Selected items from the CARES Act

The CARES Act, signed into law by the President on March 28, makes a number of provisions that will be of interest to individuals and businesses. We will not try to describe them all, nor we will provide details on the direct monetary payments coming to families. Those have been well explained by others.

There is a new "above the line" deduction for up to $300 in charitable deductions that can be used by taxpayers who use the standard deduction. Some limits will apply.

The 60% of income limit on charitable contributions by those who itemized their deductions is waived for 2020. If you wish you can give away your entire salary.

Repayment on certain Federal student loans is suspended and no interest will accrue between now and September.

Employers may offer a new before-tax benefit to their employees: They may pay or allow the employee to defer up to $5,250 this year to repay student loans, and that money is not included in the employee's taxable income. This may be more popular than you would think because it would not cost the employer anything to offer this new benefit.

IRA owners have several new benefits.

• Required minimum distributions for 2020 are waived. The first-time RMDs for 2019 that have not yet been made are also waived. 
• Certain owners who are affected by the coronavirus have the option to withdraw up to $100,000 of IRA funds, without being subject to the 10% penalty that would apply if they are under age 59 1/2. As always, the funds that are taken out are taxable, but the tax will not be payable if the funds are repaid to the account within three years, and if they are not repaid the tax payments can be spread over three years. 

The $500,000 limit on net operating losses for businesses has been waived for 2020 and retroactively for 2018 and 2019 as well.

Raising money for those in need

If you are soliciting funds for the benefit of an individual (such as someone who has lost his home in a fire or has a serious illness and has incurred medical bills), you should be aware of when and how you may have to register and report your activities, and also be aware of some other rules that apply to fundraising activity.

In Michigan, the Charitable Organizations and Solicitations Act governs fundraising in general. It generally requires registration with the state to solicit contributions for a charitable purpose, but it makes an exception (MCL 400.273) for contributions intended for a particular individual if

• The person to benefit is identified by name when the contribution is requested;
• Only the actual and reasonable expenses for fundraising costs are deducted;
• No fundraiser is paid in any manner for his services; and
• The money is turned over to the person to benefit. 

If your activities meet these requirements, registration is not necessary. Be prepared to document compliance with the four requirements.

The money that is collected is not considered income to either the beneficiary or the fundraiser (assuming that it is turned over to the beneficiary). It is regarded as a gift from the original donor to the beneficiary, and gifts under $14,000 per year have no Federal tax-related requirements. The recipient does not have to report it as income, and the donor does not have to file a gift tax return. The contributions, however, are not tax-deductible by the donors. 

You may think of asking a church or another charitable organization make the request for contributions, since it is a tax-exempt organization. An organization that exists as a nonprofit corporation and is exempt from income tax under section 501-c-3 of the Internal Revenue Code, however, is not permitted to use any of its assets for the benefit of a particular individual. Mixing this kind of individual benefit donation with the charitable purposes of a church or nonprofit is not recommended, since that could jeopardize its own status as a qualified charitable organization.

Asking a church to use its premises for a benefit dinner or similar gathering is not problematic, so long as it is the organizer, and not the church, who receives the money and properly transmits it as required.

What about Federal requirements - reporting the collections to the IRS? Although charitable entities which qualify as 501-c-3 organizations are required to file informational returns with the IRS, even though they are not taxed on their receipts, the fact that donations to a fundraiser on behalf of a particular individual are legally characterized as gifts means that there is no obligation to file any return.

Importantly, those who are asked to contribute to such a fundraiser should be informed that their contributions are not eligible for any tax deduction.

Is this a worthy cause?

In Saturday's mail came a solicitation from the American Federation of Police and Concerned Citizens, a charity that seeks donations to assist the surviving spouses and children of police officers killed in the line of duty. It includes numerous references to the "MARQUETTE County Area" to make it appear that this is being sponsored or supported by local law enforcement.

When a solicitation like this comes in, how can you know whether it deserves a contribution? The question of whether it is "legitimate" is different. So long as it is organized as a 501-c-3 corporation and has filed the required forms each year, and so long as it does not divert its funds to private hands, a charity is "legal." But many legal charities are not deserving of consideration because they spend the majority of their funds on administrative and fundraising activities instead of the activities that define their missions.

Whenever this question arises, we recommend that you take a look at Charity Navigator, which calls itself "Your Guide to Intelligent Giving." The entry for the AFPCC tells us that it has a rating of 14 out of 70, very low. Its report on what is done with the money:

Program Expenses - 21.8%
Administrative Expenses - 6.0%
Fundraising Expenses - 72.1%

Thus, of every dollar contributed, 72 cents goes to efforts to collect more dollars, and only 22 cents goes to the group's activities. But, to be fair, 6% for administrative expenses is not bad at all.

A very interesting section is at the bottom of the page: links to the entries for "Charities Performing Similar Types of Work." Taking a look at a highly rated charity - the New York City Police Foundation, rated 64.31 out of 70 - we see the following breakdown:

Program Expenses - 86.7%
Administrative Expenses - 7.9%
Fundraising Expenses - 5.2%

So the NYCPF spends more than 86 cents of every dollar raised on its charitable activities.

Charity Navigator is one of several web sites that help to illuminate these issues. Others are:

• Start With Trust - by the Better Business Bureau
• GiveWell - "real change for your dollar"

Making sure the document is right

If you make a large charitable contribution, say a series of weekly checks to your church totaling more than $25,000 in a year, if the church sends you one or several letters acknowledging the gifts, and if you keep meticulous records, including copies of the cancelled checks, you are in the clear on taking a  deduction if the IRS chooses to audit you, right? You would think so.

