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Name That Philanthropist!

Posted in Uncategorized, tagged , , , , , , , on August 7, 2012 | 1 Comment »

My partner, Ed Mendlowitz, recently printed up a set of Topps trading cards called (are you ready?)  ”Great Accountants in History.”  His deck included such luminaries as Luca de Pacioli, the father of double entry bookkeeping (circa 1494), Charles Waldo Haskins, the first CPA leader in the US (Accounting Hall of Fame – I’m not kidding),  Ithamar, son of Aaron, the first “auditor” in the bible, and, of course, the inimitable Edward Mendlowitz himself, author of Power Bites and notorious blogger at  http://partners-network.com .  My beef with all of this is that my pack did not come with a stick of stale chewing gum.  Am I stuck in a 1960′s time warp, or isn’t the stick of stale gum a required element of trading cards?

Anyway, I think it is safe to say that the baseball card industry probably has nothing to worry about in terms of competition from this series.  I don’t even think that the “Heroes of the Torah” trading card collection will be at risk.  But it got me to thinking – why not release a series called……”Great Philanthropists, Then and Now”?  Hmm…. It may or may not have legs.  Before we invest our hard earned paper route money into that little venture, let’s do a little low cost market testing and see how many of you can actually—— 

Name that Philanthropist!

     
A.  This handsome fellow is said to have revolutionized the petroleum industry and defined the structure of modern philanthropy.  At one time considered the most hated man in America (go figure), he founded the University of Chicago and also a university that bears his name.   B.  Most of his fortune was earned in the steel industry and most of his charities contain his name.  How do you get to ________ Hall?  Practice, practice, practice! C.  I wonder if this photo was processed with the film pioneered by this guy – I bet it was!  He established a school of music that bears his name, as well as schools of dentistry and medicine at the University of Rochester, among others. 
D.  A metals magnate, this gentleman founded (with his mother and several others) Swarthmore College and later, the “school of finance and economy” that bears his name at the University of Pennsylvania.      E.  You probably recognize this guy, but whom does he represent?  He was a patron of the arts, a founding board member of the American Museum of Natural History, and a devout Episcopalian.   F.  Think “Revenge of the Nerds.”  This guy is currently one of the world’s wealthiest individuals and has pledged the bulk of his wealth to his foundation.  In addition, he established the “Giving Pledge” to encourage his fellow billionaires to do likewise.
 
G.  The “Oracle of Omaha,” this kindly looking grandfather famously said “…a very rich person should leave his kids enough to do anything but not enough to do nothing.”  He has pledged 99% of his wealth to charity, mainly through the foundation that Philanthropist “F” has established.  H.  A partner of Philanthropist “B,” he underwrote a number of charities that bear his name including the nonprofit ______ Houses in NYC which builds affordable housing.  His family fortune lives on through Bessemer Trust.   I.  The mysterious and publicity shy co-founder of DFS (Duty Free Shops, this gentleman flies coach, owns neither a home nor a car, and wears a $15 watch.  He founded the Atlantic Philanthropies which will self liquidate by 2017 – funneling approximately $9 billion to charitable works!
 
J.  The founder of CNN and TBS, he gave $1 billion to support UN causes by creating eht United Nations Foundation.  He is a signatory of the Giving Pledge.   K. “Revenge of the Nerds, Part II”  An internet entrepreneur, he is currently considered to be among the 100 wealthiest and most influential people in the world.   In 2010, he arranged to donate $100 million to the Newark Public Schools.  This little pisher is also a signatory to the Giving Pledge.   L.  A rather quiet and conservative singer-songwriter-performer (NOT!), this young lady recently founded the “Born This Way” Foundation to focus on youth empowerment and issues like self-confidence, well being, anti-bullying, mentoring and career development.  
M.  Canadian-American actor, producer, and activist who suffers from early-onset Parkinson’s disease.  He started a foundation that bears his name.  The foundation was created to help eradicate Parkinson’s disease.   N.  A true “rags to riches’ story, this guy was the “worldwide head of production” of Pepsi and keeper of the secret formula from the 1940′s to the 1960′s.  He started the foundation that bears his name to help those who were less fortunate than himself.   O.  A man with a very unfortunate first name (in that it was also used as the name of a product that was one of the biggest failures in his company’s history), he also established a foundation in 1936 which has gone on to become one of the most influential nonprofits in the world.  
     
