• PLANNING FOR DONOR CONTROL AND OTHER STRINGS ATTACHED TO CHARITABLE CONTRIBUTIONS
  • October 14, 2004 | Author: Richard L. Fox
  • Law Firm: Dilworth Paxson LLP - Philadelphia Office
  • PLANNING FOR DONOR CONTROL AND OTHER STRINGS ATTACHED TO CHARITABLE CONTRIBUTIONS Donors often seek to impose conditions and restrictions on contributions to charity, or want to retain an interest in contributed property. Advisors should review whether doing so will reduce or eliminate the anticipated income tax benefits. Donors to charities increasingly do not want to simply make an unconditional gift of money or property, but instead desire to earmark it for a specified purpose and impose other terms and conditions on the contribution. [FN1] For example, a donor may wish to fund the construction of a building named after him or his family, name a scholarship or professorship, create an endowment fund to support a particular college within a university, support the work of a particular individual, or earmark contributed funds for a variety of other specified purposes. A donor may also seek to impose restrictions on property contributed to a charity, such as limiting the property to a particular use or prohibiting the sale of the property by the charity. In addition, a donor may not want to part with the entire interest in the property to be contributed, but may wish to retain some interest in that property. Conditions and restrictions imposed by a donor are generally embodied in gift agreements or other contractual arrangements between the donor and the charity, which may also provide the donor with certain continuing involvement in a project, require the charity to provide financial reports to the donor, and contain provisions requiring the return of the contribution or a change in its use if the charity is no longer in existence or its charitable purposes change. In determining whether to accept contributions subject to conditions and restrictions, a charity must consider whether it is ceding too much control to a donor and whether to ultimately reject a contribution if the charity is unable to reconcile the conditions and restrictions sought by the donor with its underlying mission, needs, and policies. [FN2] Furthermore, the granting of naming rights should be carefully scrutinized by the charity, [FN3] including determining those circumstances when the charity should retain 'un-naming' rights under the gift agreement. [FN4] Absent the retention of 'un-naming' rights, the removal of a donor's name may not be as simple as prying letters off a building's facade. Rather, based on the gift agreement, the donor may be in a position to assert that the name cannot be changed and, if it is, that the charity must return the contribution with respect to which the naming rights were granted. [FN5] Practitioners must consider whether a donor's imposition of restrictions or conditions on a charitable contribution, or his retention of an interest in the contributed property, will disqualify or reduce the donor's charitable income tax deduction. [FN6] In two recently issued rulings, the IRS addressed the income tax consequences of donor restrictions and conditions on charitable contributions, as well as the effect of the *442 donor's retaining an interest in the property being contributed. In Rev. Rul. 2003-28, [FN7] the deductibility of contributions of a patent to a university was considered in three separate factual situations. In the first situation, the donor contributed a license to use the patent, but retained the right to license the patent to others. In the second situation, the donor contributed the patent on the condition that a particular faculty member would continue to be on the faculty of the university during the remaining life of the patent and if the member ceased to be on the faculty, the patent would revert to the donor. In the third situation, the donor contributed the patent subject to a restriction that the university would not sell or license the patent for three years after the contribution. In Ltr. Rul. 200250029, the IRS addressed the income tax consequences of a contribution of funds to a charitable organization that fostered new music where the donor expressed an interest in supporting a specific composer's work and the donor's contribution ultimately did fund his work. This article explores the income tax issues raised in connection with donor control and other strings attached to gifts to charity, including those addressed in the recent IRS rulings, and provides relevant planning strategies. Transferring less than the donor's entire interest Section 170(f)(3)(A) denies a charitable income tax deduction for a contribution of less than the donor's entire interest in property, even though the contribution is effective under local law and otherwise constitutes a valuable right. [FN8] Thus, for example, the contribution to a charity of the rent-free use of a building [FN9] or a life estate or a remainder interest is not deductible because these interests represent less than the entire interest in the property. Similarly, if a donor contributes an interest in motion picture films, but retains the right to make reproductions of such films and exploit the reproductions commercially, no deduction is available because the donor has not contributed his entire interest. [FN10] In Rev. Rul. 2003-28, the IRS determined that the license granted to the university to use a patent, under which the taxpayer retained the right to license the patent to others, is similar to a rent-free lease and a partial interest in motion picture films, so that the contribution constitutes only a partial interest in the patent. Accordingly, the IRS disallowed the charitable