The New Normal for Charitable Tax Planning

Mar 26, 2024 | Business Planning, Charitable Planning, General Estate Planning, IRS / Tax Guidance, Podcasts, T&E Litigation

“The New Normal for Charitable Tax Planning,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Jim Milton, ACTEC Fellow from Tulsa, Oklahoma. Several new developments related to charitable tax planning have occurred, including contemporaneous written acknowledgments, acquiring qualified appraisals, and the assignment of income doctrine. ACTEC Fellow Justin Miller of San Francisco, California, is with us today to explain what practitioners need to understand. Welcome, Justin.

Justin Miller:  All right. Well, thank you, Jim. Thank you, ACTEC. And thank you for having me as part of this podcast. As Jim mentioned, I’m going to address three things today and some recent developments related to (1) contemporaneous written acknowledgments, (2) qualified appraisals, and (3) the anticipatory assignment of income doctrine. When you’re giving to charity and you want to get the benefit of that tax deduction for income tax purposes, for giving to charity, assuming you’re itemizing your deductions, you want to make sure that you do it correctly.

So, how do you do it correctly? What are the mistakes we want to avoid? And what’s happened recently that should give us some guidance on how to do it correctly? So, let’s start with contemporaneous written acknowledgments.

Contemporaneous Written Acknowledgements

You’ve got to get this letter when you donate to charity that not only thanks you for your donation but it has to state whether or not you’ve received something in return, such as goods or services. Any time you’re donating something $250 or more, you have to get that contemporaneous written acknowledgment, or let’s call it a CWA letter to make it easier. That CWA letter, if you’re giving to a Donor Advised Fund (DAF), also has to confirm that the donor-advised fund has exclusive legal control over the assets contributed.

These are requirements under Section 170 of the code. And not only do you have to get that CWA letter, it does have to have those specific disclosures, but you’ve got to receive it by the earlier of the date you file your tax return for the year of the contribution or the due date, including extensions for the return. Now, you might think that charities and people- taxpayers- just have this down, and it’s a given. You get the letter. It has those right magic words. You get the letter in time. But every year, it seems there are some very wealthy taxpayers, and mistakes are made.

Let’s just use, for example, the Albrecht case, May 2022 (Albrecht v. Commissioner, T.C. Memo 2022-53, May 25, 2022). This is where the taxpayer donated 120 items under a five-page gift agreement. So, it’s clear these were things with a ton of value, it was actually given to the charity. Now, nothing was received in return. However, that five-page gift agreement did not specifically state whether or not something was received in return. And because you didn’t get a full CWA letter in the appropriate time period, because you didn’t get that, you’re going to not be able to fix it. These are strict requirements. And so, in that Albrecht case, zero deduction, zero way to fix it.

There was another case, the Kiefer case (Kiefer v. Commissioner). This was donating business interest, in July 2022, and they donated their interest. It was clear this was a completed gift. They’ve got agreements. The letter from the donor-advised fund did not specifically state that the donor-advised fund had exclusive legal control over the assets contributed, so it was not a valid CWA letter. They didn’t get that letter in time. No way to fix it. Zero-dollar deduction.

A couple more recent cases. There was the Braen case, B-R-A-E-N, July 2023 (Braen v. Commissioner, T.C. Memo 2023-85 (Jul. 11, 2023). This was a real estate developer. They made this donation. And what was not disclosed in the CWA letter is this bargain for reversion in the settlement agreement. Now a donation was made, but because it wasn’t a valid CWA letter, once again, zero-dollar deduction and zero way to fix it.

Just a few days after that, we had the Tucker case, July 2023 (Tucker v. Commissioner, T.C. Memo 2023-87 (Jul. 17, 2023). This is where the taxpayers paid all these expenses for the fashion show and the charities thanked them for paying the expenses. They confirmed those expenses were paid, there was no question that this taxpayer paid those expenses, but the letter that they received failed to describe whether or not they got any goods and services in return. And because they didn’t get that correct type of letter in the right period of time, once again, zero-dollar deduction and zero way to fix it.

Rule number one: if you’re donating to charity and you’re making a charitable gift of $250 or more, you’ve got to do the contemporaneous written acknowledgment, CWA, correctly and within the required period of time.

Qualified Appraisals

But what about bigger deductions? You’re donating something more than $5,000, let’s say, other than cash or publicly traded securities. You also have to do that right as well, meaning you would need a qualified appraisal by a qualified appraiser. There are specific education requirements and experience requirements for that appraiser. And if you don’t do this correctly and you don’t have it attached, once again, not only do you get a zero-dollar deduction, but you actually cannot fix it. It’s a strict requirement. You can’t fix it after the fact.

