Mass General's Advisor’s Corner is produced every six weeks to share tax and philanthropic planning updates and also feature current hospital news and updates on patient care and medical research and education. 

Massachusetts General Hospital’s Advisor's Corner

Thank you for your interest in Massachusetts General Hospital’s Advisor's Corner.  Mass General launched this monthly publication to share tax and philanthropic planning updates that you and your clients may find useful.  It will also feature current hospital news and updates on patient care and medical research and education. 

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Ways and Means Takes Testimony on the Charitable Deduction


In a lengthy hearing before the full House Ways and Means Committee yesterday, 42 witnesses in six panels of seven each spoke about the future of the charitable deduction.

Extended Summary

The full text of the formal testimony is available on the Committee's website. Written comments are to be submitted by the close of business Thursday, February 28, 2013.

In anticipation of the hearing, the Joint Committee on Taxation released a report summarizing the present law and detailing the recent proposals to reform the deduction structure. These include:

limiting the existing deduction to contributions in excess of a floor, expressed either as a fixed dollar amount or as a percentage of adjusted gross income; limiting the marginal benefit of the itemized deduction, as has been proposed by the Obama administration in several successive budgets; extending the benefit of the deduction to nonitemizers by allowing an "above the line" income adjustment, with or without a floor; and replacing the deduction with a nonrefundable credit, with or without a floor.

The likely revenue effects and impacts on giving of each of these approaches were the subject of a Congressional Budget Office study two years ago.

Selected highlights of yesterday's testimony:

Roger Colinvaux, a law professor at the Catholic University and former legislation counsel to the Joint Committee on Taxation, suggested that while the choice among policy options would depend in part on whether the deduction is seen as an adjustment to a taxpayer's income base or as a subsidy. Accoridng to the professor, either rationale would support placing a floor under the deduction, and repealing provisions allowing a deduction at fair market value for appreciated property. C. Eugene Steuerle, a fellow at the Urban Institute and a co-founder of the Urban-Brookings Tax Policy Center, proposed a combination of measures he said would increase charitable giving with little or no revenue effect. Among other things, he suggested an creating "above the line" deduction for non-itemizers, subject to a floor, allowing deductions for contributions made until April 15, expanding the charitable IRA Rollover, limiting the deductibility of gifts of non-related use tangible personal property, reducing and simplifying the foundation excise tax, and changing the foundation payout rule, which he said punishes higher payouts in a recession. Diana Aviv, president and CEO of Independent Sector, cited data from the Center on Philanthropy at Indiana University she said contradicted the suggestion "that the charitable deduction disproportionately benefits those charities favored by wealthier donors," specifically, arts organizations and private colleges. The 2012 Study of High Net Worth Philanthropy, she said, found that 79.3% of households with incomes above $200,000 per year gave to "basic needs" charities in 2011, with the average size of these gifts increasing by 17.5% from 2009. Ms. Aviv urged legislators to make permanent several "extenders," including the charitable IRA Rollover, the enhanced deduction for contributions of food inventory, and the enhanced incentives for contributions of conservation easements. Conrad Teitell, volunteer legal counsel to the American Council on Gift Annuities, urged an expanded version of the charitable IRA Rollover to allow a taxpayer as young as 59-1/2 to roll over as much as $500,000 to fund a charitable remainder trust or gift annuity.

No fewer than fifteen of the witnesses represented regional affiliates of the United Way. Testimony from these and several other witnesses focused anecdotally on social services performed by local charities and asserted broadly that the charitable deduction is an essential element of the landscape.

At least two witnesses did step somewhat outside predictable comments.

Jan Masaoka, CEO of the California Association of Nonprofits, asked legislators to "take a full-picture approach" in looking at the deduction. She noted a CBO report that "taxpayers who earn more than $100,000 a year took in 76% of the total charitable tax subsidy in 2006, despite contributing [only] 57% of all donations," and that "the charitable giving of higher earners tends to go more toward large institutions, such as for facilities projects at universities," underscoring her point by noting that "[m]illionaires give just 4% of their total contributions to 'basic needs' organizations." Ms. Masaoka suggested an "above the line" deduction for non-itemizers and a floor on deductions as "ideas worthy of discussion." Ms. Masaoka's figures were underscored by a report issued last week by the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. John M. Palatiello, president of the Business Coalition for Fair Competition, decried the encroachment of exempt entities into the private sector, unfairly competing with for-profit businesses. He urged closer tracking and stronger enforcement of the tax on unrelated business income, and legislation to provide a more workable definition of what constitutes an "unrelated" business.

