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IRS Offers Tips for Year-End Giving

Posted by William Byrnes on December 19, 2013


In its December 16th Newswire (IR-2013-98), the IRS reminded individuals and businesses making contributions to charity of several important tax law provisions that have taken effect in recent years. The IRS highlighted the following changes in the end of year Newswire.

Special Tax-Free Charitable Distributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2013, offers older owners of individual retirement arrangements (IRAs) a different way to give to charity.  An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Charitable Contributions of Clothing and Household Items

To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2013 count for 2013. This is true even if the credit card bill isn’t paid until 2014. Also, checks count for 2013 as long as they are mailed in 2013.
  • Check that the organization is eligible. Only donations to eligible organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2013 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  • And, as always it’s important to keep good records and receipts.

IRS YouTube Videos:

See Publication 526, Charitable Contributions.

See Online mini-course, Can I Deduct My Charitable Contributions?

 

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The Development of the Law of Charity and Charitable Practices

Posted by William Byrnes on August 22, 2013


The entire article may be downloaded at > William Byrnes’ SSRN academic page <

This article describes the ancient legal practices, codified in Biblical law and later rabbinical commentary, to protect the needy. The ancient Hebrews were the first civilization to establish a charitable framework for the caretaking of the populace. The Hebrews developed a complex and comprehensive system of charity to protect the needy and vulnerable. These anti-poverty measures – including regulation of agriculture, loans, working conditions, and customs for sharing at feasts – were a significant development in the jurisprudence of charity.

The first half begins with a brief history of ancient civilization, providing context for the development of charity by exploring the living conditions of the poor. The second half concludes with a searching analysis of the rabbinic jurisprudence that established the jurisprudence of charity. This ancient jurisprudence is the root of the American modern philanthropic idea of charitable giving exemplified by modern equivalent provisions in the United States Tax Code. However, the author normatively concludes that American law has in recent times deviated from these practices to the detriment of modern charitable jurisprudence. A return to the wisdom of ancient jurisprudence will improve the effectiveness of modern charity and philanthropy.

The entire article may be downloaded at > William Byrnes’ SSRN academic page <

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Early American Distrust and Gradual Acceptance of Charitable Institutions

Posted by William Byrnes on August 9, 2009


This week I again turn my blogticle to expiscate the eristic historical context of the tax advantaged treatment enjoyed by charitable institutions.  In the previous blogticle on the Common Law history of charity law, we examined English history from the period 1536-1739.  Now I turn my attention to the period of the United States’ colonial period until 1860. 

Colonial Period 

The Colonies inherited the English common law and its history discussed in my previous blogticle on this subject, but without the 1736 Mortmain Act.  In addition to the common law, the colonialists also inherited the English distrust of perpetual land restriction, the power exercised by the Catholic Church because of its substantial land holdings, and the distrust of the Anglican Church because it was an organ of the English government.[1] 

During the early period after the War of Independence, some states legislatures and courts exercised this inherited distrust by voiding the establishment of charitable trusts, denying the grant of charters for charitable corporations, and constricting transfers to both.[2]  Seven states, being Maryland, Michigan, Minnesota, New York, Virginia, West Virginia, and Wisconsin, voided charitable trusts.[3]  In contrast, many states, in their constitutions and well as by statute, borrowed from Elizabeth I’s 1597 statute to protect incorporation for charitable purposes.[4]  Charitable incorporations included churches, charities, educational institutions, library companies, and fire companies.[5]  The policy behind the charitable statutes included promotion of freedom of religion, easing legislative workloads, and easing of incorporation procedures.[6] 

But not all states had charitable incorporation statutes.  Some states, such as Virginia, denied granting charters to charitable corporations for several years.[7]  Of the states with charitable incorporation statutes, all contained restrictions regarding maximum income, expenditure for charitable purpose, as well as reporting rules to guard against the accumulation of property.[8]

Post Colonial: Universal Property Taxes Crystallize the Tax Exemption Debate

By the middle of the century, the Supreme Court of the United States, by examination of the Statute of Charitable Uses and common law applicable in the U.S., derived a broad definition for charity.[9]  The Court upheld contributions to “charitable” institutions based upon the factors of the institutions’ public purpose and freedom from private gain.  In 1860, upholding a devise and bequest for establishing two education institutions, the Court stated

         “a charity is a gift to a general public use, which extends to the rich, as well as to the poor” and that “[a]ll property held for public purposes is held as a charitable use, in the legal sense of the term charity.”[10] 

In 1877, upholding a devise to an orphan’s hospital, the Court presented that:

        “A charitable use, where neither law nor public policy forbids, may be applied to almost any thing that tends to promote the well-doing and well-being of social man . . . . ‘Whatever is given for the love of God, or the love of your neighbor, in the catholic and universal sense, — given from these motives and to these ends, free from the stain or taint of every consideration that is personal, private, or selfish.’ ”[11]

