As tax professionals, most readers of this publication are likely well acquainted with the tax advantages of charitable giving. To summarize briefly, individuals who itemize their deductions are entitled to deduct up to 50% of their adjusted gross income (computed without regard to any net operating loss carrybacks) for cash contributions to tax-exempt public charities described in section 501(c)(3).1 The fair market value of appreciated securities held for the long-term capital gain holding period and other capital gain property (capital assets—including property used in a trade or business as described in section 1231(b) of the Code—whose sale at fair market value would produce long-term capital gain) contributed to public charities may be deducted up to 30% of adjusted gross income.2 Contributions which may not be used in a taxable year because of the percentage limitations may be carried forward to the succeeding five taxable years.3 Partners in professional service partnerships may also deduct on their individual income tax returns their distributive shares of charitable contributions made by the partnership.4
What is perhaps less well known is that professional associations such as the ABA, a section 501(c) (6) tax-exempt professional association that is generally not eligible to receive charitable contributions, may establish restricted funds for that purpose. At the behest of the Section, the ABA established the ABA Section of Taxation Tax Assistance Public Service Endowment Fund (TAPS) as part of the ABA's Fund for Justice and Education (FJE). The TAPS fund is intended to provide stable, long-term funding for public service programs for underserved taxpayers. Contributions to TAPS are therefore tax deductible as charitable contributions through the mechanism described herein.
Associations and Charitable or Educational Affiliates Background
Most professional organizations are tax exempt as section 501(c)(6) business leagues. Bar associations generally have this characterization because they engage in substantial lobbying activity and may also engage in judicial evaluation programs that are not permitted for section 501(c)(3) charitable organizations.5
Although section 501(c)(6) organizations commonly engage in some activities that might be regarded as "charitable" or "educational" under section 501(c)(3), such as public education or activities that benefit charitable classes or the community as a whole, section 501(c)(6) organizations generally do not operate in a manner which would permit them to qualify for charitable contributions. As a consequence, it is relatively common for trade or professional associations to form not-for-profit corporate affiliates (or, occasionally, charitable trusts) which qualify as section 501(c)(3) organizations. Indeed, the Code specifically acknowledges that organizations carrying out the charitable or educational functions of section 501(c)(6) organizations may be public charities in appropriate circumstances.6
Although the most common form of organization for association-related charitable organizations is the corporate form, another option is the creation of a separate restricted fund within the association. In Revenue Ruling 54-243,7 the Service ruled that tax-exempt organizations not described in the 1939 Code predecessor of section 501(c)(3) could "establish a separate fund exclusively for religious, charitable, scientific, literary, or educational purposes, apart from their other funds." Provided that the fund "is operated exclusively for such purposes, separate books and accounts are maintained," and, upon dissolution or otherwise, the fund's assets are restricted to use for its specific purposes—rather than the general purposes of the exempt organization creating the fund—the fund can qualify for exemption as a charitable organization eligible to receive tax-deductible charitable contributions. Over the years, several published rulings have cited Rev. Rul. 54-243 as also applicable to organizations formed under then-current versions of the Code,8 and it has not been revoked.9
The ABA's FJE is such an organization.10 The FJE, created in 1961, carries on a number of educational and charitable activities. It has its own bylaws and is governed by a board consisting of the current members of the ABA Board of Governors. Its officers are the current President, President-Elect, Secretary, and Treasurer of the ABA, who serve, respectively, as the FJE's President, Vice-President, Secretary, and Treasurer. The assets of the FJE are required to be kept separate from the assets of the ABA, and the FJE maintains separate books and records, has an annual audit of its financial statements as part of the ABA's annual audit, and files its own Form 990.11
TAPS Purposes and Activities
TAPS was created in honor of the Section of Taxation's 75th Anniversary and its commitment to serving justice for indigent taxpayers. TAPS is a permanent endowment within the FJE: the principal of the fund will be maintained to produce income to support the Section of Taxation's public service programs. Following the FJE's approval of the creation of TAPS, the Section contributed $2.5 million of its reserves to fund the TAPS endowment. As of December 31, 2015, TAPS has already received just over $300,000 in additional cash contributions and pledges. The overall fundraising goal is $5 million, a sum which it is anticipated will provide sufficient income to support the Christine A. Brunswick Public Service Fellowships. Contributions are being solicited from individuals, law firms, foundations, corporations, and other outside sources.
The Christine A. Brunswick Public Service Fellowships are awarded to two recent law school graduates each year. These fellows serve a two-year term providing tax-related legal assistance to the underserved. Fellows receive funding for their salaries and benefits (at a level commensurate with federal judicial clerks) and law school debt service, as well as stipends to attend Section meetings. In addition, fellows are assigned Section mentors who are available for consultation throughout the term of the fellowship.
