from Medieval Academy News

Contributions to the Academy, Cash and “Non-Cash”
by David Anderson

As Medieval Academy members whose “tax home” is the United States plan ahead for the end of the year, they may want to consider the advantages of contributing to the Academy, a qualified charitable organization under Section 1.170c of the Internal Revenue Code. Since the Academy is a qualified organization, contributions to it may be taken as deductions on individual and business income tax returns, and bequests to the Academy reduce the taxable value of an estate. Although the Academy has no development officer (in fact, no money is spent on fund-raising, per se), the Academy office and Finance Committee have experience with the paperwork necessary to secure these tax benefits for its members.

The following notes regard “non-cash” contributions, such as royalties, books, art, and securities, which typically require the most planning and paperwork. They are preceded by a review of the (narrowly) financial arguments in favor of charitable giving, which has, of course, many personal and professional rewards as well.

Taking advantage of tax subsidies. U.S. tax law encourages charitable giving, and giving more and sooner, by providing two tax advantages: first, unlike bequests, charitable contributions made while the donor is alive yield income tax deductions; and, second, qualified organizations, because they are tax-exempt, can, in principle, invest funds at a higher after-tax rate of return than can the donor.

These are strong arguments for contributing to the Academy, even in the light of recent changes in estate tax law. (The Tax Relief Act of 2001 provides, for example, that the “unified credit” exemption for estates is increased to $1 million in 2002, and the maximum estate tax rate is reduced to 45% by 2007.)

To illustrate the advantages of charitable giving, suppose that you are considering whether to increase the estate you plan to leave your daughter or to make a financial contribution to your favorite scholarly society. If you are in a 30% marginal tax bracket, each $1.00 gift to the society costs you only $0.70 (70¢), because of the income tax benefit ($1.00–[$1.00 x 0.30]). At this point, not making the charitable contribution would increase your estate by only $0.70. In effect, you are deciding between enriching the society by $1.00 and increasing your estate by $0.70. Furthermore, if the tax rate on your estate is 45%, the $0.70 added to that estate will give rise to taxes of $0.315 ($0.70 x 0.45) upon your death. Thus, your choice is between a $1.00 donation and a $0.385 ($0.70-$0.315) increase in your daughter’s inheritance.

Now add the interest factor. If during your lifetime you invested the $0.70 safely, realizing a 6% return, in one year your income is about $0.042 (4.2¢). You pay taxes on this at your marginal rate of 30%, leaving about a $0.03 (3¢) gain. However, if you made the charitable contribution, the scholarly society of your choice—assuming it can pick safe investments as well as you can—realizes income of $0.06 (6¢), or twice as much, over the same period, because it received $1.00, net, from you and invested it tax-free. In sum, you take best advantage of the very significant tax subsidies provided by the U.S. government when you give sooner, rather than later.

“Non-Cash” contributions. Much of the above argument applies to “non-cash” contributions as well. For example, donors can take a tax deduction equal to the fair market value of securities, intellectual property, and other assets contributed to charity. When you give property other than money with a value over $500, you must file Form 8283, Noncash Charitable Contributions, with your income tax. If the value is over $5,000, you must attach a receipt from the donee organization and, usually, a signed appraiser’s certification (IRS Regulation 170-a [13]).

Securities. Sometimes a further tax subsidy results from contributed shares of stock because the qualified organization does not pay capital gains tax on the appreciation in the value of the assets contributed. Consider these scenarios. First, you own shares in the family business; your father wants to sell out and retire, and a large consolidator is interested. Second, you own founders’ shares in an internet start-up that is finally going public. In both cases the big pay-off for your shares will come with big capital gains taxes, because you have held the shares for years and paid next to nothing for them. This is the right moment to contribute some shares. For one thing, you get a deduction on your income tax just when you need it most (but watch out for the Alternate Minimum Tax here!) and, for another, the qualified organization receiving the shares does not pay capital gains tax when the company is sold.

Royalties, etc. Contributions of intellectual property can also be taken as deductions. Typically, an appraisal determining the present value of the royalties would need to be submitted with your income tax return.

Books and art. The Academy has helped find charitable organizations interested in specialized libraries. Recent examples include college libraries wanting to enlarge their standing collections and agencies providing books to Eastern European institutions. In general, the Academy does not add to its own coffers by this service but is happy to provide help to its members, who get the tax break as well as the satisfaction of a well-planned gift.

More information. Tax Regulations are available at the IRS Website, http://www.irs.ustreas.gov/tax_regs. Useful publications include “Tax Act Provisions Effective in 2001,” Kleinrock’s Federal Tax Bulletin (14 June 2001), Shannon P. Pratt, et al., Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 3rd ed. (New York, 1996), and Myron S. Scholes and Mark A. Wolfson, Taxes and Business Strategy (Englewood Cliffs, N.J., 1992).

If you would like to discuss the possibility of contributing to the Medieval Academy, contact the Executive Director, Medieval Academy, 1430 Massachusetts Ave., Cambridge, MA 02138 (617-491-1622; RKE@MedievalAcademy.org).

Editor’s note. David Anderson, a member of the Academy’s Finance Committee, is a business appraiser for A. I. F. Management Co., Pittsford, N.Y. His interest in matters charitable can be traced to a Princeton Ph.D. in medieval English as well as an M.B.A. from the University of Rochester. He may be reached at aif@frontiernet.net.