IRA Charitable Rollover - A Gold Mine with a Trap

IRA Charitable Rollover - A Gold Mine with a Trap

Article posted in Income Tax on 19 July 2018| 4 comments
audience: National Publication, Dennis Walsh, CPA | last updated: 20 July 2018
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Summary

IRA charitable rollovers are now a permanent part of the tax law. There is at least one little known caveat that you must be aware of in order to protect your clients and donors from adverse consequences.

 
 

By Dennis Walsh, CPA

The IRA charitable rollover, authorized by IRC Section 408(d)(8), has grown in popularity since being made a permanent part of federal income tax law.

This provision permits an owner of a traditional individual retirement account (IRA) who has reached age 70 ½ to make an annual contribution of up to $100,000 directly from the IRA to a qualified charity.

As a result of bypassing the donor’s tax return, this giving alternative may encourage larger charitable gifts as a result of not being subject to the annual percentage of adjusted gross income (AGI) limitations for charitable deductions, while also being applied to a donor’s required minimum distribution.  And because of certain exclusions and deductions sensitive to changes in AGI, it can result in added overall tax savings.  

But donors, charities, and their advisors need to beware of potential hazards.  As explained in the following Joint Committee on Taxation excerpt, if a donor receives any amount of personal benefit from the recipient charity in connection with such a rollover contribution, the entire amount of the exclusion will be disallowed.  This means that it is vital that a charitable rollover not be solicited or pledged in connection with a fundraising activity or methodology where goods, services, or other donor incentives are provided to donors at no charge, such as fundraising events that include meals, entertainment, and other amenities.

“The exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.” 1 (emphasis added)

Note also that a donor must have the same timely obtained written confirmation from the charity applicable to regular cash gifts.  An IRA trustee will not provide this on behalf of the charity in the case of a charitable rollover.

This confirmation must generally include a statement that either no goods or services were provided to the donor, or a description and good faith estimate of the value of any goods or services provided in connection with the gift.  See IRC Section 170(f)(8) and IRS Publication 1771 for complete requirements

While the Congressional Committee language is not included in the enabling Statute or in Regulations issued to date, as an expression of Congressional intent it will clearly come to the aid of the IRS in the event of litigation.

In contrast to a deduction for a traditional cash gift subject only to reduction by the value of a personal benefit received as part of a fundraising activity, any amount of personal benefit received in connection with an IRA charitable rollover will disallow the entire exclusion

If the IRS determines that a donor benefit of any amount is provided in connection with a charitable IRA rollover, then it has the authority to assess the gross IRA distribution as income, necessitating that the donor amend his or her income tax return to claim a charitable contribution deduction.  The IRS cannot automatically apply an offsetting charitable deduction since it does not know if the donor obtained adequate substantiation from the charity by the applicable date.  But that’s not the end of it.

Under these circumstances, presumably the charity will not have disclosed the estimated value of personal benefits provided as required under the quid pro quo reporting rule of Section 6115 since this would be fatal to the rollover exclusion as discussed. 

And since a donor must obtain the required written statement on or before the earlier of the date the return is originally filed or the due date of the return including extensions, the charity cannot provide a corrected receipt that includes the value of benefits after the fact in support of an amended return. These unfortunate circumstances would leave no opportunity for a donor to claim an offsetting charitable deduction on an amended return, exposing the entire IRA distribution to tax and interest.

Because the requirement for an affirmative statement regarding the presence or absence of donor benefits and related substantiation requirements are codified as absolute at IRC Section 170(f)(8)(C), Courts have been completely unforgiving in cases where the timeliness or completeness of written gift substantiation is at issue.

Even if the absence of a timely and correct written gift confirmation escapes IRS notice and the donor is successful with an amended return, however, the stress, cost, and embarrassment associated with such an outcome and resulting damage to donor goodwill must clearly be avoided

In summary, charitable organizations should avoid soliciting or accepting a charitable IRA rollover in connection with a fundraising effort where any amount of personal benefit is provided to a donor.  If there is doubt as to the presence of an applicable donor benefit, err on the side of caution.  And be sure charities are providing the required substantiation for IRA charitable rollovers in the same manner as for other cash gifts. 

(1)           

  • 1. General Explanation of Tax Legislation Enacted in the 113th Congress Prepared by the staff of the Joint Committee on Taxation March 2015

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Comments

Re: IRA Charitable Rollover - A Gold Mine with a Trap

Great article and advise. Do you have any idea how the IRS would view "naming rights" in making a gift via an IRA charitable rollover?

Re: IRA Charitable Rollover - A Gold Mine with a Trap

There are currently no statutes or Regulations applying a quid pro quo analysis to charitable naming rights. Exclusion of such rights in connection with a charitable gift from treatment as a personal benefit is well settled law, agreed with by both the courts and the IRS for decades. And I haven’t seen anything to date that suggests a reason for different treatment in the case of a gift remitted in the form of a QCD. Thanks for your thoughtful comment. Dennis.

Re: IRA Charitable Rollover - A Gold Mine with a Trap

Great reminder, Dennis. Do you have guidance on the use of a QCD to fulfill a pledge? I am aware that the Treasury and IRS are discussing the use of a DAF to fulfill a pledge as NOT resulting in more than incidental benefit. One might think that the logic would be similar, but I have not heard this aspect discussed.

Re: IRA Charitable Rollover - A Gold Mine with a Trap

I haven’t seen the discussion you referred to but I see no issue with the notion of pledging IRA assets as the source of a gift to a qualified organization whether remitted by the IRA trustee as a QCD or through initial distribution to the owner.

For the benefit of other readers as well, incidental personal benefits that may be disregarded, such exceptions along with examples are detailed in Reg. Sec. 1.6115-1 and Reg. Sec. 1.170A-13(f)(8), as well as IRS Pub. 1771. Thanks for your comment. Dennis.

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