Date: Thu, 26 Oct 2006 11:11:05 -0700
From: Frank Carothers (UC-Berkeley) <fcarothe_at_library.berkeley.edu>
Subject: The effect of recent federal legislation on gifts-in-kind
[ *IMPORTANT NOTE: Please see updated posting sent on 2/5/07
regarding this topic --Eric Lease Morgan and the ACQNET Editorial
Board]
Dear Colleagues,
As many of you are probably aware, important changes in the regulations
governing gifts-in-kind
were approved by Congress in August 2006. The changes promise to have a
fairly serious impact
on library gift programs. Early this week, after consultation with
attorneys at Berkeley's Office of
Planned Giving, I completed a report for my administration, outlining
changes in the regulations and
suggesting some responses. A slightly modified form of the report
follows below. I am very
interested in hearing how you are adjusting your program to the new
rules governing gifts-in-kind,
and would welcome comments on the response I've outlined for Berkeley.
With best regards,
Frank
Frank Carothers
UC Berkeley Library
Amendments to federal tax code passed in Congress this August in section
1215 of the Pension Protection Act of 2006 (PPA'06)
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h4enr.txt.pdf
<http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:h4enr.txt.pdf>
will impose significant changes to policy and practice regarding
acceptance and processing of large gifts-in-kind (i.e., those gifts of
books and journals with an appraised value of more than $5000, or
smaller gifts that are part of a series of gifts of books and journals
made by a single donor in a single tax year and having an aggregate
value of more than $5000). What follows here is my effort to evaluate
the ramifications of the amendments, and some preliminary conclusions
and recommendations. Relevant sections of Title 26 (Internal Revenue
Service)
http://uscode.house.gov/pdf/2004/2004usc26.pdf
are pages 593-594, 596, and 2745.
As you know, gifts are normally deductible at their full fair market
value unless put to "unrelated use" by the donee organization (26 CFR
1.170A-1(c)(1)). "Unrelated use" is defined as use in a manner that is
"unrelated to the purpose or function constituting the basis of the
charitable organization's exemption under section 501." (26 CFR
1.170A-4(b)(3)). Sale, exchange, or other disposal is an unrelated
use. The amendments pose a major administrative problem for library
gift programs because they introduce a new requirement for the
comprehensive recording and reporting of those parts of large gifts put
to unrelated use. They also represent something of a public relations
problem because they will inevitably reduce the amount of the donor's
allowable tax deduction for those gifts.
Briefly, the Act amends sections 170(e) and 6050L(a) of the tax code to:
1. Reduce donors' deduction to their basis in the gifted property
(or, per 26 CFR 1.170A-1(c)(1), to the fair market value of the
gifted property if that is less than the donor's basis),
1. "if the use by the donee is unrelated to the purpose or
function constituting the basis for its exemption under
section 501" (26 USC 170(e)(1)(B)(i)(I), as amended by the
PPA'06);
2. or, in the case of "applicable property" (where "applicable
property" refers, by definition (26 USC 170(e)(7)(C)), to
large gifts, as described above), for items that are "sold,
exchanged, or otherwise disposed of by the donee before the
last day of the taxable year... " (26 USC
170(e)(1)(B)(i)(II), as amended by the PPA'06);
3. or, in the case of applicable property, for items that are
disposed of by "sale, exchange, or other disposition by the
donee ... after the last day of the taxable year of the
donor in which such property was contributed, and ... before
the last day of the 3-year period beginning on the date of
the contribution of such property... (26 USC 170(e)(7)(B) -
26 USC 170(e)(7)(B)(ii), as amended by the PPA'06);
2. require that if "the donee of any charitable deduction property
sells, exchanges, or otherwise disposes of such property within 3
years after its receipt, the donee shall make a return showing ...
a description of the donee's use of the property, ... and a
statement indicating whether the use of the property was related
to the purpose or function constituting the basis for the donee's
exemption under section 501." (26 USC 6050L(a)(1), 26 USC
6050L(a)(1)(F) - 26 USC 6050L(a)(1)(G), as amended by the PPA'06)
(where "charitable deduction property" refers, by definition (26
USC 6050L(a)(2)(A)), to large gifts, as described above); and
3. stipulate that "any person who identifies applicable property ...
as having a use which is related to a purpose or function
constituting the basis for the donee's exemption under section 501
and who knows that such property is not intended for such a use
shall pay a penalty of $10,000." (26 USC 6720B, as amended by the
PPA'06).
The majority of gifts-in-kind made to most libraries are valued for tax
purposes at less than $5000. The amendments will not affect these.
