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1 Search the complete LISI, ActualText, and LawThreads archives. Search archives for: Find it New sletters Click for Search Tips Click for Most Recent Newsletters Steve Leimberg's Charitable Planning Newsletter - Archive Message #235 Date: 16-Nov-15 From: Steve Leimberg's Charitable Planning Newsletter Jonathan G. Blattmachr & F. Ladson Boyle on Green v. United States: Allowance Subject: of Trust Charitable Deduction for Contribution of Appreciated Property Purchased with Gross Income The income taxation of estates, trusts and their beneficiaries in some ways parallels the income taxation of individuals. But there are many special rules. One relates to the income tax charitable deduction. In their commentary on Green v. United States, Jonathan G. Blattmachr and F. Ladson Boyle point out whether, when, or the extent to which an estate or trust may be entitled to a charitable income tax deduction may sometimes be in dispute, despite Supreme Court guidance and a long history of the basic provision allowing the deduction. Jonathan Blattmachr is the Director of Estate Planning for the Alaska Trust Company, a Director at Pioneer Wealth Partners, LLC, a wealth management firm in New York City, and with Dallas Attorney Mike Graham, is a co-developer of Wealth Transfer Planning, a computer system for lawyers that offers specific client advice and automatically prepares wills, trusts, and other estate planning documents using document assembly. Lad Boyle is the Charles E. Simon, Jr. Professor of Federal Law Emeritus at theuniversity of South Carolina School of Law, a frequent writer and lecturer on tax and estate planning topics and Co-Editor (with Alan 1
2 Medlin and Howard Zaritsky) ofprobate Practice Reporter. He is co-author with Jonathan of the treatise Blattmachron the Income Taxation of Estates and Trusts, published by the Practising Law Institute. Before we get to their commentary, members should note that a new 60 Second Plannerby Michelle Ward was recently posted to the LISI homepage. In her commentary, Michelle reports on Dunn v. Commissioner (T.C. Memo ), where the Tax Court disallowed a taxpayer's attempt to deduct an IRA contribution carried forward from a prior year. You don't need any special equipment to listen, just click on this link Now, here is Jonathan and Lad s commentary: EXECUTIVE SUMMARY: On November 5, 2015, in a case of apparent first impression, the United States District Court for the Western District of Oklahoma held in Green v. United States that a trust that was authorized to distribute any amount of its gross income to charity was entitled to an income tax deduction under section 642(c) of the Internal Revenue Code of 1986, as amended, for the full fair market value of property purchased with gross income the trust had received in prior years, and was not limited to the trust s adjusted basis in the property. The decision may provide a benefit to certain trusts (and estates of decedents) that provide for payments to charity. FACTS: The Trust expressly authorized the trustee to distribute to charity such amounts from the gross income of the Trust as the [trustee] determines appropriate. The Trust also provided that [a] distribution may be made from the Trust to charity only when both the purpose of the distribution and the charity are as described in Section 170(c) of the Code. 2
3 The Trust was a partner in a partnership. The Trust had tens of millions of dollars of gross income imputed to it and it received tens of millions of dollars of distributions from the partnership. The Trust used some of that gross income to purchase interests in real estate through a single member limited liability company (LLC) which was disregarded for federal income tax purposes. After the real estate had appreciated in value, the Trust (through the LLC) contributed it in kind to charitable organizations. Even though the charitable contributions were made by the LLC, the court acknowledged that, for income tax purposes, the contributions were treated as being made by its sole member, the Trust. On its tax returns as originally filed, the Trust claimed an income tax charitable deduction, but not for the full (appreciated) value of the property contributed to charity. Later, the trust filed claims for refund claiming charitable deductions for the full (appreciated) value of the contributed property. The Service disallowed the refund claims and the Trust filed a suit in the United States District Court seeking refunds. The District Court held that the Trust was entitled to an income tax deduction for the full fair market value of the property contributed to charity, under section 642(c), and not just the Trust s basis in the properties. COMMENT: The Law Individuals and corporations are entitled, subject to limitations and special rules, to a deduction for contributions of money or other property to qualified charitable organizations. See section 170. In general, an estate or a trust is taxed as an individual is taxed. See section 641(b). However, in lieu of the type of charitable deduction allowed an individual for contributions to charity under Section 170, an estate and trust is generally allowed an unlimited income 3
