Year-End Planning For Charitable Gifts

Year-End Planning For Charitable Gifts

Article posted in General Counsel Memoranda on 15 November 2000| comments
audience: National Publication | last updated: 16 September 2012
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Summary

This article explores year-end planning for charitable gifts. Often, one of the biggest concerns at year end is making sure a donor's charitable gift takes effect in the current year so that it is deductible on the current year's return and not on the following year's return. Other year-end planning issues are selecting the appropriate charitable giving vehicle to accomplish a donor's tax planning goals and making sure the year's charitable remainder trust distributions are timely.

by: Emanuel J. Kallina, II, Esquire & Jonathan D. Ackerman, Esquire

Introduction

This article explores some of the issues involved with planning charitable gifts as the end of the year approaches. Often, the biggest concern at year end is with the timing of the gift and the various rules for determining when a charitable deduction may be taken. At this time of year, the typical donor is trying to combine his or her philanthropic goals with his or her tax reduction goals. That is, the donor wants to make sure he or she obtains the tax benefits resulting from the charitable gift on the current year's income tax return rather than on a future return. At the end of the year, this goal may be complicated by certain conditions that must be met for the gift to be deemed to occur in the current year. These conditions may vary with the type of asset involved in the contribution. Other year-end concerns are selecting the appropriate vehicle for the charitable gift and making sure that charitable remainder trust distributions comply with the applicable timing rules.

Timing of Gift

If a donor decides to make a charitable gift late in the year and wishes to take the charitable income tax deduction for that year, then it is important to know the rules governing when the gift is deemed to occur. Code1 Section 170(a)(1) states the general rule as follows:

There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.2

The Regulations specify that the charitable income tax deduction may be taken for the year in which the contribution is paid.3 The Regulations go on to state that the charitable gift is generally made when delivery occurs.4 Typically, the cases try to ascertain when the donor surrendered dominion and control over the asset being given to the charity in determining when a gift occurred.

The specific factors determining the timing of the payment or delivery may depend on the type of asset used for the gift. This section reviews some of the assets where these factors may be a bit tricky.

Stock

The timing of the deductibility of a charitable gift of stock depends upon when the donor has relinquished control over the stock.5 The Regulations state, "If a taxpayer unconditionally delivers or mails a properly endorsed stock certificate to a charitable donee or the donee's agent, the gift is completed on the date of delivery or, if such certificate is received in the ordinary course of the mails, on the date of mailing."6 In other words, if the donor has the stock certificate, the gift is complete when the stock certificate is properly endorsed and mailed or otherwise delivered to the charity or the charity's agent. If such a stock certificate is mailed, the date of mailing will be the date of delivery so long as the certificate is received in the ordinary course of the mail. If instead of giving the stock certificate directly to the charity, the donor gives the certificate to the donor's broker or to the corporation that issued the stock to handle the transfer, then the date of the charitable gift is the date the stock is transferred to the name of the charity on the corporation's books.7

Although it is clear that control has passed when the stock is transferred to the name of the donee on the issuing corporation's books or when a properly endorsed stock certificate is delivered to the charity or the charity's agent, it may also be possible for control to pass in order to get a charitable deduction in the current year even when there is not enough time to get the corporate books changed before year end or the donor does not have the actual stock certificate to deliver.8 When the stock transfer is handled via a broker, the best course is to make sure that the broker is acting as the agent of the charity and not the donor. In that case, the date of delivery of the stock certificate to the charity's broker/agent will be the date of the gift regardless of the timing of the ownership transfer on the issuing corporation's books.9

If the stock is in a brokerage or similar account, the donor probably will not have access to the stock certificate. Generally, the financial institution where the stock is held will be the donor's agent and the transfer to the charity will not be complete until the stock is transferred to the charity's name on the issuing corporation's books. If the financial institution holds the stock in street name, the charitable gift is not made until the financial institution transfers the ownership of the stock to the charity on its books.10 However, if the charity appoints the financial institution to act as the charity's agent for the transfer, it appears that the transfer may be deemed to take effect at that time.11 The charity's instructions should be put in writing and acknowledged by the financial institution.12 The cases indicate that care should be used when trying to time a charitable deduction under this approach.

