Solicitations Corner & Some Happenings

Charity Advisor Resource Newsletter - Volume 1.3 (2009)

BY JONATHAN D. ACKERMAN

BEWARE - Misleading request for form filings - The California Secretary of State's office has been advised that solicitation letters are being sent to California businesses encouraging them to comply with its Corporations Code filing obligations by submitting fees and documents to a third party rather than by filing directly with the Secretary of State's office. Charities have also been contacted in this regard. These solicitations are not being made by the CA Secretary of State's office and are not being made by or on behalf of any governmental entity. The solicitations request that a fee and a completed form be submitted in order for the business to comply with applicable California or other law. See this Consumer Alert for more.

Tax Court challenges income tax deduction on basis of gift to private foundation - charitable income tax deductions have historically been denied where the IRS can prove that the donor retained strings over a gift to charity, for instance, where the donor retained possession of the gifted asset after the contribution to charity. But, in this case, the IRS argued that the donor retained too much control over a gift to his own private foundation, solely because he controlled the private foundation. WELL, isn't that one of the significant aspects of creating a private foundation - the donor maintains control. In addition, the donor is entitled to less favorable tax consequences from a gift to a private foundation rather than a gift to a public charity. Lastly, in 1969 Congress determined that donors had too much control over private foundations and imposed a series of excise taxes and regulatory rules on the private foundation. Foxworthy, Inc., et al v Commissioner of the Internal Revenue Service, (T.C. Memo. 2009-203, September, 2009), is a long case with a series of issues; however, review pages 12 - 13 for the facts, and pages 65 - 67 for the court's opinion, with regard to this charitable deduction issue. Here's an excerpt of the most important segment of that opinion: "However, respondent has not cited any authority in support of his contention that merely having control over the foundation disqualifies the Bells from claiming the charitable contribution deductions for the contribution of the shares of Northeast Investors Trust to the foundation. Although the foundation is a private foundation controlled by the Bells, control alone is not sufficient to defeat the deduction to the Bells. Control in the context of private foundations generally is an issue in determining whether a private foundation is liable for excise taxes because of self-dealing." In a case with penalties for failure to file returns and fraud, the Tax Court in this Memorandum opinion roundly rejected the IRS' argument that the ability to deduct contributions made to a private foundation would be disallowed due to the donor's control of the foundation.

Margin Debt as UBI - in a recent case, the U.S. Court of Federal Claims held that securities acquired by a charity on "margin" were debt-financed property, and the income derived on the sale of such securities was debt-financed income subject to unrelated business income (UBI). The charitable trust in this case was created to support solely Cornell University. There is another case in the Second Circuit that had the same result, but dealt with another trust created by the same donors for the benefit of another university. This is a very technical area and several exceptions may apply; however, for purposes of this Happenings update, the result in this case should not be a surprise to any entity that administers or acts as a trustee of a CRT, as every dollar of UBI in a CRT is subject to a 100% excise tax on that income. SO, please go back and double check to make sure that the intake sheet completed upon creation of the CRT account does not permit the acquisition of any asset using margin of any kind. To review this case, see The Henry E. Bartels and Nancy Horton Bartels Trust for the benefit of Cornell University v United States (Case No. 03-2526T, 6/30/09).

Proposed Regulations Issued for Type III Supporting Organizations (SO) - Under the Pension Protection Act of 2006, Congress significantly changed the permissible structures and activities of supporting organizations as defined under Code Section 509(a)(3). Though this is a very technical area, for purposes of this Happenings update, let's just highlight a few big changes from the Notice of Proposed Rulemaking, which preceded the issuance of these Proposed Regulations. First, the Proposed Regulations make it clear that the holding of exempt use property will qualify the SO as a Functionally Integrated SO, and that certain rules associated with the qualification of a private foundation as an operating foundation have been dropped from that determination. Second, the Proposed Regulations also eliminate the number requirement (the SO can support no more than 5 designated public charities) and re-institutes the "attentiveness" requirement in its place. Lastly, the Proposed Regulations delineate the extensive notification requirements imposed on the SO. To see much more on these Proposed Regulations visit www.irs.gov/charities/charitable/article/0,,id=213544,00.html.