NCPG - National Committee on Planned Giving

Government Relations News

Comments by the National Committee on Planned Giving (NCPG) on the Proposed Regulations on Exchanging Property for a Private Annuity

CC:PA:LPD:PR (REG-141901-05)
Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station
Washington DC 20044
Submitted on behalf of NCPG by:

Tanya Howe Johnson, President and CEO
233 McCrea Street, Suite 400
Indianapolis, IN 46225
Phone: (317) 269-6274
Fax: (317) 269-6276
E-mail: thjohnson@ncpg.org

Prepared by:
Reynolds T Cafferata
Partner
Rodriguez, Horii & Choi LLP
777 S. Figueroa, Suite 3307
Los Angeles, CA 90017
Phone: (213) 892-7704
Fax: (213) 892-7777
E-mail: reynolds@rhclaw.com

REG-141901-05 would require that any gain in property transferred in exchange for a private annuity be taxable immediately at the inception of the contract and not reported ratably over the annuitant's life expectancy. You have asked for comments on whether the proposed rules should also be applied to charitable gift annuities.

These comments are submitted by the National Committee on Planned Giving, a national membership association serving more than 10,000 charitable gift and estate planners. We greatly appreciate the opportunity to provide the IRS with feedback. Along with this original, we are enclosing eight copies, as required. NCPG is NOT requesting to present oral comments.

NCPG would not favor applying the proposed rules to charitable gift annuities, one of the most popular charitable giving vehicles. NCPG believes the proposed rules, if applied to charitable gift annuities, would create a disincentive to funding gift annuities with appreciated property. The proposed rule change is also inconsistent with longstanding tax principles of taxation of charitable gifts.

We understand that the proposed regulations are designed to address perceived abuses in private annuity contracts. However, as a charitable giving arrangement between a donor and the organization whose mission they wish to support, CGAs are not commercial contracts that are susceptible to abuses of the type that sometimes occur with private annuities. Following are more specifics to support this position:

A charitable gift annuity is a transaction in which a donor contributes cash or property to a charity and receives an annuity in exchange for the property. The fair market value of the annuity is less than the value of the property contributed to the charity by the donor. The difference between the value of the annuity and the value of the contribution is a contribution to the charity for which the donor may claim income and gift tax deductions. Most charities issue gift annuities based on American Council on Gift Annuity rates that are designed to result in a gift equal to about 50 percent of the value of the contributed property. Under Internal Revenue Code Section 514(c)(5)(A), the value of the annuity cannot exceed 90 percent of the value of the contributed property.

If the donor contributes appreciated property for a gift annuity, Treasury Regulation Section 1.1011-2(a)(ii) allows the donor to report gain from the annuity over the donor�s life expectancy in limited circumstances. To qualify for the deferred reporting of the gain, the annuity must be payable to the donor (a survivor beneficiary also may be named). In addition, the donor must be prohibited from assigning the annuity to any person other than the issuing charity. In those circumstances, the gain in the appreciated property is reported to the donor over the donor�s life expectancy. To determine that gain, the donor is required to allocate basis to the gift portion of the property in proportion to its value with respect to the entire contribution.

If the proposed rules were applied to charitable gift annuities, a key component of these gift arrangements�the ratable taxation�would be lost, leading to fewer charitable gift annuities, as many of these gifts are currently funded with appreciated securities or other appreciated property. Since the donor does not receive a significant cash payment when the gift annuity issued, if the donated property is highly appreciated, the donor simply may not have the cash to pay the tax on all the gain in the year of the gift. Ratable reporting assures the donor that the donor will have the cash each year to pay taxes when due.

Other common deferred giving vehicles�the pooled income fund and the charitable remainder trust�offer even more favorable deferral of gain than the charitable gift annuity. In the case of the pooled income fund, the donor is never taxed on the gain in donated appreciated property. In the case of the charitable remainder trust, gain in donated property is taxed to the donor only when all other gains have been distributed and taxed to the donor. This is true even if these vehicles make payments to a person other than the donor. The general principle is that with respect to a donation to a charitable life income arrangement under the Internal Revenue Code, gain is only taxed when it actually is paid out to a non-charitable beneficiary. So long as the gain is being held for the distribution to the charity, the gain is not taxed. The gift annuity should retain its limited gain deferral to maintain parity of tax treatment with other charitable giving life income vehicles under the Internal Revenue Code.

Full taxation of the gain of appreciated property when a gift annuity is issued will force donors to reduce the amount of the gift to pay the taxes. This effectively means the charity will bear the burden of the taxation, a result that the Internal Revenue Code and general tax principles seek to avoid.

The proposed regulations are designed to address abuses of private annuity contracts in which transactions are structured to avoid rules regarding installment sales and a subsequent disposition of the property sold for the installment obligation. Installment sale treatment is allowed on some dispositions of appreciated property because of lack of cash in the hands of the taxpayer to pay taxes and because of a risk of not collecting all amounts due. Some taxpayers have used the private annuity to defer taxation under circumstances where all sales proceeds were available to pay taxes and where there is no risk of collection.

As a charitable giving arrangement between a donor and the organization whose mission they wish to support, charitable gift annuities are not susceptible to abuses of the type that sometimes occur with private annuities. The limitations on the value of the annuity that a charity will issue and the limitation on assignment of the annuity when a donor is allowed to defer gain eliminate the possibility of the donor getting an inappropriate economic advantage or tax result from a gift annuity. Significantly, if the annuitant in an abusive private annuity transaction dies before receiving the full value of the property given in exchange for the annuity, the annuitant�s family members receive the value of the property free of gift and estate tax. If the donor who receives a gift annuity dies before receiving the value of the property given for the annuity, a charity receives all the value. The donor and the donor�s family receive no benefit from the early death of the donor.

For the foregoing reasons, the limited deferral of reporting of gain for gift annuities should not be modified. Thank you for the invitation for public comment. Please feel free to contact us for any further information. We hope that you will favorably consider our request.

Submitted by:

Tanya Howe Johnson
President and CEO
National Committee on Planned Giving