Until the mid 1850s, many state statutes allowed incorporation for charitable purposes but did not necessarily exempt these corporations from state tax.[12]  Before the 1830s, the states did not have a universal tax system and thus, while tax exemption expressed government favoritism, it was not practically significant.[13]  However, the 1830s enactment of universal property tax regimes brought the issue of exemption to the fore.[14]  During the remainder of the century, several states enacted limited tax exemption for churches and educational institutions.[15]  By example, many states exempted from property tax the land upon which a church stood, but taxed the church’s income, including ministerial, rental, and endowment.[16]  The Massachusetts statutory tax exemption for religious, educational, and charitable organizations, applying to Harvard University, did not include an exemption for real estate or businesses held for purposes of revenue.[17]

Tax Policy Debate

Supporters and critics of exemption debated three primary policies concerning the granting of limited tax exemption for churches.  From a public policy perspective, the general community felt that the church served as the communal epicenter.[18]  Church supporters also put forward that churches provide the benefits of encouragement of personal morality, public spiritedness, and democratic values.[19]  Critics countered that from an equity standpoint, exemption inequitably expressed state favoritism for religious groups over non-religious property owners.[20]  Also, exemption critic James Madison warned that the accumulation of exempt Church property would eventually result in religion influencing the political process.[21]

Supporters provided a tax policy justification that the limited exemptions applied only to the charitable institution’s property that produced insignificant income, such as cemeteries, the church, the school, thus the exemption’s revenue effect would be slight.[22]  Critics responded that whereas both exempt and non-exempt persons used the state’s services, only non-exempt persons paid for them with resultant increased burdens upon them.[23]  Supporters retorted to this argument of an inequitable burden with a government benefit argument that the churches provided public services, such as orphanages and soup kitchens, not performed by non-exempt payers.[24]

From an economic policy justification, supporters forwarded that because many of these exempt institutions did not produce much revenue, the tax could not be collected, leading to unpopular land seizure.[25]  Critics responded that the exemption primarily benefited wealthy churches with valuable property and significant income rather than the humble ones with low land value and de minimis income.[26]  Again employing the subsidy argument, supporters argued that all church income, regardless of church size, went to provide charitable services, such as religious activity and caring for the poor.[27]

Prof William Byrenes (www.llmprogram.org)


[1]After the revolution, the colonialists felt the same distrust for the Church of England as that for Rome.  See James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory L.J. 617, 624 (1985) (commenting on the ongoing anti-charity-anti-clerical atmosphere of the post-colonial period); Note, The Enforcement of Charitable Trusts in America: A History of Evolving Social Attitudes, 54 Va. L. Rev. 436, 443-44 (1968) (same).  This distrust of the Catholic Church reached into the late nineteenth century, creating opponents of tax exemption for religious institutions.  See Stephen Diamond, “Of Budgets and Benevolence: Philanthropic Tax Exemptions in Nineteenth Century America”, 17 (Oct., 1991) (Address at the N.Y.U. School of Law, Program on Philanthropy, Conference on Rationales for Federal Income Tax Exemption, Oct. 1991), http://www.law.nyu.edu/ncpl/abtframe.html (last visited Jul. 9, 2003); see also Erika King, Tax Exemptions and the Establishment Clause, 49 Syracuse. L. Rev. 971, 1037 n.8 (1999) (quoting James Madison’s statement that “[t]here is an evil which ought to be guarded [against] in the indefinite accumulation of property from the capacity of holding it in perpetuity by ecclesiastical corporations.”)

[2] See Evelyn Brody, Charitable Endowments and the Democratization of Dynasty, 39 Ariz. L. Rev. 873, 906-10 (1997); Fishman, supra at 623-25; John Witte, Jr., Tax Exemption of Church Property: Historical Anomaly or Valid Constitutional Practice?, 64 S. Cal. L. Rev. 363, 384-85 (1991).

[3] 4 Austin Wakeman Scott, The Law of Trusts § 348.3 (3d ed. 1967).  Some states, such as Virginia in 1792, repealed the pre-independence English statutes, including the Statute of Charitable Uses.  The lack of the Statute of Charitable Uses consequence, as argued by the States and agreed by the Supreme Court in Trustees of Philadelphia Baptist Ass’n v. Hart’s Executors, 17 U.S. 1, 30-31 (1819), was that charitable trusts without stated beneficiaries were void because of the lack of common law precedent for establishing a trust without a beneficiary.  Nina J. Crimm, An Explanation of the Federal Income Tax Exemption for Charitable Organizations: A Theory of Risk Compensation, 50 Fla. L. Rev. 419, 427 (1998) (noting that this decision and ones following it led to the establishment of charitable corporations instead of trusts to receive donations).

