Charitable deductions and UBIT.

• Author: Loftus, Cynthia
• Position: Unrelated business income tax

Sec. 501(c)(7) organizations can save tax dollars when replacing member-related assets. Often, during renovations, assets are discarded or sold at far below their fair market value (FMV). When this occurs, organization exempt from income tax under Sec. 501(a), particularly country clubs, should consider donating the items to a qualified charity or selling the assets at their FMV with the gross proceeds going to charity.

Sec. 501(a) organizations are required to pay tax on unrelated business income (UBI). Generally, UBI is income generated by an activity regularly carried on that is not directly related to the organization's exempt function. Special rules apply for organizations exempt under Sec. 501(a)(7), (9), (17) and (20) to include investment income as UBI.

Sec. 512(b)(10) provides for a charitable contribution deduction, as allowed by Sec. 170, not to exceed 10% of UBI computed before such deduction. The qualifying deduction need not be directly connected to the unrelated trade or business generating the UBI. The charitable contribution must, however, be made to an unrelated charitable organization.

Generally, the amount of a charitable deduction for property other than money is the property's FMV, reduced by the rules of Sec. 170(e)(1) (relating to appreciated property). For ordinary income property, Sec. 170(e)(1) reduces the donated property's FMV by the amount of ordinary income that would have resulted if the asset had been sold. Ordinary income property includes inventory, capital assets held less than one year and Sec. 1231 assets, but only to the extent that the depreciation recapture rules require ordinary income recognition. An increased deduction is available under Sec. 170(e)(3) for contributions of inventory and depreciable property to a public charity for the care of the ill, the needy or infants. Sec. 170(e)(3) does not, however, change the reduction in FMV due to the depreciation recapture rules.

While the Sec. 170(e)(1) limitation reduces the charitable deduction for depreciated property, there are still benefits to be...