Though the principle of "unrelated use" obtains in respect to the
deductibility of these gifts (as does that of "reasonable expectation,"
which I won't address here), they are exempt from the donee reporting
requirement per 26 USC 6050L(a)(2)(A), which explicitly applies the
requirement to large gifts only. It is neither necessary nor desirable
to change procedures regarding gifts valued for tax purposes at less
than $5000, assuming those procedures are in compliance with existing law.
However, the amendments will have a significant impact both on libraries
and on donors in the case of large gifts. Not only do they extend the
time limit for reporting the sale or other disposal of these gifts, but
they also broaden the reporting requirement to include each item of
which these gifts are composed. Prior to passage of the PPA'06,
regulations required only that sale or disposal of those parts of a
large gift individually appraised at $500 or more be reported on Form
8282 if the sale or disposal occurred within two years of the date of
the gift. The new regulations require that a donee organization report
sale or disposal of any part of a large gift if sale or disposal occurs
within three years of the date of the gift. The regulations do allow,
as an alternative to that report, a statement of the intended use of the
gift and a certification that the intended use has become impossible to
implement, but I do not believe that this will often apply, at least to
gifts accepted for the Main and Subject Specialty Libraries at UC
Berkeley. They further tacitly permit storage of large gifts for three
years, though in most cases whether storage of books for three years,
uncataloged and unavailable for public use, constitutes a related use
seems doubtful to me; and may, in fact, be construed as collusion with
donors to secure a higher tax deduction.
Finally, the amended regulations stipulate that any person who knowingly
misrepresents the use to which a large gift is put (for example, by
failing to report sale or other disposal of any part of such a gift) is
subject to a penalty of $10,000 (26 USC 6720B).
The effective date for most of these provisions is August 17, 2006.
I do not believe that these amendments impose changes on library policy
and procedure for acceptance, review, and disposal of gifts valued at
less than $5000. They will, however, have a significant impact on large
gifts made to libraries. We are faced with a record-keeping requirement
that we cannot possibly meet, and the prospect of reducing the
deductions claimed by our donors. For the Main and Subject Specialty
Libraries at Berkeley I have suggested the following steps:
* update the section on "Appraisals and income tax deductions" at
the Gifts webpage ( http://www.lib.berkeley.edu/Gifts/gifts.html)
with a statement to the effect that "Not all books given to the
Library can be added to University collections and thus be put to
"related use" as required in the federal tax code as a
precondition to allowance of a tax deduction for the full fair
market value of the gift volume. An inventory of those books from
your gift that are added to the Library's holdings will normally
be available through the Library's catalog (Pathfinder) within six
months of the date of your gift [see item 3, below], and will be
retrievable by a search for (donor's name) in the "association
file" on the Advanced Search page . While the Library will add to
its collections as many volumes from your gift as possible, it is
unable to provide the kind of documentation now required to
support claims of tax deduction exceeding $5000 under sections
170(e)(1)(B)(i)(I) - 170(e)(1)(B)(i)(II) and 170(e)(7)(A) -
170(e)(7)(D) of the federal tax code [supply link?]. Donors are
advised to seek the advice of a tax consultant before claiming a
deduction for their gift on their federal tax return;"
* supply this statement with our letter of acknowledgement for all
gifts for which the Library's use is not explicitly stated
(normally, all but very small gifts);
* with donor approval, insert an association note into the
GLADIS/Pathfinder record for every gift volume added to the
Library's collections. That will, at the least, give the Library
(and our donors) a list of items added to our holdings;
* discuss the new tax regulations in every conversation with
potential donors before accepting gifts;
* when appropriate, encourage donors to limit their claim to less
than $5000;
* make no adjustment to our procedure for gifts valued at less than
$5000;
* prohibit, except with approval of the AUL & Director of
Collections, long-term storage of large gifts;
* when necessary, decline gifts valued at more than $5000 rather
than engage in burdensome reporting.
Special cases will, naturally, warrant special action.
These steps may reduce the number of large gifts-in-kind made to the
Library, as donors may prefer to make their gifts to organizations that
can add a greater percentage of the items given or can promise fuller
record-keeping, or that simply avoid mention or are unaware of the new
reporting regulations. They will also add a step to the cataloging of
gift books, though I hope that addition of an association note will not
excessively complicate our catalogers' lives. They will, however, keep
the UC Berkeley Library in compliance with income tax regulations until
the next revision.
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Received on Sun Oct 29 2006 - 16:20:16 EST