Chapter 45 - § 45.3 • FORM OF GIFT OR DEVISE

• Jurisdiction: Colorado

§ 45.3 • FORM OF GIFT OR DEVISE

§ 45.3.1—In General

Unconditional, irrevocable, and immediately effective outright inter vivos or testamentary transfers to charity of cash or of the donor's entire interest in an item of unencumbered property should qualify for all applicable tax benefits, subject to the limitations referred to in § 45.2.1 with regard to income tax deductions. But problems of deductibility may arise if the interest of the charitable donee is restricted or conditional, is subject to an indebtedness, or is delayed in use or enjoyment through pledge or trust arrangements, or if the gift is not of the donor's entire interest in the property. Donors of all gifts, regardless of value, must be able to substantiate the charitable deduction. The donor of cash must maintain either (1) a bank record; or (2) a receipt, letter, or other written communication from the donee organization, including the date and amount of the donation. I.R.C. § 170(f)(17).

§ 45.3.2—Transfers Subject to a Condition or Power

If a charitable gift or devise is subject to a condition precedent or a condition subsequent, no federal income, gift, or estate tax deduction is allowable unless the possibility that the charitable transfer will not become or remain effective is "so remote as to be negligible." Further, if the donee, devisee, or a fiduciary is empowered to divert the property, in whole or in part, to a noncharitable use or purpose, the deduction will be limited to that portion, if any, of the property that is exempt from an exercise of such power. Treas. Reg. §§ 1.170A-1(e), 20.2055-2(b), and 25.2522(c)-3(b)(1).

§ 45.3.3—Transfers Subject to Indebtedness

If an inter vivos charitable gift of property is made subject to an indebtedness, the transfer will be treated as a "bargain sale," that is, part sale, in an amount equal to the indebtedness, and part gift, in an amount equal to the excess of the fair market value over the indebtedness. Thus, the amount of the indebtedness will be treated as an amount realized in a sale or exchange, even though the transferee does not agree to assume or pay the indebtedness. Treas. Reg. § 1.1011-2(a)(3). Because I.R.C. § 1011(b) requires an allocation of the donor's basis between the portions of the property deemed sold and given, a bargain sale likely results in income tax liability for the donor.

§ 45.3.4—Pledges, Subscriptions, Notes, Checks, and Credit Cards

Charitable pledges and subscriptions, although considered purely gratuitous and hence legally unenforceable under the early common law, have been enforced by many courts in recent decades on a variety of theories. Depending upon the immediate facts, courts have sustained charitable subscriptions as unilateral contracts, as bilateral or multilateral contracts (between donor and donee or among donors), or under the doctrine of promissory estoppel. Although there are no Colorado decisions dealing directly with these issues, it is reasonable to assume that if the charity or other donors have acted in reliance upon a pledge, a court will enforce the pledge. If the operative facts that turn the pledge from an offer into an obligation have occurred prior to the donor's death or disability, such death or disability will not affect the enforceability of the pledge. Regarding the donor's right to cancel an agreement or pledge to contribute to a charity, see C.R.S. § 6-16-106, part of the Colorado Charitable Solicitations Act. This section explicitly provides in subsection (1) that its protection is "in addition to any right otherwise provided by law with respect to the binding nature of an agreement or pledge to make a charitable contribution . . . ."

Nevertheless, a charitable pledge or subscription, although legally enforceable, does not give rise to a deduction until the pledge or subscription is satisfied by actual payment, regardless of the donor's method of accounting. Treas. Reg. § 1.170A-1(a); P. L. Mann v. Comm'r, 35 F.2d 873 (D.C. Cir. 1929). Similarly, the IRS and the Tax Court hold that a gift to charity represented by delivery of the donor's promissory note, even though payable upon demand and negotiable, is not deductible until paid. Rev. Rul. 68-174, 1968-1 C.B. 81; Guren v. Comm'r, 66 T.C. 118 (1976); but see MacKay v. United States, 503 F.2d 591 (10th Cir. 1974). However, a gift made by a charge to a credit card is effective and deductible when the charge is made, Rev. Rul. 78-38, 1978-1 C.B. 67, and a gift made by personal check is effective and deductible when the check is delivered, provided the check is honored and paid and bears no restriction as to the time or manner of payment. Rev. Rul. 54-465, 1954-2 C.B. 93.

§ 45.3.5—Contributions of Services

No income tax deduction is allowed for a contribution of services to a charitable organization. However, unreimbursed, out-of-pocket expenditures made incident to the rendition of services to such an organization may constitute a deductible contribution. Treas. Reg. § 1.170A-1(g). Such out-of-pocket expenses can include mileage for the use of a passenger automobile at the rate of 14 cents per mile. I.R.C. § 170(i). On the other hand, no deduction is allowed for travel expenses, including meals and lodging, while away from home on charitable business, unless there is "no significant element of personal pleasure, recreation, or vacation in such travel." I.R.C. § 170(j).

§ 45.3.6—Transfers of Partial Interests in Property

In the case of a charitable gift or devise of an interest in property that consists of less than the donor's entire interest in such property, federal income, gift, and estate tax deductions will not be allowed unless the donated interest is either (1) a qualified income interest described in § 45.3.7; (2) a qualified remainder interest described in § 45.3.9; (3) a qualified conservation contribution described in § 45.3.11; or (4) an undivided or fractional portion of the donor's entire interest in the property, not in trust. I.R.C. §§ 170(f), 2055(e)(2), and 2522(c)(2).⁴ A deduction is allowed for a contribution of a partial interest in property if such interest is the donor's entire interest in the property, provided the property was not divided by the donor in order to create such interest for tax deduction purposes. However, no deduction is allowable for a contribution of the right to use property that the donor owns, for example, by giving a charity a rent-free lease. Treas. Reg. § 1.170A-7.

§ 45.3.7—Gifts of Income Interests

Since the Tax Reform Act of 1969, no federal income, gift, or estate tax deduction has been allowed for a gift of an income interest in property unless such interest is in the form of a "guaranteed annuity" or is a "fixed percentage distributed yearly of the fair market value of the property (to be determined yearly)." I.R.C. §§ 170(f)(2)(B), 2055(e)(2)(B), and 2522(c)(2)(B). Within these parameters, a donor may create a "charitable lead trust." The donor of a charitable lead trust specifies that, in each year during the initial term of the trust, the trustee shall distribute a fixed annuity or fixed percent of trust principal, determined annually, to charity. At the end of the charitable lead term, the balance remaining in the trust estate will pass to the donor's non-charitable beneficiaries (typically, descendants). See Chapter 32, "Split-Interest Charitable Trusts," for a full discussion of the benefits and requirements of charitable lead trusts.

§ 45.3.8—Distributions from IRAs

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