Washington News

As December 31 approaches, owners of traditional IRAs who are over age 70½ may be considering a charitable gift before the end of this year. The IRS refers to an IRA charitable rollover gift as a qualified charitable distribution (QCD). An additional benefit for those who are age 73 or older is a QCD may fulfill part or all of your required minimum distribution (RMD) for this year.

Because your IRA custodian may take time to process a QCD and it must be completed by December 31, it is important to proceed promptly with an IRA gift. During 2023, an IRA owner may give up to $100,000 directly from the IRA custodian to a qualified charity. Another QCD option is a one-time gift of up to $50,000 for a charitable gift annuity (CGA), charitable remainder unitrust (CRT) or charitable remainder annuity trust (CRAT).

1. Direct IRA Rollover to Charity — A traditional IRA owner should contact his or her IRA custodian to start the process for a QCD. While distributions from a traditional IRA are normally taxable, the QCD rollovers will be tax-free if they are paid directly to a qualified charity. The QCD is made through a check payable to the charity. The IRA owner must be age 70½ or over and the QCD cannot exceed the 2023 limit of $100,000. If spouses are both over age 70½, then the $100,000 per person limit may allow a couple to distribute up to $200,000 per year to a charity. Because the QCDs are not taxable, there will be no charitable deduction.
2. IRA Rollover to Life Income Plan — A traditional IRA owner may contact his or her IRA custodian to make a QCD up to $50,000 for a CGA, CRUT or CRAT. The gift annuity or charitable trust must pay 5% or more and can only benefit the IRA owner, their spouse or both. While the $50,000 IRA payout for a gift annuity or charitable trust is not taxable, the annuity or trust payouts will be taxable ordinary income and there will be no charitable deduction.
3. How to Report Your QCD — Your QCD must be reported on your 2023 federal income tax return. You can expect to receive an IRS Form 1099-R from your IRA custodian. This will show the traditional IRA distribution in Box 1. You must report the IRA distribution on Line 4 of IRS Form 1040. You will enter the total amount of the IRA distribution on line 4a. If the full amount is a QCD, you then enter zero on line 4b. If part of the distribution is a QCD, the taxable portion is normally entered on line 4b. You must enter "QCD" next to line 4. If you have entered zero on line 4b, the entire QCD will not be taxable.
4. How To Receive a QCD Acknowledgment — Your QCD is not deductible as a charitable contribution. However, with a direct IRA rollover you are required to obtain a written QCD acknowledgment from the charity prior to filing your tax return. This acknowledgment should state the date and amount of the QCD and indicate that the donor has received "no goods or services in exchange for the gift". For an IRA Rollover to Life Income Plans, the acknowledgement should also include a statement that the donor received "no goods or services in exchange for the gift", "except for the [CGA/CRUT/CRAT]" and include the funding value and the approximate value of the donor's benefit (i.e. the present value of the income interest or contract value). You should retain the acknowledgment with your other 2023 tax records.

Editor's Note: Many individuals will fulfill part or all of their RMD this year through a gift to charity from a traditional IRA. If a donor has the right to make distributions from his or her traditional IRA through a checkbook, it will be important to send the check directly to the charity. Please allow sufficient time for the charity to deposit the check and for the financial institution to process the check. This process must be completed by December 31, 2023.

State Regulators Fault IRS For "Scam" Charities

In a letter to the Internal Revenue Service (IRS), the National Association of State Charity Officials (NASCO) expressed concern that the IRS was allowing "scam" charities to be created. NASCO officials offered specific recommendations for IRS Form 1023EZ, requested reinstatement of Schedule B filing requirements for Sec. 501(c)(4) organizations and encouraged enhanced information sharing.

1. Reinstate Disclosure Requirements for Form 1023EZ — The IRS has a very minimal standard to obtain exempt status on the abbreviated Form 1023EZ. NASCO strongly favors the standard IRS Form 1023. The longer form serves important societal purposes and reduces the number of improper charities created. It also has a basic function to educate directors of new organizations. The standard Form 1023 includes sections on finances, operations, fundraising and investments. It also exposes potential compensation abuses or related-party transactions. These items make it easier to identify bad actors. The main problem with the abbreviated Form 1023EZ is that, without this information, "scam" charities may obtain tax-exempt status. The standard form has the benefit of "requiring submission of articles and by-laws, provisions for distribution of assets upon dissolution, and detailed information regarding compensation and other financial information with officers, directors and key employees." NASCO suggests that many of these requirements should be reinstated for Form 1023EZ.
2. Reinstate Schedule B Filing Requirements — NASCO points out that the requirement for Sec. 501(c)(4) organizations to submit "names and addresses" of substantial contributors has been eliminated. In a December 5, 2019 comment letter, NASCO stated the IRS was abdicating its enforcement efforts. The responsibility for enforcement was largely transferred to state regulators. The IRS does not have the tools to investigate "dark money" spent by a Sec. 501(c)(4) nonprofit to influence elections or raise fraudulent funds. NASCO urges the IRS to reinstate a Schedule B requirement for Sec. 501(c)(4) organizations.
3. Information Sharing with State Regulators — The information shared by the IRS with state regulators reduces the level of private inurement, waste, fraud and other abusive practices. Although the Pension Protection Act of 2006 permits some data sharing, this is very limited. NASCO urges the Treasury Department to review new technologies that allow secure sharing of more information. This will enable state charity regulators to be much more effective in reducing fraud, waste, and abuse.

Supreme Court to Rule on Estate Tax Contest

On December 13, the Supreme Court granted review of Thomas A. Connelly et. al. v. United States; No. 21-3683 (8th Cir. 2023).

The Connelly case created a potential split with the Eleventh Circuit case, Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005). The Eleventh Circuit stated the receipt of insurance proceeds with an obligation to redeem stock created an asset and a liability that offset each other.

Brothers, Thomas and Michael Connelly owned a Missouri building materials company named Crown C Corp (Crown). Crown owned life insurance policies on both brothers and the plan was for the proceeds to be used to redeem the decedent's shares if one brother passed away.

Michael Connelly passed away and Crown received $3.5 million in life insurance proceeds. Crown used $3 million to redeem his shares, leaving Thomas Connelly in sole ownership of the company. The estate filed IRS Form 706 and claimed that the $3 million redemption obligation reduced the total Crown value by that amount. Therefore, decedent Michael's share was worth $3 million. The IRS countered that the insurance was an asset of the company, and his shares therefore were worth $5.3 million.

The U.S. District Court for the Eastern District of Missouri and the Eighth Circuit both determined the insurance proceeds were includable as an asset of the estate. The Eighth Circuit noted the insurance proceeds substantially increased the equity of surviving brother Thomas.

The estate claimed that this redemption issue should be reviewed by the Supreme Court because cross-purchase agreements funded by life insurance are "commonplace among owners of closely held corporations."

Editor's Note: The U.S. Supreme Court rarely reviews estate tax cases, but the apparent split in the circuit courts needs to be resolved. This is an important case because a buy-sell funded with insurance is frequently used by estate planners.

Applicable Federal Rate of 5.8% for December -- Rev. Rul. 2023-21; 2023-49 IRB 1 (15 November 2023)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2023. The AFR under Sec. 7520 for the month of December is 5.8%. The rates for November of 5.6% or October of 5.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."