The Tax Law of Charitable Giving. Bruce R. Hopkins

in 50 years, discounted semiannually using a 14 percent annual interest rate). The company was obligated to maintain a sinking fund sufficient to retire the bond at full maturity; it had the option to retire the bond at a discount after July 1986. The president of the company personally arranged for contributions to the school to cover the purchase price of the bond.

The company is on the accrual basis of accounting. The total interest that is to accrue over the term of the bond (the original-issue discount) is $19,976,934. One-fiftieth of the total discount is $399,539. That amount is what the company annually transferred to the sinking fund and deducted as interest accrued on indebtedness.⁹⁸ The mechanics of this transaction were dynamic. The accrued interest would have been taxable to a commercial taxpayer; the college, however, being tax-exempt, was excused from this tax liability. In 2031, it will receive $20 million for a 1981 outlay of $23,066. The company could have retired the bond as early as August 1, 1986; the retirement payment would have been $45,377, with the company enjoying about $2 million in tax deductions. (Even if the IRS recaptured a tax deficiency attributable to the company's deductions for interest accrued but not paid, the company would have had the use of that money to invest in the meantime.) The IRS asserted, however, and a court agreed, that the transaction lacked a business purpose other than tax avoidance, and disallowed the deductions.⁹⁹ The court concluded that the bond was a legitimate indebtedness for tax purposes and that the transaction had some economic substance for the company. The court made an evaluation of the company's motive for the transaction and found that it was (other than tax benefits) a means to provide the college with an investment that would substantially enhance its endowment. The court wrote that this motive, “while admirable, is wholly unlike the economically self-interested purpose that taxpayers must demonstrate.”¹⁰⁰

Thus, in the absence of any other economic, commercial, or business purpose for the bond transaction, the court found that it lacked the requisite independent business purpose and disregarded the debt form of the transaction for tax purposes. Did the company contribute the $19,976,934 to the college? The answer is no, because no payments have yet been made to the institution (even accrual-basis donors must actually make payments on a timely basis).¹⁰¹ Thus, the issue is one of timing, with the bond documentation reflecting a pledge. It would seem that, once made, any payments to the school would be deductible as a charitable gift (assuming all other requirements were met). After all, the court found that the company's motive underlying the transaction was not a business purpose, but was one of substantial economic disinterest.

When the charitable organization involved is a private foundation,¹⁰² the matter of a charitable pledge can be more complicated if the pledger is a disqualified person¹⁰³ with respect to the foundation. The principal difficulty is with the rules concerning self-dealing.¹⁰⁴ The making of a pledge by a disqualified person to a private foundation, in and of itself, is not an act of self-dealing.¹⁰⁵ Likewise, the making of a pledge that, when it ripens into a contribution, requires a facility or organization to be named after the disqualified person is not an act of self-dealing, because the benefit to the disqualified person is incidental and tenuous.¹⁰⁶ Under some circumstances, however, the satisfaction of a pledge by a disqualified person to a private foundation can be self-dealing. In one instance, for example, a private foundation paid the dues of a disqualified person to a church, thereby enabling him to maintain his membership in and otherwise participate in the religious activities of the congregation. The dues payment was ruled to constitute self-dealing, with the IRS concluding that the private foundation's payment of the dues “result[ed] in a direct economic benefit to the disqualified person because that person would have been expected to pay the membership dues had they not been paid by the foundation.”¹⁰⁷

NOTES

      1 1 See ch. 5.

      2 2 See Part Three.

      3 3 E.g., § 7.28 (concerning transactions in virtual currency).

      4 4 See § 19.2.

      5 5 Reg. § 1.170A-1(c)(1).

      6 6 See § 23.1.

      7 7 See § 3.4.

      8 8 Reg. § 1.170A-1(c)(1).

      9 9 As one court stated, “[d]onating appreciated property to a charity allows the taxpayer to avoid paying tax that would arise if the taxpayer instead sold the property and donated the cash proceeds” (Dickinson v. Commissioner, T.C. Memo. 2020-128 (2020)). Likewise, White v. Brodrick, 104 F. Supp. 213 (D. Kan. 1952); Campbell v. Prothro, 209 F.2d 331 (5th Cir. 1954); Rev. Rul. 55-531, 1955-2 C.B. 520; Rev. Rul. 55-275, 1955-1 C.B. 295; Rev. Rul. 55-138, 1955-1 C.B. 223, modified by Rev. Rul. 68-69, 1968-1 C.B. 80.

      10 10 The most common example of this is the rule in connection with bargain sales (see § 7.18). Another instance is gifts of property subject to debt (see § 7.19).

      11 11 See § 2.2.

      12 12 See § 2.5.

      13 13 See § 23.1.

      14 14 See ch. 5.

      15 15 See ch. 19.

      16 16 Reg. § 1.170A-1(c)(1). Long-term capital gain is defined as gain from the disposition of capital assets held for more than one year (IRC § 1223(3)).As one court stated (somewhat more expansively than is actually the law): “Congress, in an effort to encourage contributions to charitable organizations, has seen fit to permit a donor to deduct the full value of any gift of appreciated property without reporting as income from an exchange the appreciation in the value of the property which is thereby transferred” (Sheppard v. United States, 361 F.2d 972, 977-78 (Ct. Cl. 1966)). A federal court of appeals stated that the “fair market value standard is as close to a generalized valuation standard as there is in the tax code” (Schwab v. Commissioner, 715 F.3d 1169, 1179 (9th Cir. 2013)). The U.S. Tax Court declared that the “concept of fair market value has always been part of the warp and woof of our income, estate, and gift tax laws, and . . . [thus] the necessity of determining