[4] Fishman, supra at 623 (noting that Massachusetts, Pennsylvania, Vermont, and New Hampshire constitutionally protected charities). 

[5] Fishman, supra at 631-32; see also Christine Roemhildt Moore, Comment, Religious Tax Exemption and The “Charitable Scrutiny” Test, 15 Reg. U. L. Rev. 295, 299 (2002-2003) (noting that most new states had an established state church, which took over the former role of the Church of England as an organ of the state, and that, after disestablishment from the state, tax exemption continued as a matter of course).

[6] See Fishman, supra at 632-33.

[7] See Witte, supra at 385; Brody, supra at 906-07; Nina J. Crimm, A Case Study of a Private Foundation’s Governance and Self-Interested Fiduciaries Calls for Further Regulation, 50 Emory L.J. 1093, 1099 (2001); Fishman, at 631 n.70 (noting that corporate charters were granted to only 355 businesses during the eighteenth century).

[8] See Fishman, supra at 634; see also Brody, at 909 (noting that a few state statutes still constrict the ability to devise to, or the holdings of, charitable corporations).

[9] See Lars G. Gustafsson, The Definition of “Charitable” for Federal Income Tax Purposes: Defrocking the Old and Suggesting Some New Fundamental Assumptions, 33 Hous. L. Rev. 587, 609-610 (1996).

[10] Perin v. Carey, 65 U.S. 465, 494, 506 (1860).

[11] See Gustaffson, supra, at 610.

[12] For a historical summary of nineteenth century American policy regarding the ad hoc to infrequent granting of tax exemption for charitable institutions, see Diamond, supra at 12. For a description of colonial church exemptions and taxation of certain income producing properties, see Witte, supra at 372-74.

[13] See Diamond, supra at 8-9.

[14] See Id. at page 10; Witte., supra at 385-86.

[15] See Diamond, supra at 12.

[16] Id

[17] Chas. W. Eliot, The Exemption from Taxation of Church Property, and the Property of Educational, Literary and Charitable Institutions, Appendix to the Report of The Commissioners Appointed to Inquire into the Expediency of Revising or Amending the Laws Related to Taxation and Exemption Therefrom 367, 386 (1875) (stating that Harvard paid tax on its various business holdings in Boston, save one specifically exempted from tax in its Charter).

[18] See Witte, supra at 374-75.  The underpinnings of this public policy to exempt the church drew from the historical exemption justified by two causes.  Most states had an official church established by government as an organ of the state government, continuing the English tradition.  Id.   Second, the Churches acted as the community services center of most townships, thus providing the local government services that otherwise it should undertake.  See id. at 375.  This second justification foreshadowed the government benefit analysis employed by Dr. Eliot.  See infra Part VI(C).

[19] John W. Whitehead, Church/State Symposium Tax Exemption and Churches: A Historical And Constitutional Analysis, 22 Cumb. L. Rev. 521, 539-40 (1991-1992).

[20] Witte, supra at 381.

[21] Id. at 382.  This criticism of exemption, reiterated by President Ulysses Grant, most influenced the Walsh Commission’s perspective on industrialists’ foundations as well as that of the Reece Commission.  See infra Parts VIII, IX(D).

[22] See Diamond, supra at 14.  In 1873, James Parton countered this justification, alleging examples of such charitable institutions producing extraordinary income.  See infra Part VI.

[23] See Witte, supra at 381.

[24] Whitehead, supra at 540.  Dr. Eliot further enunciated the government benefit, also known as the tax subsidy, argument that the state ought to grant exemption for the charitable provision of public service.

[25] See Diamond, supra at 14.  In 1873, James Parton proffered a liberal argument of land distribution efficiency that could only be achieved through such unproductive property being seized and auctioned back into commerce.

[26] See Witte, supra at 382.

[27] See Whitehead, supra at 539-40.

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England’s Historical Legislative Treatment of Charitable Institutions

Posted by William Byrnes on August 7, 2009


When asked to comment upon the various versions of health care reform bills that will soon be voted upon by Congress, I recalled quote by Russell Long, then Chair of the Finance Committee[1]:

         “When the Finance Committee began public hearings on the Tax Reform Act of 1969 I referred to the bill as ‘368 pages of bewildering complexity.’  It is now 585 pages  . . . .”

 This week I turn my blogticle to expiscate the eristic historical context of the tax advantaged treatment enjoyed by charitable institutions.  Why charitable institutions?  In the United States, charitable institutions are known as tax exempt ‘non-profits’ though some are profitable in the accounting sense.  By example, many hospitals, though profitable and even lucripetous, are granted by the federal and state revenue authorities tax exempt status as charities.  However, Congress has pretermitted any issues, and thus leverage, associated with the tax exempt status of health care providers in the various health care reform bills.

