Does Permanently Restricted Mean ForEVER-Ever? L.A. Judge Thinks So

The Los Angeles Times is reporting that a Superior Court judge has blocked the sale of property given to UCLA under a 1964 agreement that stipulated the university would maintain the garden in perpetuity. In November 2011, UCLA put the property up for bid with a starting price of $9mil for the residence and $5.7mil for the Japanese garden on the property located in Bel-Air.

The university has been dealing with steep budget cuts and determined that the resources would be better directed towards their academic programs. Judge Lisa Hart Cole agreed with the donor’s heirs when they filed to block the sale and she noted that failing to notify the heirs of the university’s intent was “duplicitous”.

UCLA is considering its legal options and considers the judge’s ruling to be a “setback”.

Source: Los Angeles Times

Lack of Proper Appraisal Results in $18.5mil Charitable Deduction Denied

The Tax Court recently denied a taxpayer’s large charitable contribution deduction for donated real estate valued at $18.5 Million.  The Court denied the deduction because the taxpayer did not have the proper substantiation of the value under the tax code rules. The Court acknowledged the taxpayer did make the donation and also stated that the property’s value was probably greater than the amount the taxpayer was claiming.  (TC Memo 2012-152)

In order to take charitable deductions of more than $5,000 worth of noncash property, there are very strict substantiation rules that must be followed.  Among the rules is the requirement for the taxpayer to obtain a qualified appraisal for any noncash single item or grouping of items donated and valued by the taxpayer at over $5,000.

If you are a nonprofit 501(c)(3) receiving noncash donations, or a taxpayer who wishes to donate such items and take the charitable deduction applicable, we strongly advise you talk to your nonprofit tax specialist early in the process to make sure the taxpayer meets all the substantiation requirements so the desired tax deduction can be taken.

Giving Trends & Expectations Report

The Philanthropy Journal has released its special report on Corporate and Foundation Giving for 2011 which examines trends and expectations, along with providing information about what corporates, foundations, and nonprofits need from each other now.

After the economy collapsed in 2008, foundations and corporations seriously cut back on their funding of nonprofits. Many of the plans put in place after the fall-out have become an ongoing business strategy even after some bounces towards recovery. The fact that I’ve seen the word “austere” (defined as a rigorous economic approach of no luxuries or comfort) used more in the media over the last 24 hours than I have in years is just an indication of current attitudes.

So how to approach corporate and foundation grantors in this climate? The Philanthropy Journal’s study urges grantseekers to be clear, candid and work on building purposeful partnerships.

For more detail on their advice and the study findings, visit the Philanthropy Journal.

#giving #philanthropy #nonprofit #taxexempt #grantseeking

Restricted Revenue (avoiding management letter comments, part 2)

Recording restricted contributions can be a confusing topic, so it shows up often as a management letter comment.  Depending on the extent of the matter this could range from a significant deficiency to a material weakness. Below are some suggestions on how identify and record restricted contributions and avoid getting a management letter comment from your auditors.

First, what is a restricted contribution and what isn’t?

• When a pledge is received and will be paid in future year(s), it is temporarily restricted for time. If it is for a specific program it may also be purpose restricted. These would be recognized as temporarily restricted revenue in the year pledged.
• A contribution received in the current year that is intended for specific purposes is temporarily restricted. If it is for core or general operations, it is unrestricted.
• Payments received relating to future memberships or conference revenue are not temporarily restricted as they are not contributions. These would be deferred revenue.
• Payments received for contract services not yet rendered would be deferred revenue, not temporarily restricted.
• Advances on exchange transactions when the expenses have not yet been incurred, are deferred revenues.

An important concept to note is that you can’t defer a receivable and vice versa. Deferring is a way of not recognizing the revenue yet. You defer things received but not yet earned. A receivable is revenue you’ve earned and rightly recognized, but not yet received. A temporary restriction is to identify funds received and recognized as revenue, but not yet expended in accordance with donor intent. It’s easy to forget all of that in the face of a confusing revenue event. Continue reading »

“Temporarily Restricted” is a Binding Legal Concept (Garth Brooks v. Oklahoma Hospital)

As highlighted in Garth Brooks’s lawsuit against the Oklahoma hospital, a donor’s restrictions are a legally binding agreement.

On January 25, the jurors sided with Brooks’s in his claim that the Oklahoma hospital had not honored its agreement to use his donation to build a women’s center and name it after his mother as a way to honor her memory. The original donation was $500,000 and the jury awarded an additional $500,000 as punitive damages.

The agreement for the money’s use appears to have been largely verbal with Brooks testifying that he “thought he had a solid agreement” with the hospital’s president but later learned the hospital wanted to use his contribution for other construction projects. Since these projects were not part of the initial plan to honor his mother, Brooks sued for breach of contract. Whether or not potentially bankrupting a hospital in a lawsuit is really the best way to go about honoring one’s mother, is not for me to say.