deduction under Section 170(f)(3)(A). The Ruling indicates that the result would be the same if the donor had retained any other substantial right in the patent, *444 such as if the donor had contributed the patent (or a license to use the patent) solely for use in a particular geographic area while retaining the right to use the patent (or license) in other geographic areas. Nondeductibility for income tax purposes also results if a donor who owns both a painting and its copyright contributes only the painting to a museum, retaining the copyright interest. While a tangible work of art and its copyright are treated as separate property interests for purposes of the estate and gift tax charitable deductions, [FN11] no such rule applies for purposes of the income tax charitable deduction. Therefore, although a charitable gift tax deduction would be available, no charitable income tax deduction is available under Section 170(a) if the owner of both a painting and its copyright contributes the tangible work of art to a museum but retains the copyright. Even where the entire interest is contributed to charity, if the donor is also the creator of artwork, the available income tax deduction has limited value because the deduction may not exceed the tax basis of the contributed property. Under Section 170(e)(1)(A), the deduction based on fair market value (FMV) that is otherwise available for a contribution of appreciated property must be reduced by the amount of the appreciation if the property is not long-term capital gain property, such as artwork created by a donor. [FN12] Despite the disallowance rule of Section 170(f)(3)(A), the contribution of a partial interest in property by a donor is deductible for income tax purposes in the following situations: [FN13] 1. Retention of an insubstantial interest. If the donor retains only an insubstantial interest in the property contributed, an income tax deduction will be available. [FN14] A number of IRS rulings have considered this issue. In Rev. Rul. 75-66, [FN15] the IRS approved a charitable deduction when the donor contributed a parcel of land to the U.S. but retained the right to use the land to train his hunting dog. The IRS found that the retained right during the taxpayer's lifetime to train his personal hunting dog on the entire tract was not substantial enough to affect the deductibility of the property contributed. In Ltr. Rul. 8152072, the IRS ruled that a donor's retention of investment control over contributed funds, subject to certain limitations and restrictions, was 'not substantial enough to affect the deductibility of the property contributed.' In Ltr. Rul. 9303007, the IRS determined that the retention of certain display rights with respect to the contribution of artwork to a museum was 'not substantial in that they are largely fiduciary powers to be exercised in furtherance of the charitable purposes of the Donee.' Similarly, in Ltr. Ruls. 200223013 and 200223014, the IRS, again addressing the deductibility of contributions of art, concluded that retained approval rights with respect to gallery and installation design constituted 'insubstantial rights in the interests transferred.' [FN16] Any right retained by a donor must be carefully scrutinized to assure that it will not be considered substantial enough to cause the contribution to be treated as a nondeductible contribution of a partial interest. If a proposed contribution is significant, a private letter ruling should be obtained before the contribution is made, because the deduction otherwise available under Section 170(a) will be disallowed if the retained right is ultimately determined to be substantial. 2. Partial interest representing entire interest held. Section 170(f)(3)(A) does not apply to, and therefore does not disallow a deduction for, a contribution of an interest that--even though partial--represents the donor's entire *445 interest in the property. If, however, the property in which such partial interest exists was divided in order to create such a partial interest, and thus avoid Section 170(f)(3)(A), a deduction is not allowed. [FN17] For instance, if a donor owns only a life estate or a remainder interest in a parcel of real estate, a contribution of that interest would be deductible as long as that interest was not created in order to make the contribution. [FN18] An income tax deduction would also be available if the sole surviving noncharitable beneficiary of a charitable remainder trust contributes his entire unitrust or annuity interest to charity. [FN19] If a donor simultaneously contributes a life estate to one charity and a remainder interest to another charity, or contributes partial interests to several charities, which in the aggregate comprise the donor's entire interest, an income tax deduction will be available. 3. Fractional or percentage interest. Section 170(f)(3)(B)(ii) and Reg. 1.170A-7(b)(1) allow a deduction for a contribution of a partial interest that is less than the donor's entire interest in property if the partial interest is an undivided portion of the donor's entire interest, consisting of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and extending over the entire term of the donor's interest in such property. A deduction is allowable under this exception if the charity is given the right, as a tenant in common with the donor, to possession, dominion, and control of the property for the portion of each year appropriate to its interest in the property. Under this authority, a donor may transfer, for example, an undivided interest in artwork to a museum, thereby giving possession of the art to the museum for a predetermined period of time each year. [FN20] As a practical matter, contributing