For example, the United States Court of Appeals for the Ninth Circuit discussed the timing of a transfer of stock in a brokerage account to charity in Ferguson v. Commissioner.13 In this case, the taxpayers argued that a gift of stock in a corporation involved in a merger transaction to several charities was complete when the stock broker handling the transfer made in-house journal entries on his computer at Merrill Lynch on September 8, 1988. Alternatively, the taxpayers argued that the broker was the agent of the charities or a trustee of a voluntary trust created for the benefit of the charities so that the charitable gifts were completed on August 15th, 21st and 26th, respectively, when the taxpayers purportedly executed the original letters authorizing the transfer. According to the broker, these original letters were destroyed. As to the possible status of the broker as an agent of the charities, the Court observed:

The evidence shows that Brett Floyd was not acting on behalf of the Charities (as their agent, as the trustee of a voluntary trust created for their benefit, or in any other capacity) until the time that the Merrill Lynch clearance process had been completed, the AHC stock had been transferred on the books of Merrill Lynch from the Fergusons' account to the Charities' account, and the Fergusons had authorized the transfer, finally and effectively. Even if Brett Floyd had ceased to be acting under the control of the Fergusons at any time, not until Merrill Lynch's legal department had completed its two-week clearance process, would he even have been capable of acting at the Charities' behest with respect to any disposition of the AHC stock, which still remained in the Fergusons' personal accounts. Moreover, in the memorandum disposition cited by the Fergusons as support for their contentions, the Tax Court there held that, under Montana law, a voluntary trust would not be formed without some sign, some overt act, which demonstrated that, after receiving stock on behalf of a named beneficiary, the recipient bank had accepted its position as trustee for the benefit of the named beneficiaries. See Richardson v. Commissioner, T.C.M. (P-H) P 84,595 (T.C. Nov. 9, 1984). In that case, the contribution thus was not completed for tax purposes until the recipient bank had tendered the received shares on behalf of the named beneficiaries. See id. Likewise, in the present case, although controlled as to the formation of a voluntary trust by Idaho law (which does not address this issue), logic and common sense dictate that the Fergusons' gift could not be completed until Merrill Lynch, through its legal department and Brett Floyd, finally had decided that it was willing to transfer the shares according to the Fergusons' wishes and to tender the shares on behalf of the Charities.14

The Court ruled that the charitable contributions were completed on September 9, 1988, which was the date the taxpayers executed their final letters of authorization for the transfer of the stock. Specifically, the Court stated:

Therefore, in the absence of Brett Floyd's role as anything other than an agent of the Fergusons or Merrill Lynch, there could have been no contribution until the delivery of the AHC stock to the Charities' account had been completed. And in the absence of any earlier letters of authorization that were intended to be final and effective, there was no completed delivery to the Charities, no transfer that was legally binding and irrevocable, until the date that the Fergusons' letters of authorization were finally and effectively executed--September 9, 1988.15

Similarly, in the case of Morrison v. Commissioner,16 the United States Tax Court discussed the timing of a gift of stock to a church in a memorandum decision. The stock was held in street name in a brokerage account. Although the case does not specifically discuss whether the stock broker was the agent of the donor versus the donee, the stock broker used by the donor was her brother, who worked at Drexel Burnham Lambert, and he was referred to in the case as "the donor's account executive." The Internal Revenue Service ("IRS" or "Service") argued that the donor maintained control over the stock until the date of the transfer on Drexel's books. The court agreed, finding that the charitable gift was made when the broker transferred the stock on its books rather than when the donor gave her written authorization for the transfer, stating, "the date on which a donor directs his agent to transfer stock to a charity is not determinative of when a gift is complete. Rather, delivery of a gift of stock is complete when the stock is actually transferred, for only then is the stock placed beyond the donor's control." The court noted that the donor could have revoked the transfer at any time before Drexel completed the transfer on its books and there was no evidence that Drexel (the donor's brother) wouldn't have honored such a revocation.17

