Ease Compliance Burdens on Universities, Individual says

ISSUES REGARDING ANNUAL NON-CASH GIFTS UNDER
INTERNAL REVENUE CODE SECTION 4968

Background

Private foundations, on an annual basis, generally receive a small number of gifts of property from a limited group of people. Among even the largest private foundations, it is not unusual to receive only 1-2 non-cash gifts in a given year. It is permissible and typical for donors to control a private foundation.

Given this context, it is logical that for purposes of determining gain from the disposition of property for purposes of the Code section 4940 excise tax, a private foundation takes a carryover basis in any gifts of appreciated property it receives. Because the donor is almost always a party closely related to the foundation, the foundation is not a disinterested third party; it is an extension of the donor's charitable persona, and it will have access to the donor's basis information. In addition, given the small number of total contributions of appreciated property received by most private foundations in a given year, tracking basis information does not present a compliance burden.

Colleges and universities are in a very different position than private foundations with respect to annual contributions of property. As public charities with active fundraising operations, colleges and universities receive numerous property gifts annually from a wide group of donors from whom obtaining information regarding original basis would be a very significant compliance burden. Some larger colleges and universities likely to be subject to Code section 4968 receive upwards of 5000 non-cash gifts on an annual basis (a large proportion of which are from separate donors). Even smaller colleges and universities likely to be subject to Code section 4968 regularly receive 250 property gifts annually, a number that far exceeds the number of property gifts received annually by the largest private foundations.

Using Form 8283 (Noncash Charitable Contributions) to obtain basis information from donors is not a realistic solution for colleges and universities for several reasons.

• First, Form 8283 is provided to the donee organization only in limited circumstances, i.e., when it is required to complete the acknowledgement in Part IV. This acknowledgement is required only for donated property (other than publicly-traded securities) for which a deduction of over $5000 is claimed. The vast majority of non-cash contributions received by colleges and universities are publicly-traded securities for which no donee acknowledgement is required. In addition, colleges and universities routinely receive a significant number of non-cash contributions valued at less than $5000 (some estimate approximately 20 percent of total non-cash contributions), for which no donee acknowledgement is required. Therefore, colleges and universities are not receiving Form 8283 for most of the non-cash contributions they receive during the year.

• Second, many donors are not required to complete the Form 8283, such as trusts and donors who are not seeking a tax deduction (including non-itemizers, non-U.S. taxpayers, and donors who have exceeded annual deduction limitations).

• Third, while the Form 8283 includes lines for reporting basis information, that information is not always required to be completed by the donor before the donor provides the form to the donee organization. The instructions to Section A of the form, used to report information about donations of publicly-traded securities, tell donors not to complete the column reporting the donor's cost basis. The instructions to Section B of the form, used to report information about donations of non-publicly traded securities, do not require that cost basis information be completed before the form is provided to the donee organization for acknowledgement, instead stating that only other information about the donated property needs to be completed before being filed.

  • While the Form 8283 instructions could be changed to require basis information to be provided when the form is provided to the donee organization, this would not be a complete solution because of the limited circumstances in which the form is provided to donee organizations and the fact that not all donors complete the form. Such changes would place additional compliance burdens on all donors required to complete Form 8283, even though this information is only necessary for only a subset of donations to a subset of charitable donees.

• Fourth, because Form 8283 is not required to be filed until the extended due date for the taxpayer's individual income tax return — which could be as long as eleven months after the university is required to file its Form 990 related to the donation — attempting to procure basis information from Form 8283 may not be timely.

Proposal

Code section 4968 provides that regulations thereunder shall be “similar” to the regulations applicable to the private foundation excise tax. “Similar” obviously does not mean “the same.” In fact, it would be inappropriate to apply the same carryover basis provision for non-cash donations under the private foundation rules to colleges and universities for purposes of section 4968. The significant differences between private foundations and universities, the roles their donors play with respect to the institutions, and the volume of gifts the institutions generally receive each year all support the application of different rules. Permitting colleges and universities to use an asset basis based upon fair market value at the time the gift is received (or when no restrictions on sale exist) appropriately minimizes compliance burdens on universities while remaining faithful to the text of Section 4968.

Discussion

We surveyed many of the colleges and universities potentially impacted by section 4968 to better understand the number and types of annual donations they receive and the manner in which they receive tax information from donors.

Highlights of the information we received include:

• Non-cash annual donations ranged from 250 gifts at smaller schools to over 5000 gifts at larger schools.

• Publicly traded securities generally are 85-95 percent of the total value non-cash donations for most schools.

• For some schools, over 20 percent of non-cash donations will be valued at less than $5000.

• Most institutions will sell non-cash donations almost immediately upon receipt, many using a third-party agent to liquidate the securities. Some schools report receiving the securities electronically and then almost immediately selling such securities.

Many donors will not have access to cost basis information as some of the gifts relate to assets owned for decades, may not understand the request for cost basis information, or may not otherwise be forthcoming with the information. Schools are concerned that numerous requests from schools to obtain basis information will strain donor relations and adversely impact fundraising. Even if a donor offers cost basis information, schools are concerned that they may not be able to rely on the information without corroborating documentation. In sum, schools are concerned that the requirement to obtain cost basis will entail a sensitive, individualized back-and-forth process with donors that will consume an inordinate level of resources. Some large schools estimated that this process could take over 1600 hours annually — equivalent to a full-time employee. In addition, the need to reprogram schools' financial systems to integrate donor cost basis (and link to supporting documentation) would be a substantial project; one school estimated that it could take up to a year to update their complex systems.

These burdens apply not only to the somewhat limited number of colleges and universities expected to be subject to section 4968 initially, but to any college or university that could potentially become subject to section 4968 in the future (since it would be necessary for those schools to have donor basis information as well for future excise tax calculation); this is information that would not otherwise be tracked and could be a significant trap for the unwary.

Obtaining donor cost basis would be unnecessary if donors contribute non-cash property first to a donor advised fund where the property is sold and then the proceeds are donated to the college or university. Regulations should not create differences between two similarly situated donors — one who has established a donor advised fund and one who has not created such a vehicle.

Conclusion

It is arguably logical that in calculating the private foundation excise tax, a foundation is taxed on the appreciation of gifted securities in the hands of their donors, who are small in number, typically control the foundation (either legally or by virtue of their outsize gifts), and can readily supply the foundation with the necessary cost basis information. Donors to a particular university, on the other hand, number in the thousands, do not control the university, and cannot be expected to provide documented cost basis information absent time consuming, costly outreach by universities. These substantial differences warrant the application of a different rule to universities for purposes of section 4968: universities should not be taxed on their donor's appreciation but rather should be attributed a basis equal to the fair market value at the time of contribution. In fact, we request a further simplifying presumption: that a security sold by a university within a certain amount of time after contribution (say, 5 days, as the vast majority of public security gifts are) be ascribed a fair market value upon contribution equal to its sale price, and thus no gain or loss would be recognized. This approach is consistent with the conclusion that Treasury should craft basis tracking rules to address situations where the potential for tax collections is high but minimize compliance burdens where the potential for tax collection is low. Compliance burdens imposed on colleges and universities should be commensurate with the potential revenue at stake.