April is upon us, and so is the deadline for filing our personal income tax returns. While 2015 tax planning may be behind us, it’s not too early to get started on our 2016 tax planning.
In terms of charitable tax planning, many times donors have specific goals in mind in making their contributions. Often times, these goals call for restricting or specifying how a gift is to be used. In this article, we’ll discuss three different pitfalls: use restrictions, reversionary interests and deferred gifts, any of which could result in the loss of a charitable deduction.
Often times, donors wish to make gifts to a charity to be used for a specific purpose. If a donor were to give to charity with restrictions that prevent the charity from freely using the gift “in furtherance of its exempt purposes,” such a restriction will cause the gift to be nondeductible.
Much of the analysis in determining whether a restricted gift is deductible depends on the charity’s mission. The charity must intend to use the gift for its stated purpose on the date of the gift, and the possibility that the charity will not use the gift for its stated purpose must be “so remote as to be negligible.” The Tax Court has defined the phrase “so remote as to be negligible” as “so highly improbable and remote as to be lacking in reason and substance” Briggs v. Comm’r, 72 T.C. 646, 656 (1979).
Some donors want to give gifts that will revert back to the donor if the gift is not used for its intended purpose. These types of reversionary gifts are deductible, provided the possibility that the gift will revert back to the donor is “so remote as to be negligible.” An example of a reversionary gift that was not so remote as to be negligible was made in a 2003 revenue ruling. In Rev. Rul. 2003-28, 2003-1 C.B. 594, a donor transferred a patent to a university with the condition that a certain faculty member remains on the faculty for the next 15 years. The IRS found that the chance the faculty member would leave the university in the next 15 years was not so remote as to be negligible. In this case, the charitable deduction was not allowed.
Deferred gifts can occur when the transfer depends on a certain act or occurrence. An example of this might be a gift to your church with the requirement that the gift is returned if not enough funds are raised for the new church building. Provided the likelihood the church will raise enough funds for the new building is not so remote as to be negligible, the charitable deduction may be deferred until such time as the church raises enough funds.
In planning for charitable gifting with strings attached, it’s important to consult a professional who can draft the gifting agreement with these rules in mind. Happy tax planning for 2016!