CPC Commentary

Earlier in the week, Committee Chair Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI) announced the creation of eleven tax reform "working groups" within the committee, each tasked with compiling "feedback" on a specified topic from stakeholders, academics and think tanks, practitioners, the general public, and colleagues in the House. The groups' work product is due April 15.

The "charitable/exempt organizations" working group is to be chaired by Rep. David Reichert (R-WA), with Rep. John Lewis (D-GA) serving as vice-chair. Rep. Lewis has repeatedly sponsored the "Artist-Museum Partnership Act," most recently as H.R. 112-1190, which would allow the creator of a literary, musical, artistic, or scholarly work to claim a deduction for fair market value for contributing the work to a charity for which it would be related use property. He was a co-sponsor of H.R. 111-4090, which would have temporarily replaced the two-tier excise tax on investment income of private foundations with a flat rate.

Rep. Lewis also sponsored H.R. 110-7083, which would among other things have grandfathered certain non-functionally integrated Type III supporting organizations from the then threatened five percent minimum payout requirement and permitted a supporting organization to pay reasonable compensation to a substantial contributor without running afoul of excess benefit restrictions. That bill passed the House, but was killed in the Senate in a procedural maneuver by Sen. Charles E. Grassley (R-IA), then the ranking member of the Finance Committee.

Rep. Lewis also urged the Treasury and IRS to abandon the five percent minimum payout requirement. The final and temporary Regs issued in December yielded to these comments, substituting a requirement that a NFI Type III SO distribute annually the greater of 85% of its adjusted net income or 3.5% of the fair market value of its non-exempt use assets.

For his part, Rep. Reichert is a co-sponsor of H.R. 112-4035, which would exempt from excess business holdings a private foundation's investment in a wholly owned business, acquired under a decedent's will or trust, that distributes all of its net operating income to the foundation. He was also a co-sponsor of H.R. 112-1478, which among other things would have allowed an electing small business trust to pass through the full amount of any charitable contribution, without regard to the shareholder's basis in the stock.

Kallina's Korner: Getting back to the hearing and charitable income tax reform, it appears that some witnesses have the perspective that tax deductions, and the attendent tax dollars belong to the government. Would the testimony and conclusions be different if these individuals believed that charitable dollars belong to the taxpayer, and not Congress? It is true that tax deductions are a matter of "legislative grace," but ultimately the American taxpayer will decide the issue at the ballot box.

Comment Period Closes on Proposed Medicare Surtax Regs


As the comment period closes on the proposed regulations under Section 1411 implementing the 3.8% Medicare surtax on net investment income ("NII"), two commenter's focused on issues relating to charitable remainder trusts and gift annuities.

Extended Summary

1. Kaspick & Company Comments

Investment manager Kaspick & Company urged Treasury to reconsider its proposal to characterize distributions from a charitable remainder trust as NII to the extent of current or accumulated NII at the trust level, regardless of the character of the distributions under the four-tier method of accounting.

While Treasury's proposal "seeks to avoid sub-accounting within each tier of income" under Reg. Sec. 1.664-1(d)(1), Kaspick claimed it "effectively creates a fifth tier." Thus, Kaspick contended, Treasury would impose further administrative burdens on trustees, creating confusion for beneficiaries, who would sometimes be subjected to the surtax on distributions that did not, under the four-tier method, actually include NII.

Kaspick also suggested final regulations should clarify that NII distributed from a gift annuity may be spread out over the life expectancy of the annuitant, and that capital gain realized upon the creation of a gift annuity funded prior to 2013 would not be subject to the surtax.

