Limits on individuals' charitable deductions.

• Author: Swift, Kent
• Position: Part 1

This two-part article outlines the deduction limits on individuals' charitable contributions and provides basic planning strategies for maximizing the deduction. Part I focuses on the adjusted gross income percentage limits and other restrictions, which vary according to the classification of the donee organization and the donated property.

In Todd, (1) the Tax Court denied a taxpayer's charitable deduction for the fair market value (FMV) of securities he contributed to a private foundation. Because the taxpayer had failed to satisfy two separate Sec. 170 requirements, his $553,847 deduction was disallowed; a deduction was not even allowable for the contributed stock's cost basis. This case illustrates the significant effect that these restrictions can have on an individual's deduction and taxable income.

This two-part article describes the limits on an individual's charitable deductions and provides examples and basic planning strategies. Part I, below, focuses primarily on the adjusted gross income (AGI) percentage limits, which vary based on the classification of the donee organization and the type and character of the donated property. Part II, in the June 2004 issue, will summarize other rules, including planned-giving techniques, contributions of donated services, quid pro quo contributions and ordering rules for individuals with contributions subject to multiple limits. The articles should assist tax advisers in making sense of the charitable deduction limits and provide a framework for analyzing restrictions in specific situations.

Organization Classification

To be eligible to receive deductible gifts, a recipient organization must be described in Sec. 170(c);see Exhibit 1 on p. 298. Some of these organizations are categorized as 30% organizations and others as 50% organizations. Under Sec. 170(h)(1)(A), an individual's total, deduction for cash contributions to 50% organizations is limited to 50% of the donor's AGI. Likewise, 30% organizations are entities for which the deduction of cash donations is limited to 30% of AGI under Sec. 170(b)(1)(B). (2)

The most widely recognized charitable organizations are Sec. 501(c)(3) charitable organizations; (3) see Exhibit 1. However, other exempt organizations qualify to receive deductible charitable donations, including Federal, state and local government entities, which are all 50% organizations. The only restriction in Sec. 170(c)(1) on contributions to governmental entities is that they must be made exclusively for public purposes.

Example 1: E gives $50,000 to the parks department of the county where she lives for development of park space. Because the department is a 50% organization, her contribution deduction is limited to 50% of her AGI in the gift year. E call carry forward unused contributions up to five years.

Thirty-percent organizations include war veterans' groups (generally, Sec. 501(c)(19) organizations) and nonprofit cemetery companies owned and operated exclusively for their members' benefit (generally, Sec. 502(c)(13) organizations). Indi-vidual contributions to fraternal lodges (generally, Sec. 501(c)(8) or (c)(10) organizations) may also qualify for a 30% charitable deduction. To be deductible, the gift must be used exclusively for religious, charitable, scientific or educational purposes, or for the prevention of cruelty to children or animals.

Example 2: J belongs to the local chapter of the Loyal Order of the Moose. He donates $5,000 to the organization's college scholarship fund. The scholarships are awarded annually to outstanding local high school students who have been accepted into a college or university. Such contributions are limited to 30% of J's AGI by Sec. 170(b)(1)(B).

Public Charities vs. Private Foundations

Sec. 501(c)(3) separates charitable organizations into two broad categories--public charities and private foundations. The primary difference is that public charities receive their support from a wide variety of individuals and organizations. Such organizations include national public charities (e.g., the American Cancer Society, Easter Seal Foundation and The Nature Conservancy), and local charities (e.g., churches, museums, hospitals and schools). Private foundations (such as the Ford Foundation, Turner Foundation and the Bill and Melinda Gates Foundation) typically receive most of their support from a few sources. The distinction is important, because the deductions allowed for donations to certain private foundations are more limited than those for other Sec. 501(c)(3) organizations. In addition, private foundations can be subject to a variety of penalty taxes.

Public charities are 50% organizations. There are three categories: traditional charities, fee for service charities and support organizations. Charitable organizations not qualifying in one of these categories are private foundations. Exhibit 2 on p. 301 provides a list of the various types of public charities.

Operating vs. Nonoperating Foundations

Private...