P.  Named in 2006 on Forbes’ list of the 15 Richest Fictional Characters, he was portrayed by actor Jim Backus in the ridiculous TV sitcom “Gilligan’s Island.”  Being one of the 15 richest fictional characters, he had to be philanthropic, right????    

 

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Tools & Techniques 101 – What Kind of Donor Are You?

Posted in Uncategorized, tagged , , , , , , , , on July 31, 2012 | Leave a Comment »

If you have been a faithful reader of this blog, you know that I have been all over the place discussing the “why” of philanthropy: “why” you might do it, “why” certain famous individuals have become philanthropists, and “why” your family might consider taking the plunge.  (If you don’t remember, check out the archives at www.charitable-nation.com.)  Now, I want to spend a little time discussing the tools and techniques of charitable planning.  We can assume that you have sifted or are sifting through the “why” and you now want to understand a little bit of the “how.”  However, if you have not yet done this soul searching, I urge you to seriously consider the “why” of philanthropy before the “how”.  The use of charitable tools without charitable intent is meaningless.

The first question you have to ask yourself is this: what kind of charitable donor am I?  There is a broad spectrum of donors ranging from those who donate a few bucks only when the mood strikes them or when their friends “guilt” them into a donation all the way up to the serious philanthropist who invests major dollars in charitable causes expecting to see real results.  Understanding the type of donor you truly are or hope to be as well as understanding your underlying motivating passions will go a long way toward making your plan a reality.  With this knowledge in hand, the tools and techniques of charitable planning fall into place much more simply. 

Many of us fall most appropriately in the mid-point, the “proto-philanthropist” category, where we may want to give more than we have in the past, but we want to make sure that we give it efficiently and make a difference without necessarily involving a family foundation or a trust or other complex legal mechanism.  Moving from casual or checkbook philanthropy to the “proto” philanthropist level generally involves making a commitment or commitments – you make a multi-year pledge to your alma mater’s capital campaign, you consider making a planned gift to the American Red Cross in the form of a charitable gift annuity, you name the local hospital as a beneficiary of your estate, or you fund a donor-advised fund at your local community foundation.  Financial and tax planning are very important at this level.  There may be significant estate and/or income tax implications to these gifts and your advisors should be involved. 

Philanthropy becomes truly significant when it consumes the bulk of your estate and/or has more than 5 or 6 or 7 zeros appended to the value of the gift(s).  Among other things, serious philanthropists may consider the use of lifetime or testamentary charitable remainder trusts (CRT’s), charitable lead trusts (CLT), and private foundations.  Each of these tools has its own pros and cons which we will explore in future posts. 

For those who choose to engage in serious philanthropy — especially during their lifetimes — philanthropy becomes its own business.  This business may calculate a social profit/loss statement rather that a financial one, but it is a business nonetheless.  Approaching philanthropy in this way truly can help the serious philanthropist make the leap – from success to significance. 

More to come……….

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Seven Myths About the Great Philanthropists

Posted in Uncategorized, tagged , , , , , , on July 18, 2012 | Leave a Comment »

The early part of the 20th century is considered by many to be the golden age of philanthropy.  And because so many of the industrialists and financier of that era were, shall we say, complicated individuals, the rise of philanthropy itself was actually a controversial development.  A recent article in Philanthropy Magazine explored and tried to debunk what it referred to as the “Seven Myths About the Great Philanthropists.”  The article is pretty interesting (if a bit too long to read on an iPhone screen).  So, let me summarize.

Myth # 1 – The great philanthropists were robber barons. 

Fact:  They were merely very aggressive businessmen who pushed the envelope of technological process.  Because of that, they may have been a bit, ahem, ruthless in their dealings with both friend and foe but, according to the author, to classify them as robber barons is demeaning.  “Whatever else may be said of them – and there is much to be said – they created real and enduring wealth.  Moreover, the wealth they created benefited all Americans.”  By definition, robber barons get rich by extorting payments that yield no value, leaving everyone else a little poorer.

Myth # 2 – The great philanthropists were free market purists.  

Fact:  Although they perhaps liked to think of themselves that way, most of them were not above seeking and demanding government help and protection.  Example – James Wharton, who endowed the business school that bears his name at the University of Pennsylvania, stipulated in his deed of gift  that the “right and duty of national self-protection must be firmly asserted and demonstrated” and that “forfeiture shall occur upon the failure or unwillingness” of the school to teach a protectionist curriculum.  I don’t think Mr. Wharton would have been a fan of NAFTA. 

