Tax Issues Involving Charities- part 2

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, July 4, 1999

Copyright 1999 Robert L. Sommers, all rights reserved.

Substantial contributions to this series were made by Rosemary Fei (rfei@silklaw.com), a principal at the San Francisco law firm of Silk, Adler & Colvin. Ms. Fei represents nonprofit and tax-exempt organizations exclusively.

Question: We have a sizable estate and would like to give money to charity. What are our options?

Answer: If you are planning to give at least $1 million, consider creating a family private foundation (a charitable grantmaking organization receiving funding from an individual or family and controlled by those donors). You (and your family) may then engage in philanthropy, and your joint charitable interests can be pursued indefinitely.

Forming a separate foundation may run between $3,000 to $15,000, depending on the complexity of your foundation and rates charged by professionals, with on-going maintenance costs (bookkeeping, administration of grants, tax returns, etc.). Also, a private foundation is subject to extensive tax regulations; rules for deducting gifts to a private foundation are less favorable than to a regular charity.

A donor-advised fund is an attractive alternative for smaller-scale giving or for those who have no interest in running their own foundation.

Usually, a donor creates a donor-advised fund at a community foundation, which is a recognized community-supported non-profit charity that serves the community by identifying needs and allocating charitable resources. The donor then recommends application of income or principal in the fund to specific charitable organizations within the geographical area served by the community foundation.

These recommendations, however, must be subject to the foundation’s review and approval. If the donor is permitted to attach excessive restrictions to and exercise continuing control over donations, the fund becomes simply a conduit for the donor and will not be considered tax-exempt.

Advantages of forming a donor-advised fund include naming the fund, greater tax benefits than a private foundation in certain situations, assistance in grantmaking and administering the fund. Disadvantages include administrative charges, loss of absolute control over grantmaking, loss of control over how the fund will be invested, and restrictions put on the donor-advised fund by the foundation.

Unfortunately, abuses of donor-advised funds have caught IRS’s attention, especially when these funds have been used to confer personal benefits on the donor or the donor’s relatives. Prevalent abuses include using the fund for scholarships for family members. Congress is actively considering tightening rules in this area.


Question: Our volunteers spend considerable time and their own money performing services. Can we reimburse their expenses? How do we account for the value of their time?

Answer: Volunteers may be reimbursed for expenses incurred on the charity’s behalf; of course, the charity should obtain supporting documentation. You should have a policy stating how expenses by volunteers should be authorized and procedures for seeking reimbursement.

Volunteers who incur unreimbursed expenses may deduct those expenses on their tax returns as a charitable gift. These might include commuting expenses ($0.14/mile), and the cost of goods, supplies or equipment (volunteer firefighters, youth organization leaders). If a volunteer’s annual expenses total more than $250 per charity, IRS requires documentation from the charity.

Your charity does not have to account for the time volunteers spend donating services. Likewise, volunteers may not deduct the value of their time spent volunteering. Note: To attract potential funders, charities often tout the total time donated by their volunteers as evidence of a thriving operation.




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