Checks

A charitable gift made with a check is deemed paid when the donor unconditionally delivers or mails the check to the donee. In other words, if the donor mails the check before the end of the year 2000 and maintain an adequate record of such mailing, he or she may take the charitable deduction for the gift on his or her 2000 tax return. This is true even if the donee charity does not deposit or cash the check until 2001. However, if the check is not ultimately paid in due course, the charitable gift is not complete until the date of actual payment.18 As a result, the donor would want to make sure that the check for the charitable gift does not bounce and he or she would want to avoid inadvertently stopping payment on the check. It appears that this timing rule for checks applies in the same fashion when the check payable to the charity is mailed to the charity's agent rather than directly to the charity.19

Credit Cards

Revenue Ruling 78-3820 provides that a charitable gift charged on a credit card is deductible in the year in which the charge is made even if the charge appears on the donor's credit card statement in the following year and the donor pays the statement in the following year. The IRS reached this conclusion in the Ruling because the donor's bank is deemed to have paid the charity at the time the charge is made and the donor is in debt to the bank at that time "in such a way that the cardholder could not thereafter prevent the charitable organization from receiving payment."21 Because of this indebtedness to a third party, the credit card gift is distinguishable from a mere pledge or promise to pay the charity at a future date, which is not deductible.

In a Private Letter Ruling, the Service held that the same timing rules apply when the donor's contribution is made via a sponsored credit card which rebates a percentage of purchases to a qualified charity selected by the card holder.22 In other words, the charitable deduction could be taken in the year in which the credit card company makes the payment to the charity on behalf of the card holder.

Telephone Transfers

Where a person calls his or her bank to direct that a payment be made from his or her account, the IRS has ruled that the deduction may be taken in the year in which the bank makes the payment as reflected on the person's monthly account statement.23 Presumably, this timing rule would apply to a charitable contribution made in this fashion.24

Promissory Notes

In Revenue Ruling 68-174, the Service held that if a donor issues an unsecured promissory note to a charity as a gift, this is treated as a mere promise to pay in the future. As such, it is not deductible until actual payment is made.25 In the Ruling, the Service quoted a concurring opinion by Judge Atkins of the United States Tax Court in the case of Petty v. Commissioner26 for the general rule for promissory notes as follows:

The general rule has always been that, under the cash method of accounting, there must be actual payment as a prerequisite to a deduction, that is, there must be an outlay of cash or property, and that the giving of a promissory note does not constitute actual payment. See Eckert v. Burnet, 283 U.S. 140; Helvering v. Price, 309 U.S. 409; and Baltimore Dairy Lunch v. United States, (C.A. 8) 231 F. 2d 870. It was the purpose of Congress, in enacting section 23(o) and (q) of the Revenue Act of 1938 (which first employed the language now appearing in section 170(a)(1) of the 1954 Code), to put accrual method taxpayers in the same position, insofar as deductions for contributions are concerned, as cash method taxpayers, and to require in the case of either type of taxpayer that the contribution be actually paid.27

Real Estate

It is clear that a charitable gift of real estate will be considered paid when the deed is recorded in the real property records.28 However, local law may provide exceptions for the transfer of ownership when a deed is executed and delivered but not recorded and may even allow for constructive delivery of a deed where no actual delivery has occurred.29

In the case of Douglas v. Commissioner,30 ruled in a memorandum decision that a charitable gift of real estate was effective upon delivery of the deed to the charitable donee even though the deed was not recorded. The Court described the Service's position as follows:

Respondent next contends that since there was no intent to record the quitclaim deed until after the first mortgage was paid off, and since the deed was never in fact recorded, petitioners did not sufficiently divest themselves of control over the property. Respondent further contends that petitioners failed to prove either actual or constructive delivery of the deed. Respondent relies upon our decision in Alioto v. Commissioner, T.C. Memo. 1980-360, affd. in an unpublished opinion 692 F.2d 762 (9th Cir. 1982), for support of this latter contention.31

However, despite the IRS's contention that the deed was not delivered, the Court agreed with the donor that the deed had been delivered but not recorded. As to whether recording or delivery was necessary for the charitable deduction, the Court made the following comments, citing California law for the rules on delivery:

Section 1.170-1(b) , Income Tax Regs., states in part: "ordinarily a contribution is made at the time delivery is effected." Among the elements a taxpayer must prove is a clear intention to absolutely and irrevocably divest himself of title, dominion, and control over the entire gift, in praesenti. Brotzler v. Commissioner, T.C. Memo. 1982-615.