Myth # 3 – The great philanthropists were simplistic businessmen, not serious thinkers.

Fact:  Talk about painting with an overly broad brush!  The author gives a number of examples to prove otherwise.  My two cents – You can’t amass a fortune, particularly from nothing, if you aren’t endowed with serious gray matter. Enough said.

Myth # 4 – The great philanthropists used charity to control the working class.

Fact:  This is a bit of a communist argument gone awry.  “….to borrow the language of the Marxists, the great philanthropists did hope to find a bourgeois solution to the proletarian problem.  Some of them were quite explicit about their desire to use philanthropy to undercut communist influences in the labor movement.  But at a more profound level, the great philanthropists hoped to use their resources to turn the working class into the middle class….. the Marxists were wrong to see philanthropy as an instrument of exploitation.  It was an invitation to opportunity — placing, as Carnegie famously put it, within its reach the ladders upon which the aspiring could rise.”  And how is this bad? 

Myth # 5 – The great philanthropists turned to charity out of vanity.

Fact:   The author’s argument is a bit weak here.  His examples lead one to believe that vanity often was a motivator.  My argument is “so what?”  Focus on the good that charity accomplishes.  If a donor’s ego is stroked a bit in the process we shouldn’t complain.

Myth # 6 – The great philanthropists turned to charity out of guilt.

Fact:  Really?  Guilt about what?  No one in the Gilded Age ever felt the need to apologize for the accumulation of wealth.  And many of the great philanthropists did not turn to philanthropy in retirement; it was a lifelong habit started with a few of the first pennies ever earned.  So, where’s the guilt??

Myth # 7 – The greatest achievement of the great philanthropists was to establish perpetual foundations with professional staffs.

Fact:  “Surely it cannot be an accident that the Rockefeller Foundation achieved so much during its namesake’s lifetime [more than it did after his death].  Leadership, it seems, accounts for much of the difference…….Did Rockefeller and Carnegie change the course of American philanthropy by creating their foundations?  Undeniably yes.  Their efforts helped launch the field of professional philanthropy.  Is it the case….that their foundations have distributed their wealth with ‘greater intelligence and vision that the donors themselves could hope to possess?’  That is much less clear.  The great philanthropists, it turns out, were truly great at philanthropy.”

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Tax Exempt Propaganda Mills Are Just Getting Started

Posted in Uncategorized, tagged , , , , , on July 16, 2012 | Leave a Comment »

There has been a lot of coverage lately in the press about the potential impact on public opinion by certain “501(c)(4)” entities and so-called “super-PAC’s” (political action committees).  If you don’t believe me, check out the recent front page New York Times article  ”Tax Exempt Groups Shield Political Gifts of Businesses.”   Now, I know, your eyes have already started to glaze over; so have mine, but stay with me on this – it is an important topic, especially now.  Here are the takeaways:

