CHARITABLE FUNDS NOT PERMANENTLY SET ASIDE

Transcription

1 APRIL 2015 CHARITABLE FUNDS NOT PERMANENTLY SET ASIDE Court finds prolonged litigation, other expenses were foreseeable. Eileen Belmont s will left $50,000 of the residue of her estate to her brother, David, with the balance passing to the Columbus Jewish Foundation. In addition to her home in Ohio, Belmont also owned a condominium in California, where David had resided for about nine months prior to Belmont s 2007 death. In 2008, Belmont s estate filed an income tax return reporting income of $241,184, which consisted primarily of a distribution from a retirement account. The estate claimed a charitable deduction of $219,580, as an amount permanently set aside for charitable purposes [Code 642(c)(2); Reg (c)-2(d)]. The estate had not paid that amount to the Foundation and had not segregated the money from other funds. David offered to exchange his $50,000 bequest for a life estate in the California condo, but the Foundation said it was not interested in holding real property as an investment. The Foundation offered him a $10,000 stipend in exchange for vacating the property. Instead, David filed a creditor s claim, alleging that he had an oral contract with Belmont giving him a life tenancy, although this agreement was not reflected in Belmont s will. When the claim was rejected, David filed a petition as part of the ancillary estate proceedings in the California probate court. Although the estate argued that David had not contributed to the purchase of the condo, the court ruled in his favor, finding a resulting trust and granting David a life tenancy interest. The decision was affirmed by the appellate court. As a result of the litigation, the estate had only about $185,000 remaining less than the $219,580 claimed in the charitable deduction. The IRS said the estate was not entitled to the $219,000 deduction because the funds were not permanently set aside for charity. Reg (c)-2(d) provides that an amount is not considered permanently set aside unless, under the terms of the governing instrument and the Copyright 2015 Published by R&R Newkirk Co

2 circumstances of the particular case, the possibility that the funds will not be devoted to charitable purposes is so remote as to be negligible. The estate argued that the litigation costs were not reasonably foreseeable, but the IRS noted that David s legal claims were instituted prior to the estate filing the return on which the charitable deduction was claimed. The estate was on notice that a prolonged legal fight was possible, said the IRS. The Tax Court agreed with the IRS, saying that the estate was aware of its financial situation and knew that it would be responsible for legal fees, real estate taxes, homeowners association fees and estate administration fees until the estate was closed. The estate also knew that the possibility of David litigating his interest in the California condo was more than negligible, the court said. Although he was not contesting Belmont s will, he was actively litigating his property rights, which created a real possibility that the funds set aside for the Foundation would be depleted before the lawsuit was concluded (Est. of Belmont v. Comm r., 114 T.C. No. 6). TRUST LANGUAGE, NOT STATE STATUTE, PREVAILS Obligation to pay did not begin at testator s date of death. Under the provisions of Burnham Neal s will, a $2.4 million charitable remainder unitrust was to be established, with income passing to Cyndi Neal-Lunsford. The trust terms provided that until full funding of the unitrust, assets awaiting distribution to the unitrust will not be taken into account in determining the unitrust payout. Neal died in April 2012, but the unitrust was not funded until a single $2.4 million payment was made by the estate to the trustee on December 2, Lunsford filed suit, claiming that under the state s Principal and Income Act, her right to income commenced on the date of Neal s death. Lunsford estimated that she was owed about $139,000 for the period of estate administration. The Illinois Circuit Court ruled that the trust instrument provided the date when the obligation to pay was to begin. The Appellate Court of Illinois affirmed, noting that the state s Principal and Income Act provides that an income beneficiary is entitled to income from the date an asset becomes subject to trust. Because Neal s will specifically provided that funding of the unitrust marked the beginning of the obligation to pay, Lunsford was not entitled to income for the period of estate administration (In re Estate of Neal, 2015 IL App (4th) ). SUBSTANTIATION SMACKDOWNS BY IRS Tax Court denies deductions for lack of proof. Several taxpayers have learned the hard way that the substantiation rules of Reg A-13(a)(1) are to be taken seriously. In general, cash contributions of up 8 Copyright 2015 Published by R&R Newkirk Co. 4-15

