IRS “SPECIAL” RULES & REGS; CASE COUNTING GUIDELINES

John TaylorNorth Carolina State University

Session Etiquette

• Please turn off all cell phones.

• Please keep side conversations to a minimum.

• If you must leave during the presentation, please do so as quietly as possible.

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Topics/Agenda

• Background on IRS Regulations– What’s a Quid and Does one Hurt?– DAF and Family Foundation Issues

• Miscellaneous IRS Issues/Concerns– Auctions– Sponsorships– Events– Donor Control– Gift Myths

• Update on CASE Counting Guidelines

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What’s New for 2013?

• We Didn’t Fall Off the Cliff!– Actually, the “cliff” was simply pushed out a couple months

• IRA Rollovers are BACK!– Retroactive to 1/1/2012 – through 12/31/2013– Folk who didn’t take a qualified charitable distribution (QCD) in

2012 can do so through 1/31/2013– Folk who received a required minimum distribution (RMD) in

12/2012 can transfer those to charities in 1/2013 and avoid paying tax

• Is eliminating/limiting the charitable deduction off the table?

• Updated “low-cost article” and “insubstantial benefit” – stay tuned for details!

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IRS Regulations

• IRS issued final and temporary regulations in 1995 to clarify(?) a clarification issued the previous year that clarified a new section of tax code

• IRS final FINAL regulations issued on 12/16/96• IRS clarification of the clarified clarification of the final

regulations – Revised IRS Publication 1771 (3/2002)

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IRS Regulations

• And then they revised it again 7/2005! AND AGAIN 7/2007; AND AGAIN 3/2008; AND AGAIN 6/2010; AND AGAIN 9/2011

• Two primary areas of interest/concern:– Written acknowledgement requirements;– Value of Goods & Services (quid pro quo)

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Written Acknowledgments . . .

• Required for all contributions of $250 or more in order to claim a charitable deduction. Canceled checks are no longer sufficient ABOVE this amount but ARE below!

• Absolutely, positively, must issue a receipt for cash donations of any amount.

• Donor is responsible for obtaining.• Substantiation to donor must be contemporaneous

(typically mailed by 1/31). But must be received by the day they file their taxes .

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“Gospel” According to John?

• Mail the receipt before the donor asks for one

• Mail the receipt within 48 hours of receiving the gift

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Written Acknowledgments

• Written acknowledgments must provide the amount contributed (or description, not value, of non-cash property) and a statement indicating whether or not any goods or services were provided in exchange for the gift.

• Neither the donor SSN nor your tax ID are required – Except for gifts of vehicles!

• Payroll Deductions - Only applies to single deductions of $250 or more. Not required, period, if employer evidences the amount withheld (pay stub) and provides a “no goods or services” statement (pledge card).– No similar rules for other recurring gifts

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What’s In A Date?

• A “gift date” is NOT required• “Official bank record”?• Postmarks do not always prove a gift date• Pub 1771 suggests a “received date”• John Taylor suggests a “processed” date - and had that

confirmed by IRS nonprofit section head in the late 1990’s and 3 tax attorneys since

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Where Can We Find Safe Harbors?

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Safe Harbor Rules

Quid Pro Quo receipts are not required when:• Fair market value of all benefits received in connection

with the payment does not exceed the lesser of 2% of the gift amount or $102 (2013)

• Gift is $51.00 or more and the cost of all token benefits given does not exceed the IRS “low-cost articles” minimum of $10.20 (2013)– For gifts below $51.00, RULE #1 APPLIES– The only benefit the donor received consisted of token items

bearing the institution’s name or logo

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Value of Goods & Services . . .

• Quid Pro Quo receipt required: Gift exceeds $75 where part of the payment is for goods or services received, and part is a contribution

• If payment is under $75, QPQ requirements still apply, just no mandated receipt

• Disclosure must inform donor that the tax deductible amount is limited to the excess of the amount contributed over the value of goods or services provided. Must also provide donor with a good-faith estimate of the value of such goods or services

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QPQ Specifics

• FMV Defined• Low-Cost Defined• 80/20 Rule Applications

– Which comes first, the benefit or the percent reduction?– Other seating applications?