  • During the election season which, like tax season and rush hour in the NY metro area, seems to have no real beginning or end, these two types of entities will be trying their darndest to get us to think the way that they do – and vote accordingly.  While both types of entity are tax exempt, contributions to neither are deductible for income tax purposes.   Make no mistake – these organizations are in no way, shape or form to be considered “charitable organizations.”
  • As I tell my students, beware those who quote Internal Revenue Code sections by number.  They either do not know what they are talking about (bad enough) or they know what they are talking about but they don’t want you to know (even worse!)  So, let me define – a “501(c)(4)” entity is a “civic league or organization not organized for profit but operated exclusively for the promotion of social welfare…..”  So let’s call them social welfare organizations.  Now, to me, the classic definition of a social welfare organization has always been my local civic association working to make life better in my community by advocating for road resurfacing, enforcement of zoning laws, and planting flowers in the common areas of the community.  Back when I was involved in the Civic, we always took pains to make sure that we did not side with or support any political party or politician in any way.  Today, however, the “social welfare” envelope is being pushed really hard both on the national and local levels.  While these organizations are actually prohibited by regulation from devoting themselves primarily to political activity, they can spend the bulk of their money on “issue” advertisements that purport to be educational and not political in nature.  And, of course, the IRS does not yet have a clear test for determining what constitutes excessive political activity by a social welfare group.  The result is a lovely shade of grey.  Consider an organization like the American Action Network which explicitly describes itself on its website as: “…. a 501(c)(4) ‘action tank’ that will create, encourage and promote center-right policies ……. primary goal is to put our center-right ideas into action by engaging the hearts and minds of the American people and spurring them into active participation in our democracy…..”  On the other side of the aisle, consider Priorities USA:  “….a 501(c)(4) organization dedicated to mobilizing Americans to preserve, protect and promote the middle class ……..We oppose right-wing attempts to harm the American middle class in order to bestow special treatment on the very wealthiest and special interests……” Bottom line, social welfare organizations can “educate” you as to the issues but not directly support any candidates.  Donors to such organizations remain anonymous.    Educational or political?  You decide. 
  • Super-PACs are a new kind of political action committee that have been around now for about two years.  According to http://www.opensecrets.org super-PACs are:  “….ttechnically known as independent expenditure-only committees, [that] may raise unlimited sums of money from corporations, unions, associations and individuals, then spend unlimited sums to overtly advocate for or against political candidates. Super PACs must, however, report their donors to the Federal Election Commission on a monthly or quarterly basis — the Super PAC’s choice — as a traditional PAC would. Unlike traditional PACs, Super PACs are prohibited from donating money directly to political candidates.”  Unlike social welfare organizations, super-PACs can support candidates but cannot directly finance their campaigns. Donors must be disclosed. 
  • Direct contributions to political candidates are severely limited, so these organizations provide effective work-arounds for those who want to spread the gospel truth according to the organization. 
  • Because social welfare groups do not have to report their donor lists to the public, more money has been flowing to the social welfare groups.   What a surprise!
  • Both sets of groups are aggressively promoting their agenda in advertisements that, while not specifically endorsed by the candidates, pretty clearly point the way to those candidates.

This is a great example of caveat emptor – let the buyer beware.  In the short term, there is absolutely no chance of curbing abuses in this arena.  Each one of us must take everything we hear and read with a couple pounds of salt. 

Happy voting!

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Congratulate Me – I Now Have Several More Letters After My Name

Posted in Uncategorized, tagged , , , , , , on June 27, 2012 | 1 Comment »

Forgive me for feeling a bit full of myself right about now, but I just successfully completed the third and final exam toward my designation as a Chartered Advisor in Philanthropy® (CAP®) from the American College in Bryn Mawr Pennsylvania. 

 

 

I officially now have more letters after my name than in my name, which I might add, is no small accomplishment, and requires me to switch to a smaller font on my business cards.  So please don’t deflate my bubble by telling me you never heard of the CAP® designation.  Few people actually have, which begs the question – if a professional earns an unknown designation, does it make a sound?  More to the point – how important is a designation in a field that is still trying to find itself? (As one rather arrogant attorney put it to me once “there are more crap designations around……”)

 

Many people are involved in the nascent profession of “gift planning.”  And like the financial planners of 25 years ago, the professional status of gift planners and philanthropic advisors appears to be tied directly to the fields from which they emerge.  Right or wrong, accountants and attorneys may tend to get more respect as gift planners because they are perceived as technicians cobbling together tax and estate plans that encompass philanthropy as one piece of the puzzle.  Anecdotal evidence suggests that they get more respect than, say, life insurance or wealth management professionals who may be perceived as more product-focused and less client-focused.  And development officers working for the charities themselves, well, we all know what they want!  (If you don’t believe me, check out this fascinating discussion in the Chronicle of Philanthropy group on LinkedIn.)  So because we all come from different backgrounds and pedigrees, I believe that a really good argument can be made for the development of a professional designation that attempts to reach across all of these professional silos and achieve common ground.  Isn’t that part of the growth of any profession? 

 

So, what can I do now with the CAP® designation that I couldn’t do before as a “mere” CPA?  Not much.  But studying for the designation has enhanced my technical knowledge of some tax tools and techniques and it has also helped me develop a more global perspective on the field of philanthropy.  I have new appreciation for the work done on the other side of the table by development officers and fundraising executives.  But most important, I have newfound respect for the philanthropic impulses that motivate many of my clients.  What we do as technicians is help our clients select and develop the most efficient tools for the transfer of wealth to their families and suitable charities, but those techniques are the mere tools of the trade and we cannot forget that.  Understanding what motivates our clients is far more important because that will enable us to plan more effectively for the optimal solution.  As Phil Cubeta, the Sallie B. and William B. Wallace Chair of Philanthropy at the American College has written:  “The purpose of CAP….is to bring advisors and fundraisers together in common purpose around a shared body of knowledge and to help our donors and clients do great things for the charities they love and support while also taking care of the family’s financial needs.”

