IRS Retracts Rulings Allowing Harvard to Invest Charitable Lead Trusts in Its Endowment Pool, Ltr. Ruls. 200702036 (referring to Ltr. Rul. 200352019), 200702040 (referring to Ltr. Rul. 200352017), and 200702041(referring to Ltr. Rul. 200352018)
Harvard University, which has one of the largest endowments in the country, received October 2003 IRS letter rulings allowing it to invest the assets of charitable remainder trusts and charitable lead trusts for which it was both trustee and charitable beneficiary in its endowment pool. Since some of its endowment assets generated unrelated business income (UBI), the rulings approved a contractual investment arrangement allowing the trusts to receive an income equal to the endowment's payout rate that would be characterized as ordinary income to the trusts. (UBI would have caused the charitable remainder trusts to lose tax-exempt status and reduced the charitable lead trusts' charitable deductions in the year of receipt.) In these October 2006 rulings, the IRS retracted the portions of the 2003 rulings permitting charitable lead trusts to participate expressing concern that the arrangement may create inappropriate benefits for the lead trusts' non-charitable beneficiaries.
IRS Approves Two More Requests Allowing A Charity to Invest Its Charitable Remainder Trusts in Its Endowment Pool, Ltr. Ruls. 200703037, 200703038
In these rulings, a charity sought permission to invest assets of charitable remainder trust assets for which it was both trustee and remainder beneficiary in its endowment pool using the approach set out in the October 2003 Harvard rulings described above. The charity's objectives were to reduce trust management costs, achieve higher trust investment returns, and diversify the trusts' assets. To avoid passing on potential UBI to the remainder trusts, the charity proposed a contractual arrangement between the trusts and the endowment allowing the trust to receive periodic distributions equal to the endowment payout rate which would be treated by the trusts as ordinary income. In its original ruling requests the term "trusts" was defined to include both charitable remainder and charitable lead trusts. The rulings approved the arrangement for the charitable remainder trusts but refused to rule on charitable lead trusts citing the potential for inappropriate non-charitable benefit.
Stamoulis v. Commissioner, T.C. Summary Opinion 2007-38, U.S. Tax Court Docket No 18151-04S (March 8, 2007)
This Tax Court appeal provided insight into the extreme valuation ranges that may be attached to gifts of tangible personal property. In 2002, investment banker Christiana Stamoulis (an admitted "impulsive buyer") claimed charitable deductions of $55,764 on adjusted gross income of $114,819, the majority of which were attributable to gifts of little-worn designer clothes to high end thrift shops. The taxpayer substantiated the gifts by providing the detailed list of the items supplied by the charitable recipients annotated to provide full descriptions and gift values (which the taxpayer asserted were based on either actual value or straight line depreciation). The IRS denied the taxpayer's charitable deductions based primarily on lack of substantiation and assessed both a tax deficiency and an accuracy related penalty. On appeal, the court allowed the taxpayer a charitable deduction of $8,949 finding she had accurately listed the clothing donations to the charities but had overestimated the items' values. The court did not impose an accuracy related penalty; it noted the IRS had not met its burden of proof in establishing the donor acted negligently or with intentional disregard of the rules or regulations.