4 tax charitable deduction[i] for payments of its gross income for charitable purposes pursuant to the terms of the governing instrument. See section 642(c). In addition, decedents estates and certain trusts (primarily certain ones created before 1970) are permitted a deduction for the gross income set aside for a charitable purpose. There are several distinctions, however, in the income tax charitable deduction allowed an individual and the deduction allowed an estate or trust. One of the key differences is the source of contribution or payment for which such a deduction is permitted. A charitable contribution of property owned by an individual may qualify for the deduction, even if the property does not represent gross income received by the taxpayer. However, depending upon the type of property, the status of the donee-charitable entity,[ii] and the manner in which the payment is made, the deduction for any year cannot exceed 20%, 30%, or 50% of the individual taxpayer s contribution base (which is adjusted gross income determined without regard to any net operating loss carryback). See section 170(b). An individual s charitable deduction may be taken only for the year the contribution is made, except that if the amount of the contribution otherwise deductible exceeds the applicable percentage limitations, then the excess may be carried forward for deduction in the taxpayer s succeeding five tax years, but subject to the same limitations. Also, the deduction may be limited to the taxpayer s income tax basis in the property and other special rules and limitations may apply. For an estate or trust, the charitable deduction is generally unlimited. However, the deduction is allowed only if paid from the entity s gross income and pursuant to the terms of the governing instrument for the estate or trust. It is not entirely clear whether or the extent to which the payment to charity must be traced directly to gross income actually received. Compare the following cases with each other: Old Colony Trust Co. v. Commissioner, 301 U.S. 379 (1937); U.S. v. Benedict,592 U.S. 692 (1950); Crestar Bank 4
5 v. Internal Revenue Service, 47 F. Supp. 2d 670 (1999);Van Buren v. Commissioner, 89 T.C (1987); Riggs National Bank v. U.S., 352 F.2d 812 (1965); Frank Trust of 1931 v. Commissioner of Internal Revenue, 145 F.2d 411 (1944); Freund s Estate v. Commissioner, 303 F.2d 30 (2 nd Cir. 1962); Sid W. Richardson Foundation v. U.S., 430 F.2d 710 (5 th Cir. 1970); Estate of Esposito v. Commissioner, 40 TC 459 (1963), acq CB (pt. 1) 4. In any case, it seems that some type of tracing of the contribution to gross income received by the trust or estate is required to support a deduction under section 642(c). The Question before the Green Court The District Court in Green considered whether the trust s charitable deduction is limited to the basis (cost) of a noncash contribution which has been originally acquired with its gross income. The Court s Reasoning A key element in the court s decision apparently was whether the deduction allowed under section 642(c) should be strictly construed. The court acknowledged that generally deductions are a matter of legislative grace and thus should be strictly construed. Nevertheless, the court held that the charitable deductions are not a matter [] of legislative grace, but rather expression[s] of public policy that should be liberally construed. This rule of statutory construction did not eliminate any reasoning by the court, although it seems to have influenced the court s specific reasoning in allowing the deduction for the full fair market value of the property transferred to charity rather than limiting the deduction to the property s basis. Before discussing the court s decision in more detail, it seems appropriate to discuss CCA (2010) (not precedent). The issue discussed in the CCA was whether a trust s deduction under section 642(c) was limited to the trust s adjusted basis in non-cash assets acquired with its 5