an undivided interest in artwork to a charity is generally limited to situations where the donor ultimately intends to contribute the remaining interest to the same charity. The often mentioned case of Winokur [FN21] indicates that it is the charity's right to possession--not possession itself--that supports the charitable deduction. In Winokur, a deduction was allowed for the contribution of a fractional interest in artwork even though the charity did not take possession of the art for the taxable years at issue. Despite the holding in Winokur, absent the charity taking possession of the property in accordance with an underlying gift agreement, there is a risk of the deduction being disallowed by the IRS. To the extent that the charity fails to take possession for any particular year in accordance with the underlying agreement, there should be some bona fide justification for that failure, the reasons for which should be contemporaneously memorialized. [FN22] Earmarking contributions for a particular purpose or use A donor may earmark a contribution to a qualified charity for a particular purpose or use without jeopardizing the charitable deduction, provided that such restrictions do not prevent the charity from freely and effectively employing the transferred assets, or the income therefrom, in furtherance of its exempt purposes. [FN23] In Winn, Jr., [FN24] the court concluded that a contribution is considered 'to or for the use of' a charity, as required for deductibility under Section 170(a), 'despite the fact that the donor controlled which of the qualified entity's charitable purposes would receive the exclusive benefit of the gift.' Consequently, *446 so long as the contribution is earmarked for a permissible charitable purpose (such as a contribution of land to a city for use as a park, [FN25] the creation of an endowment fund for a particular college within a university, or the building of a new hospital facility), a deduction will be available. On the other hand, if the earmarked use of the contribution could somehow be construed as being contrary to, or inconsistent with, Section 501(c)(3) tax-exempt purposes or if it relates to a particular project never before conducted by the charity, the tax deduction could be in jeopardy. [FN26] To bolster the donor's position regarding deductibility, the underlying gift agreement should specifically acknowledge that the enumerated conditions set forth therein are in furtherance of, and consistent with, the charity's Section 501(c)(3) tax-exempt purposes. Further, for substantial gifts, a board resolution by the charity, under which the charity officially accepts the gift, should contain a similar acknowledgement with respect to the Section 501(c)(3) tax-exempt purposes of the gift. [FN27] In the context of earmarking gifts to charities, the following planning points should be considered: 1. Earmarking a contribution for a particular purpose is generally permissible, but if there is a possibility that the contribution could revert to the donor because it may never, in fact, be used for that purpose or if the purpose is no longer being fulfilled, the charitable contribution deduction could be disallowed, depending on the particular facts and circumstances existing as of the date of the gift. [FN28] To ensure deductibility in such situations, an alternative charitable use--within the same or a different charity--should be considered so as to avoid the possibility of a reversion to the donor. 2. The earmarking of a contribution for a particular use or purpose, as well as any other conditions attached to a contribution, should be imposed at the time the gift is made, and the donor must not have continuing authority to change the use or purpose of the contribution. The reason is that for purposes of ensuring a deduction under Section 170(a), a donor should not retain dominion and control over funds or property contributed or the power to direct the disposition or manner of enjoyment of the property, which can otherwise render a gift incomplete. [FN29] Lack of donor control also avoids treatment of a contribution (even if considered complete for income tax purposes) as a separate and distinct trust, independent of the charity to which it is purportedly contributed, which would then be classified as a private foundation. [FN30] If, however, the donor merely retains the right to make non-binding recommendations on an ongoing basis with respect to contributed funds, a deduction generally will be available as the charity retains the ultimate control and power to direct the funds. [FN31] 3. Plan for contingencies in the event that the charity (1) no longer exists, (2) does not continue to do the same charitable activities as when the gift is made, or (3) takes certain subsequent actions that may have an adverse effect on *447 carrying out the donor's intentions. For example, if a donor gives money to an orphanage to create a permanent endowment, the agreement should indicate what happens to the endowment in the event that the orphanage no longer exists. Suppose that money is contributed to a charity to build a music hall or hospital facility in the name of the donor; consideration should be given to the consequences if the building is subsequently rebuilt or renovated [FN32] or if the donee charity subsequently desires to grant naming rights for a lobby or other part of the building. Absent a requirement to the contrary, for example, a hospital could presumably name its lobby for one benefactor even if the entire building is named after another benefactor. 