 

That sounds like a winner to me.

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Car Donations – Under the Right Condition, What’s Old is New Again

Posted in Uncategorized, tagged , , , , , , , , , , on June 19, 2012 | 2 Comments »

One activity that ranks very low on my list of “fun things to do” is the selling or trading in of an automobile.  More likely than not, that explains why I tend to keep cars for many, many years.  I’ll never forget a recent trip to a new car showroom – the salesman used the detached bumper from our old jalopy as a visual aid to explain why our trade-in allowance was so low!  Anyway, last week, I think we set actually set our own personal automobile longevity record when we finally disposed of our 1995 Ford Taurus station wagon.  Yes, the car was a bit “out of style” and, yes, the interior was a bit shopworn, but given that it had over 105,000 miles on it, it was truly in great condition.  The engine ran well, the transmission was recently rebuilt, and the tires were fairly new.  But, despite the tender memories attached to this vehicle, it was time for us – and it – to move on.  

Given my aversion to selling automobiles, particularly ones that are approaching 17 years of age, I needed to find a more viable alternative for disposing of this car.  Trade-in?  Perhaps, but I was really too embarrassed from the prior “detached bumper” incident.  Leave it parked on the side of the road in a bad neighborhood with the keys in the ignition and the engine running?  Too “Seinfeldian.”  Hey – how about donating it to charity?  We hear ads on the radio all the time for such donations, and this car, while not a cream puff, could certainly find a good home this way while possibly providing us with a tax deduction along the way. 

A car donation can make sense, and it certainly did in this instance, but like everything else in the tax world, you have to make sure you follow the rules and that you are reasonable with your valuation.  Understand that automobile deductions were a highly abused area until a few years ago when the IRS sensibly tightened the rules.  Gone are the days when taxpayers could claim a healthy (read: inflated) deduction for the donation of a trashed out Yugo with no tires and a rubber band for an engine to a sketchy charity that would then sell the vehicle for scrap.  As well those days should be gone. 

Here are the planning takeaways:

  • The value of the car (or boat or plane or other vehicle) will be based on its fair market value (FMV), that is, the amount that would result in a transaction between a buyer and a seller, neither of which has a gun to his/her head to complete the transaction.  If that value is $5,000 or greater, you will need a written appraisal from a qualified appraiser to substantiate the value.  But read on….
  • This theoretical FMV will only be available to you if the charity actually uses the vehicle in the furtherance of its charitable mission.  If the charity sells the vehicle “without significant intervening use or material improvement” the value of the deduction on your tax return will be limited to the gross proceeds of that sale – and the charity will have to advise you and the IRS of that amount. 
  • In addition, if the value of the automobile exceeds $500 at the time of contribution, the charity is required to provide you with form 1098-C acknowledging receipt and certifying their use or sale of the vehicle.  Note however, that the charity does not value the car for you – that is your responsibility. 
  • Finally, if the charity sells the vehicle to a needy individual at a price significantly below fair market value or gratuitously transfers the vehicle, you will only be able to claim the fair market value if the sale or transfer furthers the charity’s mission. 

In the right situation, the donation of a vehicle can be a great thing.  Just remember that you do not get something for nothing.  You may think the car is worth $4,500 but if the charity only clears $300 for scrap metal, your deduction will be adjusted accordingly.  And, in any case, your tax savings will equate to only a fraction of what you could get if you sold the car in the open market.

Oh, the ending of our personal story?  Well, the old Ford was gifted to New Ground, a local Long Island charity committed to educating and empowering families and Veterans caught in the web of homelessness.  Their goal is nothing less than the truly independent functioning of their clients for generations to come.  Since Long Island is not a particularly mass-transit friendly area (except perhaps for the LIRR and a couple of bus lines), commutation ends up being a major hurdle for families of modest means.  It is our hope that this vehicle will make life a little bit easier for one of these families.  If so, then this transaction will have been a home run for everyone.

