IRS revises allocation rules for charitable contributions.

For a decade and a half, TEI has been urging the Treasury Department and Internal Revenue Service to revise the rules under section 861 relating to the allocation and apportionment of charitable contributions. The government recently announced plans to amend the regulations to provide a more workable solution.

The current Treasury Regulations--which have been in effect since 1977--provide that deductible charitable contributions will "generally" be considered as not definitely related to any gross income. Consequently, those deductions must be ratably apportioned among U.S. and foreign sources. In certain circumstances, a taxpayer could allocate the deduction to one or mare classes of income.

In 1989, the IRS issued a notice announcing its intent to eliminate the word "generally" from the regulations, thereby requiring a ratable apportionment of the deduction to all classes of income. Two years later, responding to policy and administrative concerns about the 1989 notice, the government issued proposed regulations setting forth special rules for the allocation of charitable contributions solely to U.S.-source income or to foreign-source income, based on where the funds would be used. The proposed regulations proved quite controversial, sparking an outpouring of concern from charitable groups that the proposal would dampen the climate for philanthropy and were inconsistent with the...