4. Typically, only the state attorney general has standing to enforce charitable restrictions imposed on charitable contributions. [FN33] Nevertheless, in a New York case, Smithers v. St. Luke's-Roosevelt Hospital Center, [FN34] the court held that the estate of a donor of a charitable gift had standing, under the common law of New York, to sue the donee charity to enforce the terms of the gift, because the donor was in a better position than the attorney general to be vigilant and to enforce his intent. Although the effects of this decision are not entirely certain and would depend on the laws of the state at issue, consideration should be given to specifically conferring standing and a contractual right to sue upon the donor within the gift agreement; these rights would be held by some third party individual or foundation after the donor's death. Contributions subject to a condition precedent or condition subsequent A charitable income tax deduction under Section 170(a) is not allowable if a transfer for charitable purposes is, as of the date of the gift, dependent on the performance of some act or the happening of a precedent event in order for the transfer to become effective unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. [FN35] Similarly, if, as of the date of the gift, a transfer for charitable purposes may be defeated by the performance of some act or the happening of some event, no deduction is allowable unless the possibility that such act or event will occur is so remote as to be negligible. An example of the latter category is contained in Rev. Rul. 2003-28, where the transfer of a patent to a university was subject to the condition that a specific faculty member of the university, who was an expert in the technology covered by the patent, continue to be a faculty member during the 15-year remaining life of the patent. If he ceased to be a member of the faculty before the patent expired, the patent would revert to the donor. Because the likelihood of the individual ceasing to be a member of the faculty within the specific time period was not so remote as to be negligible, [FN36] the IRS ruled that no deduction was allowable under Section 170(a). Further examples of the effect of imposing a condition precedent or subsequent are as follows: 1. A gift of land to a city 'for as long as the land is used by the city for a public park' is deductible if, on the date of the gift, the city does plan to use the land for a park *448 and the possibility that the city will not use the land for a public park is so remote as to be negligible. [FN37] 2. A gift of timber land to a charity for transfer to the United States for use as a wildlife preserve was not disallowed as a result of the grantor's retention of mineral or timber rights and a right of reverter that could be exercised only upon the approval of the U.S. Government, the possibility of which, on the date of the gift, was so remote as to be negligible. [FN38] 3. A Board of Education solicited gifts to build a new public high school, advising donors that if sufficient funds were not received, the contributions would be returned. The IRS ruled that until it was known whether the contributions would be returned or retained, the possibility that the contributions would be returned was not so remote as to be negligible. Thus, the deductions were disallowed until it was clear that the school would retain the contributions. [FN39] 4. A gift of land to a charity was subject to a variety of specified conditions to ensure that the land would ultimately be used for the benefit of American Indians; the breach of any of the conditions would give the donor the right of re-entry. The court held that the contribution was not deductible because the possibility of failure of any one of the conditions and the possibility of the donor's subsequent re-entry did not appear on the date of the gift to be so remote as to be negligible. [FN40] 5. A gift of water-bearing land to a city, subject to reversion if the city abandoned the land, was deductible because the possibility of the future non- use of the property as part of the city's water system was sufficiently remote. [FN41] To avoid the risk of disallowance under Section 170(a) in those situations where the possibility of reversion may not be so remote as to be negligible, consider providing for an alternative charitable use within the same charity or an alternative charitable donee so that there is no possibility that the property will be used for other than charitable purposes. How restrictions affect the value of the deduction Reg. 1.170A-1(c)(1) provides that if a charitable contribution is made in property other than money, the amount of the contribution is the FMV of the property at the time of the contribution, reduced as otherwise provided in Section 170(e). If a donor places a restriction on the marketability or use of the property, the charitable deduction equals the FMV at the time of the contribution, determined in light of the restriction. [FN42] In Rev. Rul. 2003-28, although the three-year prohibition on sales could never cause the patent to revert to the donor and would not otherwise provide the donor with a benefit, the IRS ruled that such prohibition reduces what would otherwise be the FMV of the patent at the time of the contribution and, therefore, reduces the charitable contribution deduction under Section 170. There are a multitude of rulings as well as case law where the imposition of restrictions and other limitations imposed on charitable contributions of property caused the deduction to be less than the unrestricted FMV of the property contributed; this authority should be analyzed prior to placing restrictions. [FN43] As a general rule, though, as long as the restrictions do not affect the marketability of the donated property, a full FMV income tax deduction should be