The undisputed evidence shows that petitioners never had physical possession of any portion of the property. They did not even have a key to the premises. Father John had possession of the key from the outset. Furthermore, there is sufficient evidence indicating that petitioners never intended to exercise any control over the property. As far as petitioners were concerned the property "belonged" to the Church.

Where a gift of real property is made, by way of a deed, state law controls when the deed is effectively delivered. Guest v. Commissioner, 77 T.C. 9, 18 (1981); Greer v. Commissioner, 70 T.C. 294, 304 (1978), affd. 634 F.2d 1044 (6th Cir. 1980); Alioto v. ommissioner, supra. Under California law, a grant takes effect, so as to vest the interest intended to be transferred, only upon its delivery, either actual or constructive, by the grantor. See Cal. Civ. Code secs. 1054 and 1059 (West 1982).

In Alioto v. Commissioner, supra, we found that the taxpayer had failed to make actual delivery of the deed. We further found that the taxpayer had merely made promises to various charitable institutions to give them various property interests, and made no specific commitment as to the time the gift would be made, or the specific property interests to be given. As a result thereof, we concluded that there was no constructive delivery.

Here, however, there is sufficient evidence indicating that the deed was actually delivered. Petitioners, as well as their witnesses, testified to this fact. We find their testimony credible and accept it as true. However, even if there was no actual delivery, there is sufficient evidence of the deed's constructive delivery to the Church.

Section 1059 of the California Civil Code provides:

Though a grant be not actually delivered into the possession of the grantee, it is yet to be deemed constructively delivered in the following cases:

1. Where the instrument is, by the agreement of the parties at the time of execution, understood to be delivered, and under such circumstances that the grantee is entitled to immediate delivery * * *.

Furthermore, the evidence shows that all parties to the transaction knew that petitioners intended to give, and the Church intended to receive, a 20-percent interest in the property. It also shows that the transfer of the deed, and the 20-percent interest, was to be made in December 1981. Petitioners completely and effectively divested themselves of total possession and control over a 20-percent interest in the property, and the deed was in fact delivered.32

Tangible Personal Property

Some items of tangible personal property have specific title documents that can be endorsed and delivered to the donee to effect the charitable gift. Automobiles have title certificates, for example. Boats and airplanes also have title documents but it should be kept in mind that local law may have special rules for the transfer of these items. If the tangible personal property does not have a title document, the donor should create a careful record to show the timing of the gift. The charitable substantiation rules may provide evidence of the timing of the gift as will actual delivery of the tangible personal property to the charity, but the donor should also consider using a signed and notarized letter as additional evidence of the time of the gift.33

Vehicle for Gift

With most planned giving vehicles, such as donor advised funds, charitable remainder trusts and pooled income funds, the year-end charitable deduction timing issues will generally be the same as those noted above for outright gifts. However, the rules applicable to the charitable deduction for a charitable lead trust vary depending on whether the trust is a grantor trust or a non-grantor trust for income tax purposes. As a result, the donor's year-end income tax planning goals may determine which type of lead trust is most advantageous. A donor advised fund may also be a useful year-end charitable planning device where a donor would like to obtain a charitable deduction for the current year but defer to future years the decisions on the specific charitable organizations to receive assets.