• And what about membership ($75 or less) benefits?– Free or discounted admission– Free or discounted parking– Preferred access to and/or discounts on goods/services

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Who Is the Donor Poll

• Check received from the Charitable Gift Fund of the Triangle Community Foundation, indicating that we should send an acknowledgment to Jane Smith (whose family also has a separate fund at TCF). Who is the legal donor:

– Jane Smith– Charitable Gift Fund– The Smith Family Foundation from whom we have previously

received gifts– Triangle Community Foundation

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Who Is the Donor?

It Depends!

It actually could be the Family Foundation (no such legal entity, BTW) or the Triangle Community Foundation, but is more likely a gift from a Donor-Advised Fund (Charitable Gift Fund)

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Donor-Advised Funds

• A donor sends an asset to a qualified tax-exempt arm of an organization AS A DONATION TO THAT ENTITY

• The assets are now under the name, and control, of that entity

• The donor contacts the entity and ADVISES them to make a gift to a qualified nonprofit organization

• The entity is the legal donor• BTW, why do donors give this way instead of directly to

us?• It’s partly our fault!

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Donor-Advised Fund Issues

• Pledge Payments• No Way!!!!!!!!!

• BTW, this is also true for gifts from Family (private) Foundations but for a different reason – self-dealing – more in a bit

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Straight from the IRS:

• “A charitable pledge is an obligation of the donor to give money or property to a charity at a future time. Where a charity (including a charitable organization of which a donor advised fund is treated as a component part) relieves a donor of a substantial obligation by satisfying the donor’s pledge, the charity is providing the donor with an impermissible benefit. Accordingly, a donor’s charitable pledge may not be fulfilled by a single payment or a series of payments from the charity.”

• In other words – it is income to the individual!!!

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Legal Opinion

Attorney Statement Pertaining to Donor-Advised Funds:• “Gifts through donor advised funds should not be applied to satisfy

pledges nor linked to a donor [other than perhaps to acknowledge a gift from a foundation at the direction of the donor]. Here are some of the reasons:

1. “the donor will take a deduction when the gift to the conduit foundation is made

2. “the donor cannot take a double deduction and therefore does not need a receipt

3. “if you have recorded a pledge by the donor, then while that pledge is on your records, a gift from a 3rd party [the conduit foundation] which satisfies that pledge is in effect a gift to the donor by the 3rd party [lots of cases on this] which in theory may be treated as an improper transfer by the foundation [non-profit] to the donor [non-qualified donee] and may also be treated as income to the donor

In summary, it will be very difficult to make a "safe" gift to a nonprofit through a conduit foundation to satisfy a pledge.

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Legal Opinion

• “Although I will not provide an opinion regarding this matter, it would appear that if a donor has a pledge on the books, one way to proceed might be for you to voluntarily cancel the pledge before the gift from the conduit Foundation is made [and without any legally binding agreement tying the cancellation to the Foundation gift]. This could be very risky, however, and the donor is assuming all of the risk. The only safe procedure is to make sure donors understand that a pledge may not be satisfied except by a direct gift. The conduit foundations [e.g. Fidelity, Community Foundations] were established as and intended to be the donee charity and therefore there can be no linkage.”

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Donor-Advised Funds – And Their Donors

• Do the donors know the rules?• They aren’t YOUR rules!• But do our donors really NOT know the rules?• You bet they do, or should (but might not care – and

should!)

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Community Foundation Statement

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Private Foundations & Self-Dealing

• Cannot enter into any sort of financial relationship with “disqualified persons”: officer/director/trustee/employee/donor

• Lengthy list of “prohibited transactions” for these folk, which includes satisfaction of a pledge & purchases, e.g.:– Family pledges are personal debts, and if a disqualified person

makes such a pledge, its an act of self-dealing for a foundation to pay that debt

– If the foundation buys a ticket to a fundraising event, and the ticket price includes payment for goods and services (dinner and entertainment), the ticket cannot be used by a disqualified person

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A Bit of This & That

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What Is A Gift?

• Gifts & Grants are synonymous (for CASE and CAE reporting purposes)

• A gift is the irrevocable transfer of property or money to a qualified organization and has no donor-imposed restrictions, conditions, or control– You cannot un-gift a gift!

