Technical - Charitable Contribution Deduction - Part 1 - Income Tax Issues (& Gold)

Charity Advisor Resource Newsletter - Volume 1.3 (2009)

BY JONATHAN D. ACKERMAN

Some of the income tax issues associated with a gift of gold are as follows:

Generally - Section 170(a) ("Section" shall refer to the Internal Revenue Code of 1986, as amended, unless otherwise indicated) provides for income tax charitable deductions for certain types of contributions to qualifying charitable entities. Section 170(c) defines charitable contributions. Under this Section, the general rule is that the contribution must be "to or for the use of" an entity "organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes." Different income tax rules apply depending upon the character of the charitable organization, i.e., a public charity or a private foundation.

Contributions to Public Charities

Generally - If a contribution is made "to" an entity described in Section 170(b)(1)(A) (such as, a public charity), then a greater portion of the amount contributed may be deductible, as described below. Entities described in Section 170(b)(1)(A) are generally churches, schools, hospitals, publicly supported organizations, a governmental unit, certain private foundations (discussed further below under the heading Tax-Favored Private Foundations), and organizations created under Section 509(a)(2) (a service provider publicly supported organization), and 509(a)(3) (supporting organizations).

Tangible Personal Property (Related Use Rule) - a charitable contribution of tangible personal property is subject to a reduction equal to the amount of gain that would have been long-term capital gain if the property had been sold at its fair market value when it was contributed, if: (1) the donee's use of the property is unrelated to the purpose or function that is the basis for its qualification as a tax-exempt organization, or (2) the property is "applicable property" that is sold, exchanged, or otherwise disposed of by the donee before the last day of the tax year in which the contribution was made and for which the donee charity hasn't made the certification under Section 170(e)(7)(D), See Section 170(e)(1). In other words, and with regard to (2) above, if the "premature" disposition occurs in the tax year of the donor in which the contribution is made, the donor's deduction is generally basis and not fair market value. Much of the analysis in this regard relates to the definition of "related use." For a simple example, a rare (numismatic) coin collection or jewelry given to a museum for use in its exhibits would constitute a related use.

Percentage Limitations & Ordinary Income Reduction Rule - Section 170(b) specifies the percentage limitations that apply to income tax deductions for charitable contributions. Generally, contributions "to" Section 170(b)(1)(A) entities are deductible to the extent of fifty percent (50%) of the donor's contribution base for the taxable year of contribution. If the property contributed is long-term capital gain property as described in Section 170(b)(1)(C)(i), then the limit is thirty percent (30%) of the donor's contribution base for the year. Further, contributions to such entities are generally not reduced pursuant to Section 170(e)(1)(B) by the amount of capital gain that would have been long-term capital gain if the property had been sold for its fair market value. In other words, if long-term capital gain property is donated to public charities, the contribution is generally deductible to the extent of its fair market value and is subject to the thirty percent (30%) contribution base limit. However, if short-term capital gain property or ordinary income property is contributed to public charities, then the deduction would have to be reduced pursuant to Section 170(e)(1)(A) - to the tax basis of the contributed asset in the hands of the donor.

Contributions to Private Foundations

Percentage Limitations & Deduction Limitations to Tax Basis - On the other hand, if a contribution is made "for the benefit of" a public charity or "to or for the benefit of" an entity that is not described in Section 170(b)(1)(A) (such as, a private non-operating foundation), then the contribution is generally deductible only to the extent of thirty percent (30%) of the donor's contribution base for the year (instead of 50%) and, if the property is long-term capital gain property as defined in Section 170(b)(1)(D), the limit is generally twenty percent (20%) (instead of 30%) of the donor's contribution base for the year. In addition, if the contribution is of capital gain property to a non-operating private foundation, the contribution must be reduced by the amount that would have been long-term capital gain if the property had been sold for its fair market value. In short, when long-term capital gain property is donated to such "less tax-favored" charitable entities, the contribution is usually deductible only to the extent of its adjusted tax basis and is subject to the twenty percent (20%) contribution base limit, unless the contributed asset constitutes "qualified appreciated stock" as discussed below. Correspondingly, limits on the amount of the deduction also apply pursuant to Section 170(e)(1)(A), if short-term capital gain property or ordinary income property is contributed to such entities.

Qualified Appreciated Stock - However, if the contributed property constitutes "qualified appreciated stock," the donor will be entitled to a fair market value deduction under Section 170(e)(5)(A). Qualified appreciated stock is generally any stock of a corporation for which (as of the date of the contribution) market quotations are readily available on an established securities market, and the income from its sale would constitute long-term capital gain. As a caveat, qualified appreciated stock shall not include any stock of a corporation contributed by a donor to the extent that the amount of the stock so contributed (when increased by the aggregate amount of all prior contributions by the donor of stock in such corporation) exceeds 10 percent (in value) of all of the outstanding stock of such corporation - please note that the family attribution rules apply here, See Section 170(e)(5)(C).

Thus, the donor will be entitled to a fair market value deduction for a gift of capital gain property to a private non-operating foundation only if the property constitutes "qualified appreciated stock" - SO, BEWARE of gifts of real estate and closely-held business interests to a private non-operating foundation, as well as gifts of interests in gold that do not constitute "qualified appreciated stock".

Tax Favored Private Foundations - Most private foundations are generally referred to as private non-operating foundations. These foundations ordinarily make annual distributions directly to public charities and do not engage in direct charitable activities. It is possible, however, to gain a more favorable tax write-off for a charitable contribution to a private foundation, if under Section 170(b)(1)(A)(vii) contributions are made to those private foundations that are described in Section 170(b)(1)(E). These organizations include private "operating" foundations, "distributing" or "conduit" foundations and "pooling" foundations. However, these types of private foundations must meet specific technical requirements in order to gain the tax-advantaged status.

See also our other articles relating to gold in this CAR Newsletter 1.3:
Featured Article - Gold as a Hot Topic Today
Fundamentals - How Does a Donor Own Gold

As you will note, a gift of gold may not be simple - there are many potential pitfalls for the donor and the charity. In addition, the character and method of investing in gold and gold-related assets are evolving. In all events, professional counsel should be retained to fully analyze the implications of a gift of gold given a particular set of circumstances.


Jonathan Ackerman, 2002 President of NCPG (now known as Partnership for Philanthropic Planning), represents donors and tax-exempt organizations on a national basis. His advice is often sought by charities in their creation and operation, especially with respect to contributions and other funding opportunities, as well as by families (and their advisors) who desire to integrate philanthropy into their estate plans.