Gifts of Stocks and Bonds

Donating appreciated securities, including stocks or bonds, is an easy and tax-effective way for you to make a gift to your church or charity.

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Wednesday July 24, 2024

Washington News

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Should The Charitable Mileage Rate Be Increased?

On June 13, 2022, average prices reached $5 per gallon in the United States. However, with concerns about a recession, the world price of oil has recently declined from $140 per barrel to approximately $100 per barrel. As a result, the average national gas price has declined to $4.75 per gallon.

An American Automobile Association representative, Drew Gross commented on the changing gas prices and stated, "It is kind of like the stock market: You have these incredible swings, when it sees rising rates or talk of a recession, a global recession, that means an economic slowdown, which means less oil is being consumed. That is bad news for the oil industry. And that is why prices have been dropping."

The increased cost of gas impacts many volunteers for charitable organizations. The mileage rate for 2022 for volunteers who drive for their favorite nonprofit is $0.14 per mile. This charitable mileage rate is much lower than rates for medical purposes or business mileage. The charitable mileage rate has been locked at $0.14 per mile since 1998.

There is an option for charitable volunteers to use the "actual costs" model. This would permit you to deduct your actual costs for gasoline and oil, but not the costs for maintenance, tires or insurance. If you use this method, you will need to track the actual expenditure for gas and oil for your charitable trips.

The charitable mileage deduction is only available to the driver of the vehicle. Additionally, the deduction is not available if you are driving to help a specific individual. Gifts for the benefit of a specific person are honorable and meritorious, but do not qualify for a charitable deduction. Gifts that are deductible are made to qualified exempt nonprofit organizations. These may include benevolent, religious, educational, scientific, literary, and other exempt organizations.

In order to deduct your charitable mileage, you will need to maintain a logbook. You should record the date, the number of miles, the charitable organization and the location for your trips. Your total miles for the year may then be multiplied by $0.14 per mile and deducted on IRS Form 1040.

In recognition of the increased transportation costs for charitable volunteers, U.S. Representative Angie Craig (D–MN) and Representative Pete Stauber (R–MN) have joined together to introduce the bipartisan Tax Emergency Adjustment for Mileage Volunteers (TEAM Volunteers) Act. This Act would increase the charitable mileage rate from 14 cents per mile to the current business travel rate of 62.5 cents per mile. The TEAM Volunteer Act would apply for a two-year period after passage.

Representative Craig stated "Volunteer drivers donate their time and resources to ensure that those most in need are able to receive the supplies and resources they need to survive. But today, increasing costs and inflationary pressures have made it more difficult for them to do so. Raising this volunteer reimbursement rate will allow us to meet the unique challenges of this moment and ensure that dedicated volunteers can continue providing crucial services to our communities."

Editor's Note: There have been several proposals to increase the charitable mileage rate. The current 2022 law remains a deduction of $0.14 per mile until legislation is enacted by Congress. It is quite important for charitable volunteers to have good records to substantiate their milage, which includes keeping a logbook to record their mileage and claim the $0.14 per mile deduction.

Partnership Gift Charitable Deduction Denied

In Kevin M. Keefer et. al. v. United States; No. 3:20-cv-00836, the District Court for the Northern District of Texas denied a $1.257 million charitable deduction for the gift of a limited partnership interest to a donor advised fund. The gift failed both the partial interest and the contemporaneous written acknowledgment tests.

In 2015, Kevin Keefer owned a 4% limited partner interest in the Burbank Limited Partnership (Burbank). The major asset of Burbank was a hotel. On April 23, 2015, Burbank and Apple Hospitality REIT (Apple) exchanged a non-binding letter of agreement (LOI) that described potential terms for a future sale. Burbank did not sign the LOI. On June 18, 2015, Keefer assigned a 4% limited partnership interest to the Pi Foundation (Pi) to create a donor advised fund (DAF).

Burbank was discussing the sale of the hotel to Apple for $54 million, but the contract had not been signed. On July 2, 2015, Burbank and Apple signed a sale contract, but Apple held a 30–day review period before the contract was final. The sale closed on August 11, 2015.

The taxpayer obtained an appraisal of the donated partnership interest by David Marshall. The appraisal did include Marshall’s certification and a description of his qualifications, but did not include his tax identification number, as required by the regulations. The appraisal also stated that the appraiser "has been informed that the Donor and Donee have an agreement that the Donee will only share in the next proceeds from the Seller's Closing Statement. The Donee will not share in Other Assets of the Partnership not covered in the sale."