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Let’s Talk About “Control”

• Once a gift always a gift– Cannot give a gift back – 1099s? What if the gift was matched?– Retain gift after a restricted program is canceled

• Scholarship recipient selection– Donor’s involvement

• Certainly cannot have a majority vote• Control based on position/power

• Cannot require institution to take action it otherwise would not take

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Common Gift Myths

• Donation of time or service. While truly a charitable act, only a volunteer’s REQUIRED out-of-pocket expenses (mileage, parking, supplies, etc.) may be deducted.– FASB/GASB may recognize as an asset– Expressly forbidden as a charitable donation per IRS Publication

526– Donated advertising space is a “service” per IRS Revenue

Ruling 57-462

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Common Gift Myths

• The use of a donor’s property by a charitable organization (partial interest – IRS Pub 526)– Vacation home for charity auction– Office space in lieu of rent– One-time display of artwork (fractional gifts are the exception –

and are legal!)– Use of software

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How Will This Benefit Us?

• What’s the determining factor for acceptance of a gift-in-kind?– Related use: The GIK must be useful to the institution in fulfilling

the purpose or mission for which the institution was granted tax-exempt status

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How Will This Benefit Us?

– Unrelated use: May still qualify as a gift-in-kind (that you can count and the donor can deduct – sort of), provided it was given specifically to be sold (charity auction)

– “the Treasury Regulations under section 170 provide that if a donor contributes tangible personal property to a charity that is put to an "unrelated use", the donor's contribution is limited to the donor's tax basis in the contributed property”

– “The term "unrelated use" means a use that is unrelated to the charity's exempt purposes or function . . . The sale of an item is considered unrelated, even if the sale raises money for the charity to use in its programs”

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Unrelated Gifts – Charity Auctions

• Not many specific IRS rules here! But what rules there are can be found at:

http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Charity-Auctions

This is where you will find those previous quotes• Purchaser MUST “know” the FMV in advance and pay in

excess– Quid pro quo receipt

• Donor’s item must (?) sell – NO receipts until AFTER the auction

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Auction Receipts

• Donor of item may be able to claim a deduction– Only if it is a gift (not a service or partial interest)– Only if it sells (?)– The receipt should only describe the gift

• Buyer of an item may be able to claim a deduction– Only if the FMV was published or known in advance– Only if they paid more than that– Does not matter if the donated item was not a gift– Quid pro quo receipt is required

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Sponsorships

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Sponsorships Described

• See Federal Register, Vol. 67 No. 80, page 20433• Or just go to the IRS documents section of the

FundSvcs.org download site!• But if you would rather read about it in “plain English”,

download the American Society of Association Executives (ASAE) interpretation of the IRS regulations, also at FundSvcs.org

• All of the above pertain to “taxation” – or not – of sponsorship payments. We translate that to mean “no gift” or “gift.” If the payment could be considered taxable income, then no gift

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Sponsorships Defined

• Calling something a sponsorship does not always mean the sponsor gets something of value in exchange

• Sponsorships are typically encouraged when you want to have an event underwritten

• You do need to handle standard quid pro quo benefits such as receiving a “table” or a certain number of tickets to the event

• Usually, all a sponsor is really looking for is name recognition

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“Free” Recognition A Sponsor Can Receive

• Mention of location, phone number, website• Value-neutral descriptions, including displays or visual

depictions, of the sponsor’s product line or services• Displays of brand or trade names and product or service

listings• Logos or slogans that are an established part of the

sponsor’s identity• Mere display or distribution (free or at a cost) of the

sponsor’s product at a sponsored activity

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Recognition Cannot Include:

• Qualitative or comparative language• Price information or other indications of savings or value

(John wonders how, then, they can sell the item as suggested on the previous slide?)

• An endorsement or inducement to purchase, sell, or use the sponsor’s service, facility, or product

• A single message containing advertising and acknowledgement is considered 100% advertising

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So What Is a “Good” Sponsorship?

• Any payment by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit

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Sponsorship “Worry Words”

• Try to keep words out of sponsorship documents that are red flags to the IRS: sponsorship agreement; partnership; joint venture; royalty agreement; advertising

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Can Participants Claim a Deduction?