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Begging? Or “Planting Seeds” with Style?

Posted in Uncategorized, tagged , , , , on June 6, 2012 | Leave a Comment »

I follow a LinkedIn group sponsored by the Chronicle of Philanthropy.  A recent discussion started by Gary Ravetto, a nonprofit strategist from Cleveland Ohio raised the following issue:  “We are a bunch of beggars, I was told tonight……[by someone who] doesn’t work in the nonprofit sector.  His exact words were, “I’ve been reading you and the others who are with those charities. You work pretty hard at ignoring the obvious. You are a bunch of beggars. You people always have your hand out whining about how you need more money. I’m for shutting all of you down so you’ll stop pestering the rest of us who make a living the hard way.”

Well, that told Gary and all those other whiny fundraisers!!

Fundraising is a difficult task.  Fundraisers constantly toe the line between being statesman-like representatives of their organizations and ” persuasive salespeople”.  Friend-raising, fundraising, the line is often blurred.  And board members who find themselves placed in the position of “softening up prospects” often have the hardest jobs of all – they DO tend to see themselves as beggars and desperately want to avoid becoming the cocktail party pariah, the one whom everyone else wants to avoid because of a perception that they are picking pockets.  In their mind’s eye, they end up ranking right up there with life insurance and used car sales people.   What a life!

But step back a minute. The not-for-profit sector is huge.  What rings true for me may not ring true for you, but that’s okay.  There are plenty of religious, social, international, animal-rights, civil rights, sports, cultural, educational, etc., etc., etc. groups around to spark philanthropic interest in just about anyone’s mind (except maybe Gary’s “beggar-epithet” throwing correspondent noted above.)  When viewed in that light, one cannot help but drop the beggar tagline and begin to realize that (1) fundraising is necessary (and not a necessary evil) because (2) the government can’t or won’t do it all and (3) people need to feel part of the solution to the problem. 

Most of the responses to Gary’s post were very interesting, but I want to share one with you that especially quantifies the importance of the work done in not-for-profit sector.  John Biggins, a fundraising consultant in the Chicago area, offered the following response to the Machiavellian correspondent:

“You can’t combat ignorance. For all of us who proudly work in this field and witness the impact on a day-to-day basis on humanity, Peter Drucker’s quote always resonates with me:  ‘Fundraising is going around with a begging bowl, asking for money because the need is so great. Fund development is creating a constituency which supports the organization because it deserves it.’

Since community impact and serving his fellow citizen does not seem to have much value in his shallow mind, perhaps economic impact may counter his weak observation. Let’s take a look at what would happen to the economy if he had his wish of ‘shutting us down’:

-Nonprofits employ 10% of the nation’s private workers
-Nonprofits represent $800 billion in annual purchasing power
-Nonprofit expenditures account for 8.5% of national income
-Nonprofit sector is the 3rd largest contributor to the U.S. GDP, after retail trade and wholesale trade
-Donations alone accounts for 2.2% of the nation’s GDP

I’d say to him careful for what you wish for…”

So I restate the question – Is fundraising (or fund development in the parlance of Peter Drucker) akin to begging?  Or is it more like planting seeds with style?

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With Gifts of Real Property, Form over Substance Counts!

Posted in Uncategorized, tagged , , , , , , , on June 5, 2012 | 1 Comment »

Last week, in his blog Double Taxation (5/29/2012), my partner, Tony Nitti, analyzed the Tax Court case J. Mohamed, Sr., TC Memo 2012-152.  Lest one ever forget that form over substance often prevails in the tax world, one need only read this case to be shocked back into reality.  I won’t attempt to analyze the case itself (Tony is far better at that than I, and you can read his words directly) but I would like to summarize the planning take-aways:

  • The best planning is all for naught if you don’t complete the paperwork.  On the face of it, the Mohamed’s plan was a good one but it failed for lack of form – and how painful is that? They transferred several pieces of valuable real estate into a charitable remainder unitrust (CRUT) which was structured to pay income to the couple for a period of time (either their joint lives or 20 years; this is not specified in the TCM case).  A well-designed CRUT is a beautiful instrument, particularly when interest rates are trending upward – it enables you to take a current charitable deduction equal to the actuarially determined remainder value of the property transferred to the trust, it potentially increases your cashflow from the redeployment of those assets within the trust, and it can defer or even eliminate capital gains tax on the ultimate sale of the properties.  Whatever is left at the termination of the trust passes to specified charities.  Risk can be mitigated and cashflow increased in a tax-efficient manner – a work of art!  But essentially, the Mohamed’s did not complete this great plan because they did not properly complete the paperwork.  How frustrating, and what an expensive waste!