6 gross income where the fair market value of that property was greater than basis. Although not as well detailed as the facts in Green, it seems that the CCA discusses the actual Green situation. The CCA acknowledged there were no prior cases or other authority in which the Service has so limited the charitable deduction under section 642(c) to the basis of the property contributed. Nevertheless, the CCA concludes that deduction should be so limited. In Green, the Service apparently argued that the deduction for the contribution of the real estate should not be allowed as the real estate did not constitute gross income. In any event, citing to the Supreme Court s decision in Old Colony Trust Co. v. Commissioner, supra, the district court held that if the asset contributed to charity was acquired with gross income, the deduction is allowed. And the court made a finding that the real estate had been acquired with gross income the trust had received. Also, the Service apparently argued that the payment was not consistent with the terms of the governing instrument (a requirement, as noted above, for the allowance of the deduction). However, as the court pointed out, that contention by the Service was belied by its concession that some deduction for the contributions was allowed. The court rejected the Service s contention that the deduction must be limited to the Trust s income tax basis in the property contributed. The Service seemed to argue that only basis can be deemed to consist of gross income, but the court s opinion did not flesh out the details of that argument. Nonetheless, by citing to the rule in section 170 that generally allows an individual a charitable deduction for the full value of property contributed to charity (subject to many exceptions, limitations and special rules), the court concluded the Trust was entitled to a deduction for the full fair market value of the property transferred to charity. Therefore, under Green, an estate or trust that is authorized to make distributions of gross income to charity may wish to 6
7 purchase assets that are likely to appreciate in value and, when they have, contribute the appreciated property to charity and receive an enhanced deduction under section 642(c) without having to recognize the inherent income or gain in those assets, just as an individual may. Of course, investments may decline in value so that if those depreciated assets are contributed to charity, the trust (or estate) may have a smaller deduction. In such a case, the trustee or executor (personal representative) may be better off selling the depreciated asset, recognizing the loss for income tax purposes, and contributing cash to charity, all pursuant to the terms of the governing instrument. Summary and Conclusions Under Green, an estate or trust that, pursuant to the terms of its governing instrument, makes a contribution of appreciated property to charity purchased with gross income is entitled to a deduction under section 642(c) for the full fair market value of that property, and the deduction is not limited to basis. Although that result was favorable for the taxpayer in that case, planning under Green may be limited because the trust or estate cannot be certain that the property it acquires with its gross income will, in fact, appreciate in value. HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE! Jonathan Blattmachr 7
8 Lad Boyle CITE AS: LISI Charitable Planning Newsletter #235 (November 16, 2015) athttp:// Reproduction in ANY Form or Forwarding to ANY Person Prohibited - Without Express Permission by Jonathan G. Blattmachr & F. Ladson Boyle. All Rights Reserved. CITES: Green v. United States, -- F. Supp. (W.D. Okla. No. 5:13- cv-01237, Nov. 4, 2015);Internal Revenue Code Sections 170(b), 641(a), 642(c); Old Colony Trust Co. v. Commissioner, 301 U.S. 379 (1937); Crestar Bank v. Internal Revenue Service, 47 F. Supp. 2d 670 (1999); Van Buren v. Commissioner, 89 T.C (1987); Riggs National Bank v. U.S., 352 F.2d 812 (1965); Frank Trust of 1931 v. Commissioner of Internal Revenue, 145 F.2d 411 (1944); Freund s Estate v. Commissioner, 303 F.2d 30 (2 nd Cir. 1962); Sid W. Richardson Foundation v. U.S., 430 F.2d 710 (5 th Cir. 1970); Estate of Esposito v. Commissioner, 40 TC 459 (1963), acq CB (pt. 1) 4. CITATIONS: [i] For a trust, but not an estate, the deduction under Section 642(c) is not allowed to the extent the trust pays income that constitutes unrelated business income within the meaning of Section 681 but rather is entitled to a deduction under 8
9 Section 170, which, unlike Section 642(c) and as stated in the text, imposes limitations as to the level of deduction related to the taxpayer s adjusted gross income as specially computed. [ii] Status refers to the question of whether the donee-charity is a public charity or a private foundation. 9
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