instance, according to a paper issued by the Independent Sector, entitled “Extend the IRA  Charitable Rollover,” in the first two years the IRA  charitable rollover provision was in effect, “more than $140 million was donated from IRAs  to support the work of public charities across the U.S.” In a 6/25/2007 article in InvestmentNews.com, entitled “IRA  Wrinkle in Tax Law a Boon to Charities,” it was reported that based on a survey conducted by the National Committee on Planned Giving, IRA  owners had contributed at least $75 million to charitable organizations from IRAs. These contributions, the article notes, were the result of the IRA  charitable rollover provision. According to the article, of the organizations that reported data, public universities received 32.1% of the total, private universities 27.5%, and small colleges 9.8%. Also receiving donations were hospitals, religious organizations, social services, museums, and other non-profit groups. The article notes that Harvard University had received $4 million in contributions as a result of IRA  charitable rollovers, with the head of its planned giving stating that “[t]his has enabled donors to make larger gifts. I know people have provisions in place for future gifts and decided to do something now versus later because they could tap their IRAs .”

[4]  Section 408(d)(8)(A).

[5] Notice 2007-7, 2007-1 CB 395, Q&A-34.

[6] Id., Q&A-42.

[7] Id., Q&A-43.

[8] Id. 

[9] See, e.g., Strom, “Tax Break to Encourage Giving is Creating Confusion Instead,” New York Times, 12/3/2006. The article states that there was a great deal of misinformation and a general lack of knowledge about the IRA  charitable rollover provision, including some of the banks and brokerage houses that manage IRAs  resisting direct transfers of donated funds to charity, stating that, “[t]he reasons for the custodians' reluctance include ignorance of the measure ... and lack of guidance from the Internal Revenue Service.” Following the New York Times article, and a 12/20/2006 letter from Rep. Roy Blunt, then the House Minority Whip, to then Secretary of Treasury Henry Paulson requesting additional guidance on the IRA  charitable rollover provision, the IRS issued Notice 2007-7.

[10] As a general rule, only C corporations are eligible for the enhanced deduction under IRC § 170(e)(3) for contributions of inventory. IRC § 170(e)(3)(A). However, for contributions of food  inventory  subject to IRC § 170(e)(3)(C), the enhanced deduction is applied “without regard to whether the contribution is made by a C corporation.”

[11] Thus, the contribution must be made to an IRC § 501(c)(3) organization that is not a private nonoperating foundation and the donee organization must (1) use the property in a manner related to its exempt purpose solely for the care of the ill, the needy, or infants; (2) not transfer the property in exchange for money, other property, or services; and (3) provide the taxpayer a written statement that its use of the property will be consistent with these requirements.

[12]  IRC § 170(e)(3)(C)(iii).

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