As described by the Rehmann Group's BWD Express publication, a recent Tax Court case involving David and Veronica Durden upheld an IRS disallowance of the deduction. The problems:

• The church's January 2008 letter acknowledging the 2007 gifts did not include the required statement as to whether the taxpayer received anything of value in return for the gift. 
• After this deficiency was pointed out by the IRS, a letter sent by the church in 2009 including the required language was not considered because it was not sent "contemporaneously" with the gift. Under the regulations, the letter (with the required statements) needs to be sent by the date that the taxpayer files his return, or is required to file his return, to be considered contemporaneous. 

Rehmann notes that taxpayers cannot simply rely on their charitable beneficiaries to know what the documentation requirements are.

The Kochs and Cato

Charles and David Koch have sued the Cato Insitute and its president, Ed Crane in state court in Kansas, where Cato was organized, claiming violation of the non-profit's shareholder agreement. Prior to October 2011, there were four shareholders - the Koch brothers, Crane, and William Niskanen. Niskanen died in October 2011, leaving a great deal of uncertainty as to what will happen to his 25% interest.

Many non-profit corporations are organized and operated as non-shareholder entities. It is relatively unusual for a non-profit that has qualified as a 501(c)(3) entity to be owned by shareholders. Clearly the assets of the corporation cannot inure to the benefit of its shareholders, even if it is dissolved.

The value of the shares is not monetary. Their value lies in the ability of shareholders to nominate new members to the Board.

The shareholder agreement, which was first signed in 1977 and then updated in 1985, was attached as an exhibit to the Complaint. It was poorly drafted in several respects. Its essential provisons were:

• Each shareholder has 16 shares, with a value of $1 per share. (In 1977, there were five shareholders, each owning 12 shares.)
• Any shareholder who wishes to transfer his shares to any other person must first offer them to the corporation, which has a 30-day option to purchase them for the price paid for them - i.e., the $16.  
• The agreement does not say what happens if the corporation does not exercise the option. The conclusion would be that the shareholder is then free to transfer the shares to another person. 
• The complaint asserts that the remaining shareholders may exercise the option if the corporation does not do so. I do not see that in the agreement. 
• A majority of the shareholders may buy out a shareholder involuntarily. (Effectively, with four shareholders, all of the other three would have to agree to buy out the fourth.) 

The complaint alleges that Niskanen's wife has not tendered his shares to the corporation. But if she is the executor of his estate, she has a period of several months while the estate is being administered before having to make any distribution of property. So the lawsuit may well be premature. If the widow wants to distribute the shares to any beneficiary of the estate as successor, she would have to make the resale offer to Cato before she did so.

The wife, Kathryn Washburn, is herself a member of the Cato board, and would certainly want to move cautiously.

Since the lawsuit is essentially aimed at forcing the executor to comply with the agreement, it is likely that it should have been filed in the probate court in D.C. where the estate was presumably opened.  (The Last Will and Testament of Niskanen was attached as an exhibit to the complaint, which means an estate has been opened and the will has been filed.)

The will provides for a cash bequest to Niskanen's children, and then the residuary estate is to be divided among his wife, the Cato Institute, and the Institute for Justice. It does not mention or direct the disposition of the Cato shares. Thus, if the executor makes the offer and Cato does not act on it, the 16 shares could have to be divided equally, or as close to equally as possible, among those three recipients. Thus the Cato Institute itself would succeed to the ownership of five or six shares.

The shareholder agreement does not even mention the death of a shareholder, which was a major omission. It should have provided for automatic redemption of the shares on the death of a shareholder. Then there would be no need to wait for the executor to do anything, and no need for the corporation to make any decision.

This situation leaves Ed Crane and the board in a quandary. If the shares are in fact absorbed by the company, this would leave the Kochs as two of the three remaining shareholders, amplifying their ability to continue their current course of adding members of their choosing to Cato's Board of Directors. If the Board declines to repurchase the shares, then the executor would be free to sell or transfer the shares to a person of her choice, assuming that she could get approval of the probate court or consent of the residuary legatees - one of which is the Cato Institute itself - to do so.

Theoretically, as this situation replays itself - and it will, as the current shareholders age - the number of shareholders could shrink until only one person is left. The last one alive would then have full control of the board of the organization.

Obama's plan to limit charitable contributions

The recent "Jobs Bill" proposed by President Obama famously includes proposals to increase taxes on "the wealthy" - those earning over $1 million per year. Most news sources do not provide any more detail.

One proposal that it includes, one which Obama has pushed before, is to limit the deduction that may be taken for charitable contributions to 28%. Almost no news source mentions that this limitation would apply to those earning far less than $1 million. It would apply to individuals making over $200,000, couples making over $250,000. It would begin in the 2013 tax year.

As stated by Lisa Chiu in Obama's Job Bill Includes Plan to Limit Charitable Deductions for the Wealthy, The Chronicle of Philanthropy (September 12, 2011), the practical effect would be:

• A donor gives a public library a $1,000 gift.
• Under current law, the $1,000 is a deduction from taxable income
• The net effect is that he saves $350 on his taxes. The net cost of his gift is $650.
• Under the proposal, the savings would be limited to 28%, or $280. The net cost of his gift is $70 higher.

Charitable organizations, predictably, are opposed to this idea, because they are concerned that it will reduce the incentive to give.

A side note: We recently discussed the tax changes in Michigan with respect to the taxation of pension distributions. One other change made in Michigan, effective with the 2012 tax year, is the outright elimination of the credit for contributions made to several recipients, including public radio and TV stations and community food banks. If reduction of a deduction is considered likely to reduce contributions, the complete elimination of the tax credit will undoubtedly have a severe impact on those recipients.