• Maybe! But you need to be clear and concise in advance

• Remember, it matters not if the event has been underwritten. What matters is the fair market value of what participants receive

• The dreaded golf tournament? Quite likely. But entry “fee” must exceed the value of the round of golf, cart, balls, food/drink, ball towels, etc.

• $1000/plate dinner? Sure. But a $25 reception? Don’t split hairs – probably best to call it a:

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Proceeds to Benefit Event

• A nonprofit conducts an event where the gift amount is negligible or difficult to determine or it is just too much work to produce receipts. Walk-a-thons and such are good examples

• The FMV of benefits received equal the “price of admission,” but some or all of the event expenses are covered by a donor or group of donors. Those donors are making a gift. However, since the attendees are receiving something of equal or greater value, they are not making a gift

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One More Type

• An event hosted by a completely independent entity, with no involvement by the nonprofit, who sends any left-over cash to a charity. The organizer of such an event is making a gift for the amount sent to charity, but the attendees are not

• Can that same entity claim a gift-in-kind for all of the food/beverages/preparations? Maybe, but usually only if event was originally sanctioned by the organization. If so, you need proof of what was purchased (reasonableness check), and proof of payment

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The Old

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The CASE Guidelines

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Now, You Too Can Count Bequest Expectancies

• Irrevocability no longer required – too difficult to manage (State laws varied), and donor-unfriendly to request

• Pledged/Executed (not found) during campaign• Should consider age and variable valuation:

– Under 50 - $0– 50-69 – Present value– 70+ - Face value

• Report separately from outright and irrevocable deferred gifts

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Back to the Future for Irrevocable Deferred Gifts

• May once again count at face value (3rd edition went strictly present value)

• Separate goals should be created for these as well – You can bring in more! But more here does not mean less “there”

• The issue of transparency suggests that you still report the present value (IRS deduction) of these, too, but face value counts towards goal– Only the present value counts for VSE purposes

• Minimum ages should be considered

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Conditional Pledges

• Reasonable expectation that the conditions will be met during the campaign. Examples include– Challenges – I’ll give you mine if you raise the other– Capital Commitments – If you build it I will pay

• Appropriate documentation• Recorded as, and with, revocable gifts/commitments and

thus counted separately

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Counting Government Funds

• Actually, no change – you never count government funding from any government for any reason

• 4th edition review committee did, however, take the issue up again

• Acknowledgement that government funds are helpful in achieving strategic goals, can be leveraged to secure private gifts, and recognize that some fundraising staff help secure

• However:

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Counting Government Funds

• Counting emphasis has always been on raising charitable donations from the private sector

• Impossible to level the playing field when looking at large public research universities compared to small private colleges; not to mention that only half of the States offer a State matching program

• Thus, securing government funds does not qualify as a private philanthropic act, however we most certainly can and should recognize its value in achieving institutional goals

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What Doesn’t Count*

• Advertising revenue• Alumni membership dues/fees• Appraisal costs and other expenses associated with

conveying a gift• Contract revenues (including clinical trial funds)• Contributed services• Partial interest• Standard discounts on purchases (does not include true

bargain sales)• Earned income transfer payments from money earning

programs/businesses• Gifts or pledges counted before; payments on pledges or

bequests made before*Applies to Campaigns AND VSE

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What Doesn’t Count*

• Gifts to social organizations• Governmental funds – ALL kinds• Oral pledges (except telethon!)• Written-off pledges• Investment earnings on gifts – includes gains/losses on

sales of stock/other property• Funds from exclusive vendor relationships: Affinity credit

cards, pouring rights, royalties, or other contractual obligations

• Non-gift portion of QPQ transactions• Surplus income from ticket-based operations

*Applies to Campaigns AND VSE

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Additional Resources

• John’s listserv “FundSvcs”• Advancement Services Download Site

– www.FundSvcs.org• Association of Advancement Services Professionals

(AASP – Advserv.org)• 2007 Advancement Services book • CASE Reporting Standards & Management Guidelines -

& 10/2011 Clarification• IRS Publications 526, 561, & 1771• johnhtaylor@ncsu.edu • 919.513.2954