The Tax Law of Charitable Giving. Bruce R. Hopkins
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an individual.80 Certain deductions are not allowable to an S corporation, including the charitable contribution deduction.81
Under the law prior to its amendment in 2006, if an S corporation contributed money or other property to a charitable organization, each shareholder took into account the shareholder's pro rata share of the contribution in determining the shareholder's income tax liability.82 A shareholder of an S corporation reduced the basis in the stock of the S corporation by the amount of the charitable contribution that flowed through to the shareholder.83
Pursuant to the amended law, the amount of a shareholder's basis reduction in the stock of an S corporation, by reason of a charitable contribution made by the corporation, was equal to the shareholder's pro rata share of the adjusted basis of the contributed property.84 This rule was applicable to contributions made in tax years beginning after December 31, 2005, and tax years beginning before January 1, 2015.85 It has not been further extended.
§ 4.18 CONTRIBUTIONS BY PARTNERSHIPS
The taxable income of a partnership generally is computed in the same manner as for individuals; however, the charitable contribution deduction is not allowed to the partnership.86 Rather, each partner takes into account separately the partner's distributive share of the partnership's charitable contributions.87
A partner's distributive share of charitable contributions made by a partnership during a tax year of the partnership is allowed as a charitable deduction on the partner's tax return for the partner's tax year within which the tax year of the partnership ends.88 The aggregate of the partner's share of partnership contributions and the partner's own (directly made) contributions are subject to the various percentage limitations on annual deductibility.89
Moreover, when a partnership makes a charitable contribution of property, the basis of each partner's interest in the partnership is decreased (but not below zero) by the amount of the partner's share of the partnership's basis in the property contributed.90
The adjusted basis of a partner's interest in a partnership must be increased by the sum of the partner's distributive share for the tax year and prior tax years of the taxable income of the partnership, the income of the partnership that is exempt from tax, and the excess of the deductions for depletion over the basis of the property subject to depletion.91 The adjusted basis of a partner's interest in a partnership must be decreased (but not below zero) by distributions by the partnership, as well as by the sum of the partner's distributive share for the tax year and prior tax years of the losses of the partnership and expenditures of the partnership that are not deductible in computing taxable income and not properly chargeable to a capital account.92
The adjustments to the basis of a partner's interest in a partnership are necessary to prevent inappropriate or unintended benefits or detriments to the partners. Generally, the basis of a partner's interest in a partnership is adjusted to reflect the tax allocations of the partnership to that partner. This adjustment ensures that the income and loss of the partnership are taken into account by its partners only once. Also, adjustments must be made to reflect certain nontaxable events in the partnership.93 For example, a partner's share of nontaxable income (such as exempt income) is added to the basis of the partner's interest because, absent a basis adjustment, the partner could recognize gain with respect to the tax-exempt income (such as on a sale or redemption of the partner's interest), and the benefit of the tax-exempt income would be lost to the partner. Likewise, a partner's share of nondeductible expenditures must be deducted from the partner's basis to prevent that amount from giving rise to a loss to the partner on a sale or redemption of the partner's interest in the partnership.
In determining whether a transaction results in exempt income94 or a nondeductible noncapital expenditure,95 the inquiry must be whether the transaction has a permanent effect on the partnership's basis in its assets, without a corresponding current or future effect on its taxable income.
As discussed, the contribution of this property by this partnership is not taken into account in computing the partnership's taxable income. Consequently, the contribution results in a permanent decrease in the aggregate basis of the assets of the partnership that is not taken into account by the partnership in determining its taxable income and is not taken into account for federal income tax purposes in any other manner. Therefore, the contribution of the property (and the resulting permanent decrease in partnership basis) is an expenditure of the partnership that is not deductible in computing its taxable income and is not properly chargeable to a capital account.
Reducing the partners' bases in their partnership interests by their respective shares of the permanent decrease in the partnership's basis in its assets preserves the intended benefit of providing a deduction for the fair market value of appreciated property without recognition of the appreciation. By contrast, reducing the partners' bases in their partnership interests by the fair market value of the contributed property would subsequently cause the partners to recognize gain (or a reduced loss), such as on a disposition of their partnership interests, attributable to the unrecognized appreciation in this contributed property at the time of the contribution.96
The partnership rules have been modified to clarify that a partner's distributive share of loss takes into account the partner's distributive share of charitable contributions for purposes of the basis limitation on partner losses.97 Thus, the basis limitation on partner losses is decreased to reflect this item. This provision became effective for partnership tax years beginning after 2017.98
§ 4.19 CONTRIBUTIONS BY MEANS OF THE INTERNET
One of the many issues that has arisen out of the utilization of the Internet as a medium to obtain charitable contributions is the tax consequences of the use of for-profit entities by charitable organizations to collect the payments. These entities may deduct a donation service fee and remit the balance to the charity involved.
If the gift is considered made to the for-profit organization, the charitable contribution deduction may be defeated.99 Otherwise, the matter turns on principles of the law as to principal and agent. If the for-profit intermediary is functioning as an agent for the charitable organization, the full amount of the contribution is deductible (not just the amount contributed net of the service fee). If, however, the for-profit intermediary is serving as the agent of the donor, the charitable contribution deduction will not come into being until the gift money (or perhaps other property) is delivered by the intermediary