available. The failure to impose deaccessioning [FN44] restrictions, however, may ultimately thwart the donor's intentions because the donee charity would then be free to dispose of the contributed property. [FN45] As an alternative to mandatory language, precatory language [FN46] may be used whereby the donor expresses his desire that the contributed property not be disposed of or sold, but should be retained by the charity for its perpetual use. Earmarking contribution for a particular person In Thomason, [FN47] the court held that 'charity begins where certainty in beneficiaries ends, for it is the uncertainty of the objects and not the mode of relieving them which forms the essential element of charity.' A charitable contribution deduction is not allowed, therefore, if a charity is used as a conduit for a payment designated for the benefit of a particular individual, even if the individual is a member of the class the charity is intended benefit. Hence, the charity must have control and discretion over the contribution, unfettered by a commitment or understanding that the contribution would benefit a designated individual. [FN48] A number of *449 cases and rulings have examined this issue in the context of purported earmarking for the benefit of a designated individual. Each case requires a factual inquiry as to whether the contributed funds were earmarked for a designated individual pursuant to a commitment or understanding between the donor and the charity, so that the charity lacked control and discretion over the funds. [FN49] In Ltr. Rul. 200250029, the charitable organization accomplished its charitable purposes by hosting composer events, placing composers in residencies with professional art institutions, funding recordings of music, and entering into agreements with professional art institutions to commission works to be performed by the institutions. In January of Year 1, a donor expressed an interest to the organization in supporting the composition of a work by a specific composer. Subsequently, in July of Year 1, the donor contributed funds to the organization, at which time the organization did not make any commitment to use the funds to commission the work of the composer, and there was no representation that the funds would be used for that purpose. Rather, the organization represented to the donor that the funds would be used at the discretion of the organization's officers, in furtherance of the organization's charitable purposes. In November of Year 1, the organization entered into an agreement that provided that the organization would pay the composer a commissioning fee and copying costs, and would also reimburse the composer for reasonable expenses associated with the composer's appearance at the premier of the work. In analyzing whether the contribution was impermissibly earmarked for the specific composer, the IRS stated that the 'expression of interest raises the issue of whether the contribution was impermissibly earmarked. ' Nevertheless, because no commitment or understanding existed between the donor and the organization that the contribution would benefit the composer, the IRS concluded that although the donor expressed an interest in the selection of a particular individual, the common understanding was that the contribution would be part of the general funds of the organization, and that the organization's officers would select the composers sponsored by the organization. Accordingly, the contribution was determined to be deductible under Section 170(a). The result of Ltr. Rul. 200250029 is consistent with the now-established acceptance by the IRS of donor-advised fund programs sponsored by a multitude of mutual funds, brokerage firms, and other investment companies. Although it is virtually certain that donor recommendations will be followed by these programs, [FN50] the IRS has determined that the donor-advised funds are a component part of a public charity (i.e., the 'independent' charity associated with the mutual fund, brokerage firm, or other investment company), not separate and distinct private foundations, provided that the charity retains the ultimate control and discretion over the funds. Thus, a donor to a charity should be able to recommend that the contribution be used to benefit a particular individual without jeopardizing the available deduction, provided that the charity retains full control of the donated funds and the ultimate discretion as to their use. [FN51] The existence of any written or oral agreement or understanding between the donor and the charity, whereby contributed funds are, in fact, ultimately destined for a particular individual, would undermine the deduction. Conclusion Before imposing conditions, restrictions, or other strings with respect to charitable contributions, consider whether doing so will jeopardize the anticipated income tax benefits. With proper planning and an understanding of the issues involved, the donor can likely effectuate his charitable intentions while still realizing the anticipated tax benefits. PRACTICE NOTES Plan for contingencies in the event that the charity (1) no longer exists, (2) does not continue to do the same charitable activities as when the gift is made, or (3) takes certain subsequent actions that may have an adverse effect on carrying out the donor's intentions. [FNa1]. RICHARD L. FOX is an attorney and a partner in the law firm of Dilworth Paxson LLP, in Philadelphia (www.dilworthlaw.com). Mr. Fox's practice areas include income taxation, charitable giving, private foundations, family planning, and trusts and estates. He may be contacted at [email protected] This article is based on an article by the author in WG&L's 'Charitable Giving and Solicitation,' Bulletin No. 63 (3/18/03). [FN1]. For a discussion regarding the increasing propensity of donors specifying terms for their gifts to charity and related control issues, see 'Ties That Bind,' Chronicle of Philanthropy (3/21/02). Charities, which readily accept gifts from donors in support of their charitable purposes, generally prefer such gifts to be unrestricted so that they can use the money or property they receive in the manner that they determine to be most appropriate. [FN2]. The Code of Professional Ethics promulgated by the International Council of Museums provides that with respect to offers of gifts: 'Offers that are subject to special conditions may have to be rejected if the conditions proposed are judged to be contrary to the long-term interests of the museum and its public.' 