Charitable Lead Trusts

If the grantor is treated as the owner of a charitable lead trust under the rules found in Code Sections 671 to 679, then the trust is known as a "grantor trust" for income tax purposes. In that case, the donor may take the charitable income tax deduction for the value of the lead interest on his or her income tax return in the year of the gift34 even though transfers to charity may not actually be made until later years. However, under the grantor trust rules, the grantor must report the trust's income on his or her own income tax return each year.35 Essentially, the up-front charitable deduction is recovered over the future years of the trust. Further, if the trust ceases to be a grantor trust at any time during its existence, the grantor must recover that portion of the charitable deduction that has not yet been recovered. Similarly, if the grantor dies before the termination of the charitable lead trust, the charitable deduction that has not yet been recovered in this fashion must be recovered on the grantor's final income tax return.36

If the grantor is not treated as the owner of the charitable lead trust, then the trust is not a grantor trust for income tax purposes. The grantor is not able to take a charitable income tax deduction for the value of the lead interest but he or she is not required to report the trust's income on his or her individual income tax return.

A grantor-type charitable lead trust may be particularly advantageous in years when the donor's income is significantly higher than his or her income is expected to be in future years. In other words, creation of a grantor-type charitable lead trust could allow the donor to have a charitable income tax deduction in the year when he or she is in the higher tax bracket and the deduction would be recovered in later years when the donor is in a lower tax bracket.

Donor Advised Funds

If a donor is looking for an immediate charitable income tax deduction but is uncertain about the specific charities he or she wishes to benefit, the donor advised fund vehicle might be an appropriate choice. With a donor advised fund, the donor makes an outright transfer of assets to the fund before the end of the current year and enters into an agreement with the charity administering the fund whereby the donor is allowed to make non-binding recommendations about future distributions to various charities. The donor is able to take a charitable income tax deduction for the year of the transfer to the fund even though distributions from the fund might not be made until future years. In contrast to retaining the right to change the charitable beneficiaries of a charitable remainder trust or charitable lead trust, the right to make suggestions on recipients of future distributions from a donor advised fund does not cause the fund assets to be included in the donor's estate for estate tax purposes.

Charitable Remainder Trust Distributions

Another year-end planning issue is making sure that any distributions from a charitable remainder trust that are required by the end of the year are made in a timely fashion. Charitable remainder unitrusts that are of the income only or net income with make-up type may make their distributions within a reasonable time after the end of the calendar year.37 A reasonable time is generally the due date of the trust's tax return for the year, including extensions.38

The Regulations under Code Section 664 that were finalized on December 10, 1998, changed the rules for standard charitable remainder unitrusts and charitable remainder annuity trusts. If a standard charitable remainder unitrust or charitable remainder annuity trust created prior to December 10, 1998, has a payout rate of 15% or less, then the payment to the income beneficiaries may be made within a reasonable time after the close of the calendar year. If the standard charitable remainder unitrust or charitable remainder annuity trust was created prior to December 10, 1998, and has a payout rate of more than 15% or if the standard charitable remainder unitrust or charitable remainder annuity trust was created on or after December 10, 1998, then the payment to the income beneficiaries may be paid within a reasonable time after the close of the calendar year under two circumstances. These circumstances are that (i) if the entire annuity or unitrust amount in the hands of the income beneficiary is characterized as either tier-1, tier-2, or tier-3 income under Code Section 664(b) (that is, none of the amount is characterized as return of principal) or (ii) if the trust distributes property in kind that it owned at the close of the taxable year to meet the annuity or unitrust amount payout, the trustee elects to treat any income generated by the distribution as occurring on the last day of the taxable year in which the annuity or unitrust amount is due. Otherwise, the payment must be made by the end of the calendar year with no grace period.39

Donors should be especially cautious in applying these new rules when a standard charitable remainder unitrust or charitable remainder annuity trust is created late in the year. If even one dollar of the year's distribution would be categorized as return of principal, this may cause the distribution to be required to be made by year end. The donor may wish to make sure that he or she puts sufficient cash into the trust so the trust will have funds with which to make the payment by year end.40

Conclusion

When considering year-end charitable gift planning, the most important factor is usually making sure that appropriate rules are followed so that the donor can take the charitable income tax deduction on the current year's income tax return. The rules for the timing of gifts of certain assets, such as stock, may be somewhat confusing and care should be taken to ensure that the desired results are obtained.

Other popular year-end planning steps are creating a grantor-type charitable lead trust to obtain an immediate charitable income tax deduction in a year when a donor has higher than normal income or creating a donor advised fund when a donor has definite current charitable intent but prefers to delay final decisions on the ultimate recipients of the gift until future years.