 

  • Remember the proverb “He who is his own lawyer has a fool for a client.”  Substitute the word “accountant” for “lawyer” and you have just about summed it up.  Not that bright, intelligent folks can’t prepare simple tax returns – in many cases they can but they have to be cognizant of the law.  Mr. Mohamed apparently overlooked that fact:  Joseph filled out the 2003 tax return himself, including the Form 8283, Noncash Charitable Contributions. He admits that he did not read the instructions before completing the form, because he says it seemed so clear that he didn’t think he needed to… even though, in fairness to the Commissioner, the form does say right at the top and center: “See separate instructions.” 

 

Now, my mother always told me that men have trouble reading and following instructions, but still……  You can’t overestimate the value of good, solid professional advice.

 

  • Finally, form over substance absolutely matters.  In this case, the Tax Court denied a legitimate $19,000,000 charitable contribution deduction (yes, 6 zeros on that one) because Mr. Mohamed did not dot his I’s and cross his T’s when filing his 2003 and 2004 tax returns.  The law is very specific – contributions of property valued at $5,000 or more (only 3 zero’s there) MUST be accompanied by a qualified appraisal and such appraisal cannot be completed by the taxpayer or his spouse.  Because his self-described occupation was that of “real estate broker, certified real estate appraiser, and a prominent Sacramento entrepreneur,” Mr. Mohamed felt quite qualified in valuing the property himself.  Apparently, not qualified enough.  In his simultaneous roles as the donor and the donee (trustee of the CRUT), Mr. Mohamed by definition was not a qualified appraiser.  (Editorial comment:  Mr. Mohamed may have been qualified to determine the value, but would you hire him to provide a “tax appraisal” if he did not understand the basic tax rules?  It’s probably a moot point; he’s already made his millions elsewhere, so I suspect he is not completing too many tax appraisals for clients.)

In fact, once the transactions were under audit, the Mohamed’s did engage independent appraisers to essentially verify Mr. Mohamed’s valuations, but the damage had already been done.  Ironically, the independent appraisers determined the total value to be about $1.7MM HIGHER than Mr. Mohamed had and subsequent sales of the properties supported both sets of appraisals.  Nevertheless, the Tax Court was absolutely clear in its decision that a greater good was at stake:

We recognize that this result is harsh–a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions–all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

 

This is a stark reminder that tax deductions are truly a matter of legislative grace.  Good intentions may be helpful but they are not enough.  You must follow the rules to the letter!

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This Just In – IRS Form 990 Too Complicated (Duh!)

Posted in Uncategorized, tagged , , , , , on May 30, 2012 | Leave a Comment »

CCH’s Federal Tax Day newsletter recently dropped this bombshell of a news item on its subscribers:  “Tax-exempt organizations complained about the difficulty of completing Form 990, Return of Organization Exempt From Income Tax, at a May hearing before the House Ways and Means Oversight Subcommittee. Industry officials told Subcommittee Chairman Charles W. Boustany Jr., R-La., that completing Form 990 requires too much detailed, and sometimes redundant, information…” 

To which I reply:  Why should tax-exempts be any different from the rest of us?  A tax return is a tax return!  We need a Congressional hearing to tell us this?

But seriously, from the moment I entered this profession, I have had trouble with the notion of tax exempt organizations filing tax returns.  It all seems just a bit contradictory to me.  Of course, the main purpose of such forms is not so much tax calculation but an effort to ensure that tax-exempt organizations are in fact tax-exempt and not just claiming to be.  So the basic returns (form 990 for public charities and form 990-PF for private foundations) are really more regulatory compliance checklists than tax returns.  Oh, these returns do provide financial data such as balance sheets and income statements, but as plain vanilla tax calculators – not so much.  (Except, of course, for private foundations that are subject to a whopping 1% or 2% excise tax on investment income — and IRS better make sure that they collect these taxes or we may end up having to curtail vital governmental services in these great United States.) 