3 to $250 can be substantiated by a cancelled check, a receipt from the donee showing the donee s name, date and amount of the gift or other reliable written records. For gifts of $250 or more, the donor must obtain a contemporaneous written acknowledgment from the donee organization. The acknowledgment must indicate the amount of cash or include a description of any property contributed and must include a statement indicating either that no goods or services were provided to the donor in exchange for the transfer or a good faith estimate of the value of any goods or services provided by the charity. Jalloh v. Commissioner, T.C. Summ. Op The taxpayer claimed a $31,037 charitable deduction in 2008, consisting of $15,340 in cash gifts and $15,697 in noncash contributions. On her 2009 return, she claimed a $10,357 deduction, including $6,490 in cash and $3,867 in noncash gifts. The IRS initially disallowed the entire amount, but later conceded that Adiatu Jalloh was entitled to deductions for cash contributions of $915 in 2008 and $1,005 in The receipt for the donor s 2009 cash contributions was undated and failed to list the dates and amounts of the contributions during the year. Although Jalloh attached a Form 8283 to her 2008 and 2009 returns for property given to several organizations, the Tax Court found each receipt deficient in some way, lacking either the date of the contributions and/or a description of the property. The court said she was not entitled to deductions in excess of what the IRS had already allowed. Legaspi v. Commissioner, T.C. Summ. Op Manolito Legaspi donated clothing and furniture to a thrift store in 2010, for which he claimed a deduction of $4,230. The receipt he received did not include a detailed description of the items donated or the mandatory statement regarding goods or services provided in exchange. Legaspi included pictures of the furniture, with handwritten notes regarding when the item was purchased, the purchase price and the fair market value, which he listed as equal to one-third of the purchase price. He did not obtain an independent appraisal of the noncash items, but instead determined a value on his own. He was not entitled to the deduction because he did not meet the substantiation requirements of Code 170(f)(8), the Tax Court ruled. Flores v. Commissioner, T.C. Memo In addition to a deduction of $1,230 for cash gifts, a couple claimed a deduction of $5,999 for expenses related to the wife s volunteer work on behalf of a charity. They did not provide receipts, bank records or documentation for their cash gifts, and were therefore not entitled to the deduction, said the Tax Court. Taxpayers may deduct certain out-of-pocket expenses and unreimbursed expenditures incurred in performing volunteer services for charity. The taxpayer must provide a cancelled check, a receipt from the donee with the donee s name, date and amount of the contribution or other reliable written records [Reg A-1(g)]. For out-of-pocket expenses of $250 or more, the donor should also have a statement from the donee containing a description of the services performed by the taxpayer. Because the couple did not produce any documents to substantiate the expenses related to the volunteer work, the Tax Court disallowed the deduction. Copyright 2015 Published by R&R Newkirk Co

4 Lain v. Commissioner, T.C. Summ. Op The taxpayers claimed a 2010 charitable deduction of $3,150 for clothing donated to a thrift shop. This was in addition to cash gifts of $5,730 claimed by the couple. They had a cancelled check for $95, payable to their church, and testified that they donated $20 in cash weekly. Lain said their tax records were destroyed by water when a water pipe in their home burst. The Tax Court noted that where records are destroyed under circumstances beyond the taxpayer s control, expenditures must nevertheless be substantiated through secondary evidence. The court reduced the deduction for cash gifts to the $95 substantiated by cancelled check and $1,000 for the weekly cash offerings, finding Lain s testimony credible. The court also found that the taxpayers had contributed items to the thrift shop, but limited the deduction to $200. Longino v. Commissioner, USTC 50,104 The U.S. Court of Appeals (11th Cir.) denied a taxpayer s $25,000 charitable deduction, noting that the document he presented a self-generated receipt thanking himself was not a contemporaneous written acknowledgment as required under Reg A-13(f)(1). The court added that he even failed to include the statement regarding goods or services. Kunkel v. Commissioner, T.C. Memo A couple claimed a $37,315 charitable deduction for noncash gifts made to their church s annual flea market and to three thrift shops in They had no acknowledgment from their church, despite contributing books, household items, clothing, toy, jewelry and furniture that they valued at more than $13,000. They had no receipt from one of the thrift shops, saying they placed the items in bins for afterhour donations. The other two charities, which made pick-ups at the taxpayers home while they were away, left generic receipts on their doorknob. The IRS disallowed the entire deduction. The taxpayers argued that they were careful to ensure that the items in each batch were worth less than $250, thereby eliminating the need to get receipts. The Tax Court said it had no doubt that the couple donated property to charities in 2011, but found it implausible that each donation was under the $250 mark. The court noted that this would mean they would have had to have made 97 separate donations to the three thrift shops to reach the more than $24,200 they claimed to have given to the thrift shops. Further, noted the court, they said they did not assign values to the donated items until they prepared their tax return in 2012, making it difficult to see how they could have ensured, at the time they contributed the property, that each individual batch was worth less than $250. Because they lacked proper substantiation for the noncash gifts, the court ruled that they were not entitled to any deduction and were, in fact, subject to an accuracy-related penalty under Code Copyright 2015 Published by R&R Newkirk Co. 4-15

5 CONSERVATION EASEMENT MUST STAY IN ONE PLACE Deduction denied where donor could swap restricted land. In 2003, Balsam Mountain Investments granted a perpetual conservation easement to the North American Land Trust over a specified 22-acre parcel of land in North Carolina. A plat attached to the agreement set out the exact boundaries of the protected area, although a provision allowed Balsam to make minor alterations to the boundaries, under several conditions. Among the conditions: (1) the total area was not to be reduced; (2) any added land was to be contiguous; (3) the Land Trust could determine whether the land added makes an equal or greater contribution to the conservation purposes than the land removed; (4) no more than 5% of the total land could be removed and substituted; and (5) no boundary adjustments could be made after five years. Balsam dissolved in In 2011, when the IRS issued the partners a notice of final partnership administrative adjustment for 2003, it disallowed the charitable deduction and imposed a penalty under Code The IRS said the easement was not a qualified real property interest, as described in Code 170(h)(2)(C) because the agreement allows Balsam to change what property is subject to the easement. Therefore, it is not an identifiable, specific piece of real property. Earlier this year, the U.S. Court of Appeals (2nd Cir.) affirmed a 2013 Tax Court ruling that denied a charitable deduction for donors of a conservation easement where the agreement allowed the donors to move the restriction to another property (Belk v. Comm r., USTC 50,107). Balsam argued that its situation differed from Belk, because it was allowed to substitute only up to 5% of the land initially subject to the easement. The Tax Court said that made the easement different, but the difference does not matter. Balsam s contribution was not a qualified real property interest (Balsam Mountain Investments v. Comm r., T.C. Memo ). Copyright 2015 Published by R&R Newkirk Co