Applicants for fellowships must secure a position with a nonprofit legal services organization that is willing to serve as the fellow's sponsor to receive the grant funds and supervise the fellow's work.12 To date, fellowships have been funded with the following nonprofit legal services organizations:
- Center for Economic Progress (Chicago, Illinois)
- Community Action Program (Lancaster County, Pennsylvania)
- Legal Aid Society of Middle Tennessee (Nashville, Tennessee)
- Legal Counsel for the Elderly (Washington, DC)
- National Women's Law Center (Washington, DC)
- Neighborhood Christian Legal Clinic (Indianapolis, Indiana)
- Oklahoma Indian Legal Services (Oklahoma City, Oklahoma)
- Philadelphia Legal Assistance (Philadelphia, Pennsylvania)
- Pine Tree Legal Assistance (Portland, Maine)
- Prairie State Legal Service (Rockford, Illinois)
- Ronald M. Mankof Tax Clinic and the Center for New Americans (Minneapolis, Minnesota)
- SeniorLAW Center (Philadelphia, Pennsylvania)
- South Brooklyn Legal Services (Brooklyn, New York)
- University of Washington Federal Tax Clinic (Pasco, Washington)
TAPS income may also be utilized to carry out other Section public service initiatives. Such programs include VITA programs supported by Section members; an "Adopt a Base" program through which Section members or law firms have adopted 34 bases where they offer programs training military personnel to prepare returns for colleagues as part of the VITA program; representation of pro se taxpayers at U.S. Tax Court calendar calls around the country; publication of guides and support for tax-related continuing legal education for clinicians from low-income taxpayer clinics; and provision of volunteer tax assistance to victims of disasters.13 TAPS income might also be tapped to support educational programs or studies regarding the needs of underserved taxpayers.
Contributions to TAPS are a great way to secure a charitable contribution deduction while at the same time supporting public service activities of direct interest to tax professionals. TAPS accepts contributions of cash or appreciated securities, and will consider other planned giving options. In addition, donors will be recognized at Section meetings and provided other forms of donor recognition. You can contribute to the TAPS fund here. ■
2 I.R.C. § 170(b)(1)(C). Deductions for contributions of ordinary income property must be reduced by the amount of ordinary income that would have been recognized if the donor had sold the property at the time of the contribution. I.R.C. §170(e)(1)(A). Special limitations also apply for contributions of tangible personal property where the use of the property is unrelated to the donee's exempt function, and to various other types of property. I.R.C. § 170(e)(1)(B).
3 I.R.C. § 170(d)(1).
4 I.R.C. § 702(a)(4). Under Treas. Reg. § 1.703-1(a)(2)(iv), a "partner is considered as having paid within his taxable year his distributive share of any contribution or gift, payment of which was actually made by the partnership within its taxable year ending within or with the partner's taxable year." See also P.L.R. 2002-08-019 (Feb. 22, 2002).
5 See Association of the Bar of the City of New York v. Commissioner, 858 F.2d 876 (2d Cir. 1988), cert. denied, 490 U.S. 1030 (1989).
6 Section 509(a), which enumerates the means by which section 501(c)(3) organizations may qualify as public charities, rather than private foundations, specifically provides (in the language immediately following section 509(a)(4)) that an organization formed to support the charitable and educational functions of organizations described in section 501(c)(4), (5), or (6) (civic leagues, labor organization, or business leagues) may be classified as a supporting organization under section 509(a)(3) if the supported organization could have met the public support test under section 509(a)(2).
7 Rev. Rul. 54-243, 1954-1 C.B. 92.
8 See, e.g., Rev. Rul. 58-293, 1958-1 C.B. 146 (bar association law library organized as separate fund under Rev. Rul. 54-243 and section 501(c)(3) of the Code would be eligible to receive deductible charitable contributions under section 170 of the Code); Rev. Rul. 77-232, 1977-2 C.B. 71 (although unrestricted contributions to an integrated state bar are not deductible, contributions to a separate fund organized pursuant to Rev. Rul. 54-243 and section 501(c)(3) would be deductible under section 170 of the Code).
9 There have been occasional suggestions that the Service reconsider Rev. Rul. 54-243. The Chief Counsel's office, in G.C.M. 39496 (Apr. 18, 1985) (discussing a proposed revenue ruling regarding publication income of a national college fraternity), suggested that a reference to Rev. Rul. 54-243 be deleted because "we have strong reservations about the continued precedential value of that ruling." On the other hand, in G.C.M. 34443 (Mar. 3, 1971), the Chief Counsel's office stated that "it is our opinion that the basic legal principles expressed in Rev. Rul. 54-243 . . . . are correct," and recommended that the ruling be republished under current law.
10 See, e.g., ABA Policy and Procedures Handbook ("ABA Greenbook"). See also American Bar Association v. United States, 84-1 U.S.T.C. ¶9179, 53 AFTR2d 84-851 (N.D. Ill. 1984) (Fund for Justice and Education created pursuant to Rev. Rul. 54-243, but its expenses nonetheless counted as part of the ABA's costs of exempt activities for purposes of computing the ABA's unrelated business income from periodicals).
12 Providing funds to other section 501(c)(3) organizations for the accomplishment of their charitable programs is a legitimate charitable purpose for a section 501(c)(3) organization such as FJE. See, e.g., Rev. Rul. 67-149, 1967-1 C.B. 133.
13 Actual funding of Section programs in these areas would be consistent with Rev. Rul. 68-489, 1968-2 C.B. 210, which allows section 501(c)(3) organizations (such as FJE) to carry out their purposes by making grants to organizations which are not themselves exempt as section 501(c)(3) organizations. FJE, as required by Rev. Rul. 68-489, will limit distributions from TAPS income to specific programs that further the section 501(c)(3) purposes of FJE and TAPS, will maintain control and discretion as to the use of the funds, and will keep records establishing that the distributed amounts were used for section 501(c)(3) purposes.