But, protect the public these forms do – IRS can make sure that tax exempt organizations are who they say they are and that they are in compliance with the myriad regulations designed to protect the philanthropic public.  As far as the rest of us are concerned – we too have the ability to check up on virtually any charity by viewing its 990 or 990PF online either at the charity’s website or at www.guidestar.org. 

So, all kidding aside, these reports provide a valuable service for those who wish to invest in particular charities.  Of course, like all financial reports, simplicity is not their overriding virtue — they are written not in English but instead in bureaucratic legalese, and it takes a fair amount of work for the casual reader to get through them in any sort of meaningful way. Think of them as a kind of prospectus for a tax exempt organization.

But because you can never tell a book by its cover (which is even harder in these days of Kindles and Nooks), this information is vital to the philanthropic investor.  Just because an organization has a word like “Cancer” or “Youth” or “Jewish/Catholic/Protestant/Muslim” in its title does not mean that it is an efficiently run charity worthy of your support.  Thankfully, the Internet has made the gathering of both qualitative and quantitative data about tax exempt entities far simpler and quicker that at any time in the past (thank you Al Gore!).  Regardless of whether you have $10 or $10 million to invest/contribute, this data can help you make intelligent choices about which organizations deserve your support.  In addition to an organization’s form 990, you can always read its annual report (often available at the organization’s website) or avail yourself of even easier-to-digest information from third party websites such as www.charitablenavigator.org, www.guidestar.org, or www.bbb.org. 

Remember the old retailer’s slogan “An educated consumer is our best customer” – that slogan applies just as much in the marketplace of philanthropic choice.     The information is out there.  Use it or lose it.

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Top 10 Best Practices of Successful (& Philanthropic) Families

Posted in Uncategorized, tagged , , , , on May 23, 2012 | 1 Comment »

In a recent blog post I wrote about the desirability of developing a family vision and mission statement.  Such a statement helps families to come to grips with who they are and where they want to be.  They help instill the most important beliefs and values in each generation of the family in a way that is at once collaborative and not coercive, supporting and not demanding.

Regardless of whether your family actually develops a written statement, we know that thinking about and instilling these beliefs and values in family members is absolutely crucial to character development, educational and career success and, yes, especially the development of a philanthropic mindset.

A student of mine recently shared the following story with me:  “My family has been fortunate enough to be able to fund a small family foundation, and my sister and I are allocated an amount of money to donate annually to ours (and our spouse’s) favored causes. It’s not a large amount of money, but my wife and I take it seriously. It’s a good way to help the next generation understand how important charitable giving is and how important it is to put thought behind it…” 

What a wonderful idea!  How fortunate my student is to have this gift to use in a way that is meaningful to his generation and perhaps even his children’s generation.  His family may not have consciously engaged in the following “top 10″ practices, but they sure as heck reaped the kind of results that these practices envision.

So, in the spirit of philanthropic advisor Charles W. Collier and his book Wealth in Families (Second Edition), here are the “top 10″ best practices of successful families, those like my student’s, who take pains to pass on more than just the family name and jewels:

  1. Successful families focus on the human, intellectual, and social capital of the family.  What does each family member have to offer both for him/herself and for the family (human/intellectual capital)?  What type of investment does the family make to cultivate this capital?  Where does the family see itself fitting into the greater society (social capital)?
  2. They stress the priority of each family member’s individual pursuit of happiness – NOT Mom & Dad’s definition of what that should be for the kids and grandkids but those of each individual family member.
  3. They work on enhancing intrafamily communication.
  4. Their time frame for determining success is long-term.
  5. They tell and retell the family’s most important stories.  Every family has a history and this history is what makes the family.  Telling and retelling the stories creates a sense of pride and a reason to continue to pull together as a family.
  6. They create mentor-like relationships with establishing family trusts.  While we tend to think of trusts as purely financial instruments, in fact, the trustee/beneficiary relationship formed as a result of the formation of a trust can be used as a tool to guide the beneficiary using someone other than the parent as that guide.
  7. They have collaboratively defined a family vision statement (the Shared Dream).  This is particularly important when engaging in family philanthropy.
  8. They teach children and grandchildren the competencies and responsibilities that come with financial wealth.
  9. They work at getting to really know each family member.
  10. They give their younger family members as much responsibility as they can manage as soon as possible.

 

It’s never too late…

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