Reminiscent of donor-advised funds, the Internal Revenue Service has ruled that contributions can qualify as charitable deductions for both income and gift tax purposes even if the donor retains the right to manage the investment for the charity.
Under the facts in Ltr. Rul. 200445023, an individual and a limited liability company propose to make donations of cash and traded securities to a tax-exempt college that agrees to place the donations in investment or brokerage accounts and permit the donors to manage the investments under a limited power of attorney.
Each donation will be unconditional and irrevocable and the donors will surrender all rights to retain or reclaim ownership, possession or a beneficial interest in any donations. The donors may not divert the assets held in the accounts to any person and are prohibited from engaging in any act of self-dealing.
Investments are restricted to U.S. equities, U.S. open-end and closed-end mutual funds, U.S. fixed income securities, offshore/onshore hedge funds, REITs and private placements. Investments can't be made in companies in which the donors own, directly or indirectly, more than 5 percent of the outstanding shares of stock. Assets in accounts may not be pledged or encumbered by the donor or used to satisfy any debt or liability of the donor.
The investment management power terminates 10 years from the date of the donation, unless terminated sooner. The college in its sole discretion can withdraw any or all of the assets or to terminate the limited power of attorney and agreement.
The IRS ruled the retention of investment management control, subject to the restrictions and limitations contained in the agreements, isn't substantial enough to affect deductibility.
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