5.4 ('Conditional Acquisitions and Other Special Factors'). For excellent analyses of issues related to the acceptance of restricted gifts of art by a museum, see Malaro, 'Restricted Gifts and Museum Responsibilities,' 18 J. Arts Management and L. 41 (1988), and Sare, 'Art For Whose Sake? An Analysis of Restricted Gifts to Museums,' 13 Colum.-VLA J. L. and the Arts 377 (1989). As a practical matter, the rejection of a sizable contribution by a strong- willed donor may prove difficult to a charity, particularly in light of the recent downturn in charitable giving. See, e.g., 'Clouds on the Horizon,' Chronicle of Philanthropy (2/6/03); 'Charitable Gifts Fell 4.8% in 2001, IRS Says,' 'Art Museums Face Slump in Revenue, Report Says,' Chronicle of Philanthropy (5/1/03). [FN3]. Recently, in the world of tax-exempt financing, the most talked- about private letter ruling is Doc 2003-8182, which has not yet been formally released as of this writing, concluding that a city's proposed contract with a private party for naming rights to a facility gives rise to a private business use, although the IRS found that the amount of private business use was not enough to jeopardize the tax-exempt status of the facility's bonds. [FN4]. The issue of naming rights has become a concern in situations, for example, where a major donor for whom a facility has been named is accused or convicted of a crime, declares bankruptcy, or engages in other activities so that the charity no longer wishes to be associated with the donor. For example, the Seton Hall University Board of Regents recently approved a new naming policy that sets forth criteria for all naming opportunities at the university and allows the removal of names from facilities. The new naming policy was proposed following criminal tax evasion charges filed against Seton Hall graduate and former Tyco chairman Dennis Kozlowski and the accusation that he had contributed stolen money to construct the university's business building, known as 'Kozlowski Hall.' See Akron Beacon J., (12/27/02); 'Seton Hall of Shame--University Furor Over Buildings Named to Dirty Donors,' N.Y. Post (11/18/02); 'Seton Hall of Shame,' Business Week (9/20/02). Another example of a donor becoming a stigma for a university is the professorship at the University of Missouri-Columbia named for Kenneth Lay, the former chairman of the scandalous and now bankrupt Enron Corp. [FN5]. In 1987, for example, Elroy Stock contributed $500,000 to his alma mater, Augsburg College, to construct a building, a wing of which would carry his name. Soon after, the college learned that Stock had sent thousands of letters criticizing interracial marriage. Augsburg then refused to place Stock's name on the building because it did not want to be associated with his beliefs, but did not return his contribution. Stock sued for return of the contribution, claiming that the college breached the gift agreement by not attaching his name to the building. After protracted litigation, it was determined that the college could retain the money. In response to critics who wanted it to return the contribution, the college created a $500,000 scholarship fund for minorities. [FN6]. Consideration should also be given as to whether a proposed contribution will qualify for the charitable gift tax deduction under Section 2055(a) or will reduce the charitable gift tax deduction otherwise available. [FN7]. 2003-11 IRB 594. [FN8]. For the legislative history and legislative intent of Section 170(f)(3), see H.R. Rep't No. 91-413, 91st Cong., 1st Sess. 57-58 (1969), 1969-3 CB 200, 237; S. Rep't No. 91-552, 91st Cong., 1st Sess. 87 (1969), 1969-3 CB 423, 479. The scope of Section 170(f)(3) extends beyond situations in which there is actual or probable manipulation of the noncharitable interest to the detriment of the charitable interest, or situations in which the donor has merely assigned the right to future income. [FN9]. See Reg. 1.170A-7(a)(1); Logan, TCM 1994-445. [FN10]. Reg. 1.170A-7(b)(1)(i). [FN11]. Section 2055(e)(4) (estate tax charitable deduction) and Section 2522(c)(3) (gift tax charitable deduction). [FN12]. See Section 1221(3); Reg. 1.170A-4(b)(1) (defining the term 'ordinary income property' to include a work of art created by the donor, a manuscript prepared by the donor, and letters and memorandums prepared by or for the donor). In Senate Bill 476 (known as the 'CARE Act of 2003'), which was passed by the Senate on 4/9/03, it was recognized that the existing tax regime provides creators of works of art with no or very little tax incentive to contribute to charity their works or the copyright interest therein. Under section 110 of the Bill, the deduction under Section 170 for 'qualified artistic charitable contributions' is generally increased from the value under present law (generally, basis) to the fair market value of the contributed property. A 'qualified artistic