The hospital argued that the donation was unrestricted and the request to have it directed towards a women’s center in his mother’s name only came after the fact.

It is important for organizations to remember that restrictions placed on donations are legally binding and can be verbal. This was a very expensive example of needing to get it in writing that it either was or was not restricted. You know what they say about assumptions…

(source: CBS news)

The Dirty Dozen – according to the IRS

The IRS has released its list of the Dirty Dozen Tax Scams to watch for when preparing and filing returns for 2011. “Illegal scams can lead to significant penalties and interest and possible criminal prosecution,” according to the IRS website. The list is published as a way of increasing public awareness and cautioning people to be on the look-out.

While identity theft and phishing top the listing, of particular interest are these two items:

• Abuse of Charitable Organizations and Deductions, and
• Misuse of Trusts

Intentional abuse of 501(c)(3) organizations includes: arrangements that improperly shield income or assets; attempts to maintain control over donated assets or the income from donated assets; over-valuing non-cash assets; arrangements to buy back the donated asset at a time and price set by the donor; and inaccurate appraisals.

Misuse of trusts include: questionable deductions of personal expenses, and promises of reduced income, estate, and/or gift tax.

IRS personnel have witnessed an increase in the abuse and misuse of these entities. Organizations should be aware of the possible motives behind some donor objectives and strive to not be complicit in such activities. Penalties and the damage to the organization’s reputation might not be worth whatever temporary benefit received.

See the full listing here.

Year End Fundraising Tips

As the year end approaches, nonprofit charities could remind potential donors that they can:

1.  Contribute certain appreciated capital assets, like stock, take a deduction for the fair market value, but not pay tax on the capital gain;  http://www.fool.com/taxes/2000/taxes000714.htm ;
2. Also certain taxpayers can benefit by making up to $100,000 tax-free IRA distribution gift directly to a charity.  The distribution is not deductible, but there is a benefit by not having to include the amount in taxable income, thereby lowering AGI.  This provision has been extended through 2011 only so far;  http://www.intervarsity.org/page/rollover-extension; 

These tax savings could be the incentive taxpayers need to donate to your worthy organization.  Charities should always remind potential donors to consult their tax advisor when giving tax information in fundraising appeals.

Pitfalls to Avoid When Starting a Planned Giving Program

Every organization makes mistakes starting new programs.  Most of these mistakes can be overcome but cost time and resources.  When starting a planned giving program these mistakes are often very public and could reduce a donors confidence in the organization.  However, learning from the mistakes of others can help ensure a strong foundation.  Lorri Greif in her article ” The Three Biggest Mistakes to Avoid When Starting a Planned Giving & Endowment Program” offers good suggestions.  The article is well worth the read.

Planned Giving

It has been estimated that Americans collectively give away more that $200 billion annually (Giving USA).   Many nonprofit organizations are establishing or refining a planned giving program to help donors effetely direct resources to their favorite charities.  Dean Regenovich in his article “Establishing A Planned Giving Program” developed the following list of items nonprofit organizations should consider in its planned giving policies and guidelines:

• Will the organization offer charitable gift annuities to its donors?
• Will the organization serve as trustee of charitable remainder trusts and charitable lead trusts? If not, is it the donor’s responsibility to secure a trustee?
• Will the organization administer charitable trusts or charitable gift annuities? If not, who will serve as the third-party administrator?
• What minimum amounts and other limitations should be established for each of the planned giving instruments? What is the minimum gift amount the organization is willing to accept for a charitable gift annuity? What is the minimum gift amount the organization is willing to accept for it to serve as the trustee of a charitable remainder trust? Are there minimum age requirements the donor must meet before the organization will enter into a charitable gift annuity contract? Are there maximum payout percentages the organization is willing to offer for charitable gift annuities and charitable remainder trusts?
• Who in the organization has the authority to accept gifts of appreciated property, particularly real estate and closely held stock? Is board approval required before such assets are accepted?
• Who in the organization is authorized to negotiate the terms of a planned giving instrument, such as a charitable gift annuity or charitable remainder trust, with a donor? Is board approval required before the document may be executed?
• Who in the organization has the authority to sign the planned giving document on behalf of the organization?

IRS Hunting for Omitted Gift Taxes

Smart Money is alerting readers that the IRS has a “sweeping effort under way” to search out unreported gifts of real estate. The agency is using land-transfer records for evidence of omitted filings. Any gift of over $13,000 within one year’s time should be reported to the IRS, with lifetime caps currently at $5 million. This includes non-cash gifts between family members. If you haven’t yet disclosed giving such a generous gift, Smart Money cautions “voluntary disclosure typically works out better than having the gap discovered in an IRS audit.”