The Tax Law of Charitable Giving. Bruce R. Hopkins

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       In the case of charitable and veterans' organizations, contributions to which are deductible for federal income tax purposes,⁵⁵⁹ activities relating to the distribution of low-cost articles if the distribution of the articles is incidental to the solicitation of charitable contributions.⁵⁶⁰

       In the case of charitable and veterans' organizations, contributions to which are deductible for federal income tax purposes, any trade or business consisting of (1) exchanging, with another of these organizations, names and addresses of donors to or members of the organization or (2) renting the names and addresses to another of these organizations.⁵⁶¹

(g) Exempted Income

Certain types of income are exempt from the unrelated business income tax.⁵⁶²

Because the unrelated business income rules apply to active business conducted by tax-exempt organizations, most types of passive income are exempt from taxation. This exemption, euphemistically embraced by the concept of modifications, generally covers income such as dividends, interest, payments with respect to securities loans, annuities, royalties, most rents, capital gains, and gains on the lapse or termination of options written by the organization.⁵⁶³

The unrelated debt-financed income rules, however, override the general exception for passive income.⁵⁶⁴ Also, interest, annuities, royalties, and rents derived from a controlled corporation may be taxable.⁵⁶⁵ It should be noted that there are three exceptions pertaining to research income.⁵⁶⁶ A specific deduction of $1,000 is available for any type of unrelated business income.⁵⁶⁷

(h) Bucketing Rule

In an instance of a tax-exempt organization with two or more unrelated businesses, unrelated business taxable income must first be computed separately with respect to each business.⁵⁶⁸ The organization's unrelated business taxable income for a year is the sum of the amounts (not less than zero) computed for each separate unrelated business, less the specific deduction.⁵⁶⁹ A net operating loss deduction⁵⁷⁰ is allowed only with respect to a business from which the loss arose.

The result of this body of law is that a deduction from one unrelated business for a tax year may not be used by a tax-exempt organization to offset income from another unrelated business for the same tax year. This law generally does not, however, prevent an exempt organization from using a deduction from one tax year to offset income from the same unrelated business in another tax year, where appropriate.

      Statutory law does not provide criteria for determining whether a tax-exempt organization has more than one unrelated business or how to identify separate unrelated businesses for purposes of calculating unrelated business taxable income.

§ 2.6 FACTORS AFFECTING INCOME TAX DEDUCTIBILITY OF CHARITABLE GIFTS

      Several factors affect the deductibility of charitable gifts:

       The transaction must be a gift.⁵⁷¹

       The person claiming a charitable deduction for the gift must actually be the donor.⁵⁷²

       The recipient of the gift must be a charitable organization.⁵⁷³

       The nature of the donor.⁵⁷⁴

       The charitable organization must accept the money or other property that was the subject of the ostensible gift.⁵⁷⁵

       When the donor is an individual, whether the donor itemizes deductions.⁵⁷⁶

       The year of the gift.

       The subject of the gift, whether money or property.

       If the gift is of property, the nature of the property that is contributed, such as:Long-term capital gain property.Short-term capital gain property.Ordinary income property.Inventory.

       If the gift is of property, whether the donor legally owns it.⁵⁷⁷

       If the gift is of property, the value of the property contributed.⁵⁷⁸

       The public charity/private foundation status of the charitable recipient.⁵⁷⁹

       The nature of the recipient if it is an organization other than a public charitable organization or a private foundation.

       The use to which the contributed property is put, such as unrelated use of tangible personal property⁵⁸⁰ or specific charitable uses (for example, there are rules concerning gifts of inventory).⁵⁸¹

       The nature of the interest in the money or property contributed; that is, whether the gift is of an outright interest or a partial interest.⁵⁸²

       Whether a business expense deduction has been allowed for the property that is the subject of the gift.⁵⁸³

       Compliance with the recordkeeping, reporting, substantiation, and appraisal laws.⁵⁸⁴

       Adherence to the charitable organizations listing reliance rules.⁵⁸⁵

Each charitable contribution can be tested against these criteria to determine its deductibility for federal income tax purposes.⁵⁸⁶

§ 2.7 CHARITABLE ORGANIZATIONS LISTING RELIANCE RULES

For a contribution to be tax-deductible, the recipient of it must be a charitable organization⁵⁸⁷ and so qualify at the time of the gift. Thus, it is the responsibility of an organization receiving contributions (and grants)