Finally, echoing the comments of Conrad Teitell on behalf of the ACGA, Kaspick urged the Treasury to exempt from the surtax short-term capital gains recognized by pooled income funds.

2. Texas Bar Tax Section Comments

The Section of Taxation of the State Bar of Texas took a somewhat different approach, urging the Treasury to allow the trustee of a charitable remainder trust to elect to allocate NII according to the four-tier method.

The Texas Bar also suggested that the Treasury allow the trustee of an existing noncharitable trust who has discretion to allocate realized capital gains to distributable net income but who may have elected to retain gains as corpus, a "fresh start" in light of the fact that undistributed gains will now be subject to a surtax at the trust level.

CPC Commentary

The comment period closed Tuesday, March 5. A public hearing is scheduled for Tuesday, April 2. Altogether, about thirty comments were submitted, mostly dealing with issues surrounding "material participation" in an activity generating passive income or losses. Only a handful specifically addressed fiduciary income tax accounting, split interest trusts, and gift annuities.

Using a CRT to Sell Section 1250 Real Property

Provided by Renaissance


This case study illustrates the use of a CRT to defer gain on the sale of depreciated rental property.


Richard and Kathy Bates, age 70 and 69, respectively, want to retire and spend more time traveling. To meet these goals, they decide to sell an apartment building they purchased twenty years ago for $2,000,000 which recently appraised for $6,000,000. After claiming $750,000 of depreciation, their current basis is $1,250,000. They are concerned about the effect of capital gain tax on the remaining $4,750,000, which they think would leave them with only $5,288,000 to invest toward their retirement and travel goals.

To make matters worse, the Bates’ CPA explains that depreciated real property is subject to a higher capital gain tax rate (25%) for the portion of the capital gain attributable to depreciation. This is referred to as unrecaptured section 1250 gain.

As a result if they sold the property, the Bates would pay a higher capital gain tax on a portion of the property. This extra capital gain tax is an extra $75,000, which means they would only have $5,213,000 to invest toward their retirement and travel goals.

At a meeting with their financial planner, Richard and Kathy learn how a charitable remainder trust (CRT) can sell the apartment building without paying capital gain tax and preserve the full $6,000,000 thereby enhancing their retirement income. The Bates are thrilled with the benefits of a CRT. Acting on their planner’s advice, they create a 6% CRT that sells the apartment building and pays them a lifetime cash flow initially based on the full $6,000,000 sales proceeds (less a Realtor’s commission). As an extra benefit, because the Bates’ CRT will leave a substantial gift to charity in the future, Richard and Kathy can claim an immediate income tax charitable deduction and reduce their taxable estate.


CMFR = 2.8%. Total Return rate of CRT portfolio = 8%. Federal income tax rate = 35%. Federal capital gains tax rate = 15%. State tax rates assumed to be 0%. 10% of original cost basis allocated to the land. Depreciated on a straight-line basis over 39 years. Richard and Kathy can benefit their heirs through life insurance or separate planning. The property in the CRT cannot be used by or sold to the Bates’ family. Assumes the property is not subject to a mortgage. Selling expense of 8%.

Note: This example is hypothetical and for educational use only. The situations, tax rates or return numbers do not represent any actual clients or investments. There is no assurance that the rates depicted can or will be achieved. Actual results will vary. Please consult with legal and tax counsel about the suitability of this plan before proceeding. For more details about this strategy or any other charitable or trust case, please call Renaissance at 800.843.0050.

© 2003-2009 Renaissance Administration LLC

Reprinted by permission of Renaissance Administration LLC

CPC Commentary

The views, opinions, and conclusions expressed in this Commentary are those of the author and do not necessarily reflect the views, opinions, or conclusions of CPC.

It appears that the 3.8% tax on net investment income, enacted as part of the Health Care Reconciliation Act, will be added to the 25% rate referred to above in the case study.

A cautionary note: under the four-tier, "worst in, first out" ordering rules for CRTs, the depreciation recapture will be distributed ahead of the long-term gain.

Content provided by in conjunction with Kallina & Associates, LLC
Copyright 2006-2011, CPC Holdings, LLC