The Braen case, which I mentioned earlier that also had a qualified appraisal issue because they failed to disclose the settlement agreement, it had an impact on value. Because of that zero-dollar deduction, they did not have the qualified appraisal. We’re going to talk about the Hoenscheid case in a second but, the other recent case that just came out a few weeks ago is Oconee Landing Property (Oconnee Landing Property v. Commissioner, T.C. Memo 11814-19, February 2024). The case came out in a decision in February 2024. The penalties for doing it wrong. Not only do you miss out on your deduction, but if you do this qualified appraisal incorrectly in the Oconee case, there was a 40% gross valuation misstatement penalty and a 20% substantial understatement penalty for the portion not attributable to that overvaluation. So not only do you miss out on your deduction if you don’t do this qualified appraisal correctly, but there could also be some very substantial penalties.

Anticipatory Assignment of Income Doctrine

And that brings us to our last topic, and that is the assignment of income. And that is if you’re about to donate something and there’s a big liquidity event being planned in the future. Well, if you do it far enough in advance, not only do you get a charitable deduction for what you give away, but you also avoid paying income taxes on all the gain if you give it away far enough in advance. But we have to avoid what’s called the anticipatory assignment of income doctrine.

Now, this was made famous. There’s a great metaphor in the Lucas v. Earl case, 1930 case (Lucas v. Earl, 281 U.S. 111 (1930). This is where that beautiful metaphor from Justice Holmes, he said, “The fruits cannot be attributed to a different tree from that on which they grew.” What was going on with it? What are these fruits? How do you attribute them?

What’s going on in Hoencheid is if it looks like this deal is almost virtually certain to close, it’s too late. You have to pay the income taxes. Even if you donate at that point in time and the charity ends up getting the money or the proceeds from that liquidity event. If you are virtually certain that that liquidity event was going to happen, you still have to pay the income taxes on it. And that’s what happened in the Hoencheid case (Hoensheid v. Commissioner, T.C. Memo. 2023-34 Mar. 15, 2023).

Here were three brothers, the grandchildren of the founder, and they received this $92 million Letter of Intent for $92 million in an LOI. One of the brothers wanted to give something to charity and was talking with his advisors, and the donor emailed the attorney and said, “I would rather wait as long as possible to pull the trigger. If we do it and the sale does not go through, I guess my brothers could own more stock than I.”

So it’s pretty clear at that point in time that the brother is worried that if he donates these shares, that deal might not go through. So at that point, we’re pretty clear that the assignment of income doctrine would not apply. Even the brother at this point is clearly, the taxpayer is saying, this deal might not go through.

Then several, several weeks went by and then the donor emailed his attorney and says, “I do not want to transfer the stock until we are 99% sure we are closing.” Now, we don’t know at what percentage the anticipatory assignment of doctrine kicks in, but I’m going to strongly guess that 99% sure we are closing is too close in time, meaning that assignment of income will kick in if you’re — I don’t know if it’s 98 or 97, we don’t know the specific percentage — but 99% is too close. And that’s what happened in this case, the donor continued to wait, due diligence was done, all of the documents, there were still some ministerial items left to fix, but the donor did not actually make the donation until two days before closing.

And what did the court say in Hoenscheid? They said it was a virtual certainty that this deal was going to close. It was virtual. Almost everything that had to be done had already been done. There were just these kinds of minor ministerial items left. And because of that, that completed gift to charity, the donor still had to pay the income taxes on the difference between basis and fair market value. Had he done it, who knows, weeks, months earlier — he would have avoided all of those income taxes donating to charity.

Now to add insult to injury, getting back to the qualified appraisal requirement. Not only did the donor in Hoenscheid have to pay taxes on the increase in the growth in what eventually sold, but that taxpayer did not get any benefit of a charitable deduction. And the reason why is he did not get a qualified appraisal by a qualified appraiser. What happened — and I don’t know, maybe he was trying to save some money instead of going out and hiring a qualified appraiser, decided to just use, you know, the investment middle market investment banker who was helping them with the transaction and, you know, yeah, they can throw a valuation together. And the court said that was very nice, but it’s not a “qualified appraisal.” There are strict rules to be a qualified appraisal and the person who did it didn’t even qualify as a qualified appraiser. And if you don’t do that qualified appraisal correctly, zero deduction and zero way to fix it.

Take Aways

And with that, let’s not forget our three main things if we’re trying to get the benefit of a tax deduction for charity:

  1. Contemporaneous Written Acknowledgment;
  2. Qualified Appraisal (if necessary);
  3. And, we’ve got to be aware of that Anticipatory Assignment of Income Doctrine.

Thank you for your time today and I’ll turn it back to you, Jim.

Jim Milton: Thank you, Justin. As always, you make tax issues worthy of anticipation and gosh, for the longest time during your talk, I thought you were saying “CYA letter,” but it’s good to know. It’s actually a CWA letter. Thanks again, Justin.


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