A final point on year-end planning is to keep in mind the proper rules on charitable remainder trust distributions. The Regulations finalized in 1998 restricted the availability of the post year-end grace period for making distributions for some trusts.


  1. All references to the Code are to the Internal Revenue Code of 1986, as amended from time to time.back

  2. IRC § 170(a)(1).back

  3. Treas. Reg. § 1.170A-1(a).back

  4. Treas. Reg. § 1.170A-1(b).back

  5. See, e.g., Londen v. Commissioner, 45 TC 106 (1965).back

  6. Treas. Reg. § 1.170A-1(b).back

  7. Treas. Reg. § 1.170A-1(b); Londen v. Commissioner, 45 T.C. 196 (1965); Estate of Sawade v. Commissioner, 795 F.2d 45 (8th Cir. 1986).back

  8. See, Arthur Andersen, Tax Economics of Charitable Giving 26 (13th ed. 1999).back

  9. Id.; Richardson v. Commissioner, 49 T.C.M. 67 (1984).back

  10. See Morrison v. Commissioner, 53 T.C.M. 251 (1987).back

  11. See Arthur Andersen, Tax Economics of Charitable Giving 26 (13th ed. 1999).back

  12. Id.back

  13. 174 F.3d 997 (9th Cir. 1999), aff'g 108 T.C. 244 (issue was whether donors were taxable on income from sale of stock pursuant to merger rather than timing of charitable income tax deduction).back

  14. Id.back

  15. Id.back

  16. 53 T.C.M. 251 (1987).back

  17. Id.back

  18. Treas. Reg. § 1.170A-1(b).back

  19. See Somes v. Commissioner, 54 T.C.M. 72 (1987).back

  20. 1978-1 C.B. 67.back

  21. Id.back

  22. Priv. Ltr. Rul. 9623035 (Mar. 8, 1996).back

  23. Rev. Rul. 80-335, 1980-2 C.B. 170 (deals with year in which deductions may be taken generally and not specifically with a charitable deduction); Rev. Proc. 92-71, 1992-2 C.B. 437.back

  24. See Arthur Andersen, Tax Economics of Charitable Giving 26 (13th ed. 1999).back

  25. Rev. Rul. 68-174, 1968-1 C.B. 81.back

  26. 40 T.C. 521 (1963).back

  27. Id.back

  28. Moerschbaecher, L., McCoy, J., and Simmons, T., Charitable Gift Planning News (Oct. 1999).back

  29. See, e.g., Johnson v. U.S., 280 F. Supp. 412 (D. N. Y. 1967) (charitable deduction available in year in which deed is delivered to charitable donee); Alioto v. Commissioner, 40 T.C.M. 1147 (1980), aff'd in an unpublished opinion, 692 F.2d 762 (9th Cir. 1982) (charitable deduction available in year deeds recorded and not in year when deeds executed but retained by donor); Guest v. Commissioner, 77 T.C. 9 (1981) (charitable deductions available in year deeds were delivered to charitable donees), acq., 1982-1 C.B. 1; Douglas v. Commissioner, 58 T.C.M. 563 (1989).back

  30. 58 T.C.M. 563 (1989). the United States Tax Courtback

  31. Id.back

  32. Id.back

  33. Moerschbaecher, L., McCoy, J., and Simmons, T., Charitable Gift Planning News (Oct. 1999).back

  34. IRC § 170(f)(2)(B); Treas. Reg. § 1.170A-6(c)(1).back

  35. IRC § 671.back

  36. IRC § 170(f)(2)(B); Treas. Reg. § 1.170A-6(c)(4).back

  37. Treas. Reg. § 1.664-3(a)(i)(j).back

  38. Treas. Reg. §§ 1.664-3(a)(i)(k) and 1.664-2(a)(1)(c).back

  39. Treas. Reg. §§ 1.664-2(a)(1) and 1.664-3(a)(1)(i).back

  40. See Arthur Andersen, Tax Economics of Charitable Giving 84 and 98 (13th ed. 1999).back

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