The appraisal determined the value of the 4% Limited to Partnership Interest in Burbank, with the exclusion of Other Capital Assets, to be $1,257,000. On June 5, 2015, Pi sent a 12 page packet of materials that described the "Keefer Donor Advised Fund."

The Keefers filed a joint return and reported the deduction of $1,257,000. The IRS audited the return and disallowed the entire deduction. The Keefers paid tax and interest of $507,964.80 and filed a claim for a tax refund.

The Keefers' motion for summary judgment included four claims. The first requested a full refund, the second requested a tax refund plus penalties and interest, the third requested a refund based on their cost basis in the property, and the fourth requested a denial of the IRS claim that the variance doctrine precluded any alternative request claims by Keefer.

The Court determined that the variance doctrine bars taxpayers from raising issues that have not previously been set forth, but there is an exception where the Government's unilateral action creates the variance. In this case, the government raised the anticipatory assignment of income doctrine as an issue during the litigation. Therefore, the variance exception applies and the Keefers may assert their alternative claims.

The key issue was whether or not there was an anticipatory assignment of income. The Court noted that if a taxpayer "gives away the entire asset, with accrued earnings, the assignment of income doctrine does not apply." However, if the taxpayer carves out a partial interest and retains that property, then the anticipatory assignment of income rule does apply.

The Keefers noted that at the time of the transfer to Pi, the hotel sale was still not binding. The Court determined in Ferguson v. Commissioner, 174 F.3d 997, 1001–2 (9th Cir. 1999) that an anticipatory assignment of income applies if the sale is binding and "most unlikely" to fail. However, in this case the contract was not final until Apple had completed its 30-day review. Therefore, no binding obligation existed at the date of the gift.

The second prong of the test is that the Keefers are not permitted to carve out a partial interest. However, the cash reserves maintained by the general partner to pay for any required renovations to the hotel as part of the sale process were not going to be allocated to the nonprofit, but were retained by Keefer.

Keefer claimed that the cash reserves were simply the equivalent of retaining the cash needed to pay "a liability for a pre-existing light bill" or similar expense. However, the reserve fund was held for future and not existing expenses. Therefore, the Pi Foundation would only share in the hotel sale proceeds and would not have a pro rata share in other assets. Because the Keefers had not transferred a pro rata share of all of their interests in Burbank, the anticipatory assignment of income doctrine applies and the deduction was denied.

In addition, the Keefers had received a contemporaneous written acknowledgment (CWA) as required under Section 170(f)(8). The CWA included the customary statement that "No goods or services were provided in exchange for your generous financial donation." However, Section 170(f)(18) requires that a gift to a donor advised fund must include the "paragraph (8)(C) from the sponsoring organization" provision, but also must state that the donee organization "has exclusive legal control over the assets contributed."

The Court noted that the language does not necessarily have to state that the organization has control if there is a factual proof that this control exists, but there is a strict compliance requirement because Section 170(f)(18)(B) specifically references paragraph (8)(C).

Therefore, the CWA was not in strict compliance and the provisions within the donor advised fund agreement that made reference to exclusive ownership by the nonprofit organization were not incorporated in the CWA.

Because the Keefers donated a partial interest and the CWA was not in compliance with the strict requirements, the deduction was denied. The Court also determined that the failure to comply with the anticipatory assignment of income doctrine negated the alternative claims and there was no charitable deduction.

Important DAF Gift Receipt Note!

Most donors give cash or public stock to DAF sponsoring organizations. The check is immediately cashed and the stock usually is promptly sold and converted to cash. Therefore, the actions of the organization demonstrate exclusive control and are in compliance with Section 170(f)(18)(B). However, this District Court decision may be followed by the Tax Court or other District Court judges. For this reason, it is important that donor receipts for DAF gifts be modified to include this provision:

"No goods or services were provided in exchange for your generous financial donation and the nonprofit organization has exclusive legal control over the assets contributed."

For convenience, it would be appropriate for the more extensive language to be used for all DAF gift receipts. In the interests of simplicity, many organizations may choose to use this language for all receipts.

While the risk is primarily for DAF gifts of partnership interests, business interests or minority interests in real estate, it is important for all organizations that sponsor DAFs to use the expanded language in future contemporaneous written acknowledgments. This language is designed to comply with Section 170(f)(8) and Section 170(f)(18) requirements.

Applicable Federal Rate of 3.6% for July -- Rev. Rul. 2022-12; 2022-27 IRB 1 (15 June 2022)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2022. The AFR under Section 7520 for the month of July is 3.6%. The rates for June of 3.6% or May of 3.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.

Published July 8, 2022
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