"Gentle Soul" Shoe Shiner Donates $200K to Charity--But Beware of the Tax Man

From WTAE Pittsburgh:

For 32 years, [Albert] Lexie has been examining his schedule each morning, like a doctor on the clock. But the longtime shoe shiner’s gift isn’t healing, it’s giving back. A shoe shine costs $5, but Lexie said customers have been generous with their tips since he started working at the hospital in 1981.

“Most of them give $6, some of them give $7,” Lexie told Channel 4 Action News anchor Wendy Bell.

And Lexie gives every cent of his tips back to the children.

“I think he does it because he loves the kids,” said Dr. Joseph Carcillo. “He's donated over a third of his lifetime salary to the Children’s Hospital Free Care Fund.”

The money goes to parents of sick children who can’t afford to pay medical costs.

“He's a philanthropist, is what he is,” said Carcillo. “He's an entrepreneur.”

Lexie has donated $200,000 to the cause, bringing in several hundred dollars a week.

No doubt about it.  Mr. Lexie has quietly and consistly done something noble and great by turning over his tips to a worthwhile charity.  However, this raises some very interesting tax implications.  In particular, it is well-settled that amounts received as tips are "income" for income tax purposes and should be reported on a person's tax return.  Now you would hope that the fact Mr. Lexie simply donated these funds to charity would absolve him of any tax liability for those tips, but that isn't necessarily the case.  The reason why is that one's charitable donations are not always 100% deductible.

In this case, it is likely that Mr. Lexie could only deduct these donated tips up to 50% of his adjusted gross income (and remember his AGI would include this tip income).  If, for instance, his donated tips ever exceeded 50% of his AGI, then he would not be able to deduct the full amount of donated tips that year.  While these excess donations can be rolled over for up to 5 years, it doesn't do Mr. Lexie much good if every year he is maxing out this deduction limitation.  On a related not, it is unclear what documentation the hospital has provided Mr. Lexie each year that would enable him to substantiate these deductions, if ever questioned.

In all, Mr. Lexie has done a noble thing...let's just hope the IRS doesn't take notice. 

Converting From a For-Proft to a Nonprofit Entity

Under California and Federal law, it is possible for a for-profit corporation to convert to a nonprofit entity.  This conversion really has two components: i) making the change for state law entity purposes, and ii) seeking and obtaining tax exempt status for the now, nonprofit entity.

With respect to legal conversion, there is a unique section in the California Corporation's Code which allows a corporation to convert to a California Nonprofit Public Benefit Corporation, simply by amending its articles of incorporation. (See Cal. Corp. Code Sec. 911.)  Oddly, this provision is not grouped with all the other provisions that deal with corporate conversions but is part of the section of the code that deals with amending articles.  This distinction means that there is no "converting" or "converted" entity or "terminated" and "surviving" entity as is the case under the normal statutory conversion sections.  In essence, a conversion under Sec. 911 means the entity is the same entity as before--it is just a classified differently.

Of course, amending the articles appropriately is only part of the process--the entity must still apply for tax-exempt status at both the state and federal level.  This is done by filling out  IRS form 1023.  Note that if you have converted from a for-profit to a nonprofit, there is a separate Schedule G to the form 1023 that must be filled out where you are to explain why the conversion occurred and what relationships various parties have to the entity.  The biggest question is why would an entity that is making money, apparently for commercial reasons, want to switch to non-profit status?  The IRS will want to ensure that there is no self-dealing or private inurement to certain owners and officers as a result of the conversion.  Assuming the IRS grants tax-exempt status, the entity can easily seek tax exempt status at the state level. 

Curiously, one grey area is whether or not the entity must acquire a new EIN for tax reporting purposes.  The guidance provided by the IRS on this matter is unclear and subject to varying interpretations.  Typically, most entities prefer to retain their own EIN so there is less administrative burden. 

On final aspect are the tax implications that are involved.  In particular, most C corporations prefer to bonus out employees at the end of the year so that there is minimal corporate income (in an effort to minimize corporate level taxes).When a conversion is made, consideration should be given as to the timing of corporate income and expenses so that as much of the corporate expenses are allocated to the time frame when the corporation is a nonprofit. 

What's the FMV of artwork that cannot be sold? IRS says $65 million

From the NY Times:

The object under discussion is "Canyon," a masterwork of 20th-century art created by Robert Rauschenberg that Mrs. Sonnabend’s children inherited when she died in 2007.

Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.  But the Internal Revenue Service takes a different view. It has appraised “Canyon” at $65 million and is demanding that the owners pay $29.2 million in taxes.

...

At the moment, tax experts note that the I.R.S.’s stance puts the heirs in a bind: If they don’t pay, they would be guilty of violating federal tax laws, but if they try to sell “Canyon” to zero-out their bill, they could go to jail for violating eagle protection laws.

Mr. Lerner said that since the children assert the Rauschenberg has no dollar value for estate purposes, they could not claim a charitable deduction by donating “Canyon” to a museum. If the I.R.S. were to prevail in its $65 million valuation, he said the heirs would still have to pay the $40.9 million in taxes and penalties regardless of a donation.

Then, given their income and the limits on deductions, he said, they would be able to deduct only a small part of the work’s value each year. Mr. Lerner estimated that it would take about 75 years for them to absorb the deduction.

“So my clients would have to live to 140 or so,” he said.

California Entrepreneur Fills Out Form Himself-- Loses $18.5 Million Charitable Deduction

In what can be considered one of the harshest Tax Court cases of the year, the Tax Court denied a gigantic charitable deduction because admittedly "confusing" IRS forms were not filled out properly.

A prominent Sacramento real estate broker, certified real estate appraiser, and entrepreneur, donated six properties worth at least $18.5 million to a charitable remainder trust in 2003 and 2004, but failed to read and ultimately follow the instructions to Form 8283 (Noncash Charitable Contributions).  Although the Tax Court acknowledged that "the property was quite likely more valuable than the [broker] reported on [his] tax returns," the Tax Court denied the claimed charitable deduction for failure to comply with the substantiation requirements.  Ouch. Mohamed v. Commissioner, T.C. Memo. 2012-152 (May 29, 2012):

We recognize that this result is harsh—a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions—all reported on forms that even to the Court's eyes seemed likely to mislead someone who didn't read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

The lesson here is that any time a person seeks a charitable deduction for real estate, a competent adviser should actually prepare the Form 8283 and ensure that any attached appraisal meets IRS requirements. 

(See more from Tax Prof)

So how much did President Obama donate to charity before running for office?

The big news today is that the Whitehouse released Pres. Obama's tax returns for 2011.  Notably, he donated 21.8% of his income to charity last year.

But what did President Obama's charitable contributions look like in prior years?  Below is a chart showing his income and chartable donations since 2000 (courtesy of TaxProf Blog). 



I won't attach Joe Biden's chart as its hard to deviate from a high of 1.45%.