 England’s Historical Legislative Treatment of Charitable Institutions

In order to finance his reign, Henry VIII seized the Catholic Church’s and universities’ lands and with parliament enacted The Statute of Uses in 1536 and The Chantries Act in 1545.[2]  The Statute of Uses, in enacting the rule against perpetuities, terminated the situation that most English land, in order to escape feudal dues, was held from family generation to generation in dynastical, perpetual trusts owned by the Church.[3]  The Chantries Act provided for escheat of colleges’ possessions.[4]  The government established as an organ of itself with tax-exempt status by its sovereign nature the Church of England, replacing the Catholic Church.[5]

See-sawing in favor of charitable institutions, under Elizabeth I in 1597, parliament enacted a charitable corporation act that exempted specified institutions from government charges and the requirement of government consent when formed for the following purposes:

        to erect, found, and establish, one or more hospitals, maison de Dieu, abiding places, or houses of correction, . . . as well as for the finding, sustentation, and relief of the maimed, poor, needy or impotent people, as to set the poor to work, to have continuance forever, and from time to time place therein such head and members, and such number of poor as to him, his heirs and assigns should seem convenient.[6]

Furthering Elizabeth I’s charitable incorporation statute by suppressing the application of Henry’s Statute of Uses and its rule against perpetuities, four years later Parliament enacted the Statute of Charitable Uses, 1601, allowing real property transfers to perpetual charitable trusts.[7]  The Statute provided for exemption from the Statute of Uses for a transfer to a charity that provided:

        relief of aged, impotent and poor people, . . . maintenance of sick and maimed soldiers, schools of learning, free schools, and scholars in universities, . . . repair of bridges, ports, havens, causeways, churches, sea-banks and highways, . . . education and preferment of orphans, . . . relief, stock or maintenance of houses of correction, . . . marriages of poor maids, . . . aid and help of young tradesman, handicraftsman and persons decayed, relief of prisoners, . . . aid of any poor inhabitants.[8]

However, during the late sixteenth century and seventeenth century, the Crown often piecemeal interfered with religious charitable trusts, either voiding the trust or employing cy pres to divert the trust assets to the Crown’s favored religion.[9]  Charitable institutions once again falling out of the Crown’s blanket favor, two hundred years after and in the same vein as the Statute of Uses, Parliament revived a specific anti-charity statute, The Mortmain Act, in 1736.[10]  The Mortmain Act of 1736 invalidated real property transfers to any charity mortis causa as well as inter vivos transfers made one year or less before death.[11]  Though this statute limiting the funding of charities remained English law until The Charities Act, 1960, Parliament modified it in 1891 to allow for exceptions for devised property not to be used for investment, thus endowment, purposes.[12]

Prof. William Byrnes (http://www.llmprogram.org


[1] 115 Cong. Rec. S14,944 (1969) (statement of The Hon. Russell B. Long), reprinted in 1969 U.S.C.C.A.N. 2391, 2490.

[2] Evelyn Brody, Charitable Endowments and the Democratization of Dynasty, 39 Ariz. L. Rev. 873, 901, 909-10, 911-13 (1997) Henry VIII was by no means the first king to dissolve monasteries. 

[3] Brody at 901.

[4] Brody at 912-13.

[5] See Christine Roemhildt Moore, Comment, Religious Tax Exemption and The “Charitable Scrutiny” Test, 15 Reg. U. L. Rev. 295, 298-99 (2002-2003).

[6] See James J. Fishman, The Development of Nonprofit Corporation Law and an Agenda for Reform, 34 Emory L.J. 617, n.65 (1985).

[7] Lars G. Gustafsson, The Definition of “Charitable” for Federal Income Tax Purposes: Defrocking the Old and Suggesting Some New Fundamental Assumptions, 33 Hous. L. Rev. 587, 605 (1996) (citing An Act to redress the Mis-employment of Lands, Goods, and Stocks of Money heretofore given to Charitable Uses, 1601, 43 Eliz., ch. 4 (Eng.)).

[8] Oliver A. Houck, With Charity For All, 93 Yale L.J. 1415, 1422 (1984) (quoting Charitable Uses Act, 1601, 43 Eliz., ch. 4).

[9] See Norman Alvey, From Charity to Oxfam: A Short History of Charity Legislation 10-11 (1995).

[10] See Gustafsson at 606, 649 n.62 (noting that Mortmain statutes had previously been enacted in England but the Statute of Charitable Uses substantively repealed them); see also Brody, at 903 (noting that Parliament’s sentiments for legislating the statute are uncertain, but may have been due to anticlerical feelings).

[11] Alvey at 11.

[12] Brody at 905 n.147 (noting that the statute was modified in 1891 to allow either the court or the Charity Commissioners to grant exception for a mortis causa real property transfer to charity as long as the property was to be used for charitable activity rather than for investment purposes).

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