charitable contribution' means a charitable contribution of any literary, musical, artistic, or scholarly composition, or similar property, or the copyright thereon (or both) that meets certain requirements. [FN13]. Section 170(f)(3)(A) applies only to a contribution 'not made by a transfer in trust.' The most popular form of partial gift which is not subject to the disallowance rule of Section 170(f)(3)(A) is a transfer of property in trust where the trust qualifies as a charitable remainder trust or a charitable lead trust under Section 170(f)(2). In addition, under Section 170(f)(3)(B), a contribution of a remainder interest in a residence or farm and a qualified conservation easement are not subject to the disallowance rule of Section 170(f)(3)(A). [FN14]. The retention of any substantial interest will cause disallowance. See, e.g., Rev. Rul. 81-282, 1981-2 CB 78; Rev. Rul. 88-37, 1988-1 CB 97. [FN15]. 1975-1 CB 85. [FN16]. The retention of approval rights over the selection of an architect, architectural plans, or other building designs with respect to a building funded by a donor should be considered insubstantial interests for purposes of Section 170(f)(3)(A). [FN17]. Reg. 1.170A-7(a)(2)(i). For example, if a taxpayer owning 200 shares of stock transfers a life estate in the stock to her son and immediately thereafter contributes the remainder interest to charity, which was then her entire interest, no deduction is allowable because the taxpayer is considered to divide the property in order to make the contribution. Id. If, however, there is a significant passage of time between the taxpayer's division of the property interest and the contribution of the entire remaining interest to charity, the IRS has allowed a deduction. See, e.g., Ltr. Rul. 9124031. [FN18]. Reg. 1.170A-7(a)(2)(i). Section 1001(e)(1) provides that in determining gain or loss in a sale or other disposition of a term interest in a property, that portion of the adjusted basis of such interest which is determined under Section 1014 is disregarded. A term interest includes a life interest in property and an income interest in a trust. Section 1001(e)(2). Thus, where the reduction rules under Section 170(e) apply (i.e., limiting the deduction to tax basis), with respect to the contribution of a life estate, no deduction would be allowable because the interest has no tax basis. [FN19]. See, e.g., Ltr. Rul. 9409017;Rev. Rul. 86-60, 1986-1 CB 302. [FN20]. Query whether the contribution of a 50% undivided interest in a $10 million painting is worth $5 million or some lesser discounted value due to, presumably, the lack of marketability. The IRS has ruled that the value of the percentage interest in the painting that is contributed equals the full value of the painting multiplied by the percentage interest being conveyed to charity, without the application of any discount for the undivided interest. See, e.g., Ltr. Ruls. 200223013, 200223014; Rev. Rul. 57-293, 1957-2 CB 153 (example 2). The IRS has taken the position that for transfers of fractional interests in real estate, any valuation discount should be limited to the taxpayer's share of the estimated cost of a partition of the property, despite case law applying substantial discounts for transfers of such interests. See, e.g., Estate of Williams, TCM 1998-59; Estate of Baird, TCM 2001-258; TAM 199943003; and TAM 9336002. One possible way to ensure that no valuation discount would be applied to a charitable contribution of an undivided interest in artwork would be to have a provision in the gift agreement allowing the charity to sell the art, with the proceeds to be split based on the tenancy-in-common percentage interests held by the donor and the donee charity. [FN21]. 90 TC 733 (1988). [FN22]. In Winokur, the court noted that the charity's not taking possession was voluntary and not due to any actions by the taxpayer. The court indicated that the result would have been different if the donor and the charity had had a 'side agreement' specifying that the charity would not take possession. [FN23]. See Phinney v. Dougherty, 307 F.2d 357, 10 AFTR2d 5531 (CA-5, 1962); Reg. 1.507-2(a)(8)(i). [FN24]. 595 F.2d 1060, 44 AFTR2d 79-5076 (CA-5, 1979). [FN25]. Reg. 1.170A-1(e). [FN26]. See Edie, 'Use of Fiscal Agents: A Trap for the Unwary' (1989) (printed in conjunction with a special project supported by the Council on Foundations), stressing that a contribution to a public charity does not necessarily support a deduction if the charity is an intermediary 'merely acting as a laundering agent for donor earmarked funds.' [FN27]. This assumes that the proposed earmarked use of the contributed funds is, in fact, in furtherance of, and consistent with, those exempt purposes enumerated under Section 501(c)(3). [FN28]. See discussion below under the heading 'Contributions subject to a condition precedent or condition subsequent.' [FN29]. See, e.g., Pauley, 459 F.2d 624, 29 AFTR2d 72-1025 (CA-9, 1972) ('Dominion and control, the retention of which by a donor will render a gift incomplete for purposes of tax deduction, is dominion and control exercisable against the donee . . . '); see also Burke, 61 AFTR2d 88-1027 (DC Conn., 1988); Hansen, 820 F.2d 1464, 60 AFTR2d 87-5240 (CA-9, 1987). If a donor's retained rights are considered 'insubstantial,' deductibility should not be affected. Where a donor transfers property to a charity but retains dominion and control of the property only in a fiduciary capacity, e.g., where a donor transfers property to his own private foundation and acts as a trustee or director, the transfer will be complete for purposes of Section 170(a), and an income tax deduction will be available. However, under Rev. Rul. 72- 552, 