Galloway Estate Loses Charitable Deduction Appeal for Charitable Trust Arrangement, Edmond C. Galloway v. United States, No 06-3007 (June 21, 2007)
The Galloway case, profiled in the Summer 2006 issue of this newsletter, involved a testamentary gift from the decedent's revocable trust. The trust terms directed a division of the trust's assets into four shares at Mr. Galloway's death, two of which were to be held for charity. The document directed a distribution of one half of each charitable trust share in 2006 and the remainder in 2016. The executor took an estate tax charitable deduction for the two charitable trusts. On audit, the IRS denied the deduction asserting the trust arrangements did not meet the split interest trust requirements under IRC §2055(e)(2). The District Court affirmed the denial in May 2006, and in this opinion, the Third Circuit Court of Appeals agreed stating the language of IRC §2055(e)(2) was clear and unambiguous.
Charity Loses Tax-Exempt Status for Active Participation in Political Campaign, Ltr. Rul. 200724033 (June 15, 2007)
In this cautionary tale for charities with political agendas, the IRS revoked the status of a charity that was actively involved in a political campaign for attorney general in which abortion was a key campaign issue. The charity's activities included the purchase of a newspaper ad opposing the pro-abortion candidate, two 4,000-piece mailings soliciting funds to oppose the pro-abortion candidate, e-mails to its donor base asking for support of the anti-abortion candidate, and signs opposing the pro-abortion candidate on its trucks. In revoking the organization's exempt status, the IRS cited IRC §501(c)(3), which describes an exempt organization as one "which does not participate or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."
IRS Provides Guidance on Political Campaign Activity for Charitable Organizations, Rev. Rul. 2007-41; 2007-25 IRB 1421 (June 18, 2007)
Increased nonprofit activity in the political arena prompted the Internal Revenue Service to issue Revenue Ruling 2007-41 to tutor charities on permitted and prohibited political activities under IRC §501(c)(3). The ruling defines "participation or intervention" in a political campaign within the context of the statute and uses 21 fact situations to provide guidance on topics such as voter education, registration, get out the vote drives, personal staff support of candidates, candidate appearances, issue advocacy (vs. political campaign intervention), and business activity.
Failure To Substantiate With A Twist: Taxpayer as Charity Founder and Contributor, Bonnie L. Duncan v. Commissioner, T.C. Sum. Op. 2007-89, No. 7114-065 (May 31, 2007)
This case is another reminder that gift substantiation is essential to the charitable deduction and can be easily overlooked when the taxpayer is both the charitable entity manager and the donor. In this case, the taxpayer founded a charitable entity (the All Creatures Animal Sanctuary and Fellowship Church, hereinafter "All Creatures") and was its primary contributor. During the initial years of operation the taxpayer claimed charitable deductions for both her mortgage interest (she had mortgaged her home to pay start up expenses) and personal contributions for operating expenses. The IRS denied the deductions because the taxpayer failed to keep appropriate records and failed to properly substantiate the gifts. In this appeal to the U. S. Tax Court, the Court agreed, denying the deduction. Note to planners: Another common situation in which substantiation may be overlooked is when the donor is both the manager/trustee of a private foundation and its contributor. Remind clients of this duty when creating new foundations or similar exempt entities.