|
Wednesday, May 1, 2024
 |
Case Studies |
Not All Tax-Exempt Organizations Are Treated Equally [Under the Code], Part 2 - New Dog Park Unleashes Little Deduction
|
Case:
Pet Care is a private foundation (PF) whose primary purpose is the prevention of cruelty to animals. Pet Care was organized in 1980 and is exempt from federal income taxes under Sec. 501(c)(3) of the Code. Pet Care receives most of its financial support from its founders; however, it does do some public fundraising. Specifically, Pet Care raises awareness during local social functions by setting up booths and displays. The booths and displays educate and motivate citizens to support Pet Care.
John Hopper is the founder of Pet Care. Originally, he contributed $10 million approximately twenty years ago to create Pet Care. John now wants to contribute some investment land to Pet Care. He hopes to create a giant dog park for the unwanted and abused dogs in Pet Care's possession. John's twenty acres of land is perfect for such a use, since it is mainly open lands in a very sparsely populated area.
John inherited the land from his mother over thirty years ago. As a result, John received a stepped-up basis in the land. However, the fair market value at that time was only $30,000. The land is now worth $300,000.
Question:
What are the tax consequences of making a gift of land to a private foundation? How is a gift of land to a private foundation different from a gift of land to a public charity?
Solution:
Generally, the gift limit for cash gifts to public charities is 60% of the donor's adjusted gross income (AGI). In the year 2020 under the CARES Act, cash gifts to public charities are deductible up to 100% of the donor's adjusted gross income. A gift of cash may be transferred and deducted in that year. If the donor gives more than the AGI limit, the excess is carried forward and may be deducted over the next five years. Additionally, gifts of appreciated property to public charities are subject to a 30% AGI limit.
However, as stated earlier, Pet Care is a private foundation. Consequently, Pet Care does not fall within the favorable AGI limitations. As such, cash gifts to Pet Care will be subject to a 30% AGI limit and appreciated property gifts will be subject to a 20% AGI limit.
In addition to the lowered AGI limitations, many gifts of appreciated property to private foundations are subject to the reduction rules under Sec. 170(e). In general, a gift of appreciated property or land to a private foundation generates a deduction equal to the land's cost basis only. (There is a limited exception for publicly traded securities.) As a result, John is allowed only a $30,000 deduction for his gift of land. In contrast, if John gave the land to a public charity, he would receive a $300,000 deduction.
Nevertheless, John elects to make the gift, because the charitable deduction was not a driving issue for him. In fact, he has excess carryovers from prior year gifts. Thus, John transfers the land to Pet Care. Soon thereafter, Pet Care starts putting the land to good use as a dog park, which thrills John immensely. John's life is full of purpose and achievement and Pet Care's continued growth and care for animals clearly evidence that purpose and achievement.
|
|
|
|