1972-2 CB 525, a taxpayer, having sufficient control of a private foundation, who makes an inter vivos transfer to the foundation, may be required to include the transferred assets in his or her estate under Section 2036, although an offsetting charitable deduction under Section 2055 would be available, resulting in a wash for federal estate tax purposes. Inclusion under Section 2036 (and the related reporting on Form 706, estate tax return) could actually be beneficial with respect to the private foundation because, under Section 4940 ('Excise Tax Based On Investment Income'), and, in particular Section 1014(b)(9) (incorporated, along with the general income tax rules, by reference under the Section 4940 Regulations), the basis of the property in the hands of the private foundation could arguably then be stepped up to FMV. The ruling did not specifically address any resulting basis step-up to the private foundation for purposes of Section 4940. [FN30]. Private foundation status might result, therefore, where the contributed funds are actually placed outside the dominion and control of the donor, but the donor retains rights to make certain binding decisions with respect to the use of the funds. For example, if a donor makes a contribution to a university to create a scholarship fund but retains the right to name the recipients of the scholarships, the fund would likely be considered a private foundation, separate and distinct from the university itself, subject to the Chapter 42 excise tax rules, including the tax on net investment income under Section 4940 that would not otherwise apply to the university. Moreover, the donor would be subject to the limitations of Section 170(e)(1)(B)(ii), generally limiting contributions of property (i.e., other than money) to a private foundation to income tax basis except for contributions of 'qualified appreciated stock,' and the less favorable gross income limitations under Section 170(b) applicable to contributions to private foundations. See Ltr. Rul. 7827015. [FN31]. See National Foundation, Inc., 13 Cl. Ct. 486, 60 AFTR2d 87- 5926 (Ct. Cl., 1987). Non-binding recommendations are the grounds on which donor-advised funds have been determined to be public charities under Sections 170(b)(1)(A)(vi) and 509(a)(1), rather than a collection of separate and distinct private foundations. [FN32]. The recent case involving Avery Fisher Hall at Lincoln Center is a prime example. In 1973, Avery Fisher, the electronics tycoon who died in 1994, contributed $10.5 million to rebuild a hall that was originally constructed in 1962, with name perpetuity as a condition of the contribution. With Lincoln Center now embarking on a massive refurbishment that will include totally rebuilding Avery Fisher Hall, it has been reported that Lincoln Center may decide to replace Avery Fisher with a new name in order to raise funds. The Fisher family is seeking to block Lincoln Center from doing so. See 'Avery Fisher Hall Forever, Heirs Say,' N.Y. Times (5/13/02). [FN33]. See, e.g., Valley Forge Historical Society v. Washington Memorial Chapel, 426 A.2d 1123 (Pa., 1981); Estate of Miller, 110 A.2d 200 (Pa., 1955). A person whose only interest with respect to the charity is the same as that of the general public will not have standing to bring such a proceeding. Weigand v. Barnes Foundation, 374 Pa. 149, 97 A.2d 81 (Pa., 1953). The purpose of this restrictive rule is to protect the trustees or directors of the organization from frequent suits and harassing litigation perhaps based only on cursory investigation and brought by irresponsible parties. Officers, directors, and trustees also generally have standing to take formal action to enforce gift restrictions. [FN34]. 225 NYLJ No. 68 (4/5/01); 281 A.D.2d 127, 723 N.Y.S.2d 426 (2001). [FN35]. Reg. 1.170A-1(e). The phrase 'so remote as to be negligible' has been defined as a 'chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction' and 'one which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.' Briggs, 72 TC 646 (1979). [FN36]. This was an assumed fact of the Ruling. [FN37]. Reg. 1.170A-1(e). [FN38]. Rev. Rul. 77-148, 1977-1 CB 63. [FN39]. Rev. Rul. 79-249, 1979-2 CB 104. [FN40]. Briggs, supra note 35. See also TAM 9828001. [FN41]. Morton, TCM 1979-484. [FN42]. See Rev. Rul. 85-99, 1985-2 CB 83. [FN43]. For a further discussion of this issue, see Fox, 'Restrictions on Charitable Bequests of Art: Recent Ltr. Rul. Paints a Picture,' 29 ETPL 452 (Sept. 2002). [FN44]. 'Deaccessioning' is the process by which an art museum permanently removes and disposes of works in its collections. See Lerner and Bresler, Art Law, The Guide for Collectors, Investors, Dealers and Artists, p. 1448 (2d ed., Practising Law Institute 1998). [FN45]. In this situation, the risk of the reduction in the deduction (i.e., by virtue of a restriction prohibiting the disposition of the property) must be weighed against the risk that the charity will dispose of the contributed property against the wishes of the donor. [FN46]. Precatory language expresses the wishes of the donor, whereas mandatory language imposes a legally enforceable obligation. [FN47]. 2 T.C. 441 (1943). [FN48]. See, e.g., Rev. Rul. 62-113, 1962-2 CB 10. [FN49]. See, e.g., Rev. Rul. 61-66, 1961-1 CB 19; Rev. Rul. 62-113, supra note 48; Peace, 43 TC 1 (1964). [FN50]. When a donor advisor to a donor-advised fund makes a grant recommendation to a qualified charity, the 'charity' operating the donor- advised fund will, as a rule, approve the recommendation and make the grant. [FN51]. This assumes that the particular individual is a member of the class of individuals that the charity is intended to benefit. 30 Est. Plan. 441, 2003 WL 22000513 (W.G.&.L.)