CHARITABLE CONTRIBUTIONS OF REAL ESTATE

MacKenzie Canter, III © 1999
Copilevitz & Canter, LLC
1900 L Street, NW
Suite 215
Washington, D.C. 20036
202-861-0740
maccanter@aol.com

Internal Revenue Code § 501(c)(3) organizations tend to overlook the great potential for charitable contributions of real estate. Gifts of real estate are more demanding than gifts of securities, but the extra effort can be extraordinarily worthwhile.

Real estate is the form in which capital is most concentrated. It is estimated that real estate constitutes 44% of all capital value in the United States, approximately $24 trillion. (In comparison, stocks are valued at approximately $12 trillion.) Yet of the $175 billion in charitable contributions in 1998, only (approximately) 2% consisted of real estate⁽¹⁾.

A gift of real estate, owned as a "long term capital gain asset,⁽²⁾" entitles the donor to a charitable contribution deduction equal to "Fair Market Value" ("FMV"). For individuals, such deductions are limited to a 30% limit of adjusted gross income⁽³⁾ with a 5 year carryover for the unused portion of the deduction. Corporations may deduct up to 10% of taxable income, with a 5 year carryover.

Sources of Gifts of Real Estate

* Gifts of homes and recreational properties;

* Gifts of a remainder interest in "personal residences" or "farms." See IRC,

§ 170 (f) (3) (B) (i). (Vacation or recreational homes qualify as a "personal residence.")

* Raw land, timberland, agricultural land, and farms can be subdivided with portions of property contributed to a charity as tenant-in-common. Hunting rights and other limited use rights can be reserved by the donor. See, Rev. Rul. 75-420, 1975-2 C.B. 78.

* Many corporations own "surplus" real estate which no longer is used due to diversification, change in product line, or change in mode of manufacturing, etc. These non-productive and in some cases, obsolete assets often are hard to sell.

* Partnerships which own properties depleted of "tax write-offs," i.e. so-called "burned-out tax shelters," may welcome the suggestion to donate real estate.

"Non-Tax" Risks and Risk Reduction Strategies

In addition to contract and tort liability, there are statutory liabilities, e.g., liabilities for violations of zoning codes, building and fire codes, housing codes, anti-discrimination and human rights codes, tenant codes and environmental statutes.

The principal federal environmental statute is the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. § 9601 et seq.

Major Points to Remember:

* Tax exempt organizations are not exempted from environmental liability statutes.

* Current and past owners and operators (potentially responsible parties or "PRP's") can be held liable for environmental "clean-up" costs.

* The "innocent landowner" defense may be difficult to prove. The burden is upon the defendant to show that a third party was solely responsible for the contamination and the third party's activities did not occur in connection with a contractual relationship. A contractual relationship can arise from land contracts, deeds, or other instruments transferring title or possession.

* The "innocent landowner" defense may apply if the defendant can demonstrate that it acquired the property after the contamination occurred and did not know and had no reason to know through the exercise of due diligence that the property was contaminated. "Due diligence" requires investigation appropriate to the type of property.

* The "innocent landowner" defense may apply if the defendant acquired the property through inheritance or bequest.

* The donee should ask for a warranty in the acquisition contract that toxic materials and hazardous wastes, etc. have not been used or disposed of on the property. The exempt organization should seek a broad indemnity (which also covers legal fees and court costs) from the donor.

CERCLA was amended in 1997 that the liability of a fiduciary for "the release or threatened release of a hazardous substance at, from, or in connection with a vessel or facility held in a fiduciary capacity, may not exceed the assets held in the fiduciary capacity."

1. Reducing Risk via Contract

* A written agreement always should be used--even with donations. The agreement should permit the charity to control the property for a specified period of time without risk and terminate the contract, without liability, during this "inspection period."

* A contract of this type provides the charity, in effect, a "free option" to market the property during the "inspection period," i.e., the charity may be able to locate, in advance of taking title, a purchaser. Why is this important? The charity's goal in many cases is to reduce the interval of ownership to as short a period as possible to reduce risks of ownership and avoid "carrying costs," such as insurance, real estate taxes, etc.

* Typically, in real estate contracts, the owner makes representations and warranties regarding the property, e.g., absence of environmental perils. Potential purchasers of the property from the charity often require extensive representations and warranties. Warranties made by the donor or seller in the acquisition contract should be assignable by the charity to a purchaser. The charity also should include in any contract with a purchaser a provision precluding suit against the charity for a breach of a warranty made by the original owner. This should keep the charity from being "caught in the middle." In the sales contract with the third party, the charity should sell the property "as is," i.e., make no representations or warranties of its own.

2. Reducing Risk via the Option Technique The owner gives the charity the option (in a written, recordable form) to purchase the property at a price below its FMV. This is attractive to the charity because it avoids taking title to the property, e.g., commercial real estate which may pose an environmental risk. The charity may sell the option, as opposed to the real estate.

The disadvantage to the donor is he or she does not control the timing of the tax deduction., i.e., the donor does not determine when the option is exercised.

The option is a pledge to make a gift in the future. No deduction is allowed when the option is given. The deduction is created when the option is exercised. See, Rev. Ruls 75 - 438, 78 - 181 and 82 - 197; Private Letter Rulings 8505012, 874013, and 8826008; and Petty v. Commissioner, 20 T.C. 521 (1963).

3. Reducing Risk via the Guest Technique

In Winston F.C. Guest, 77 T.C. 9 (1981), an exempt organization (Temple) never took title to property, yet the donor was entitled to a charitable deduction. The Temple sought to avoid "double transfer taxes," e.g., on both the sale of the property to the Temple and the subsequent sale of the property by the Temple to the third party.

Guest notified the Temple: "I am contributing to you certain properties...without any restrictions..." A representative of the Temple wrote to Guest a letter of gratitude and acceptance. The Temple's letter to Guest requested Guest to "retain title as nominee in our behalf. When we have completed our negotiations [for resale of the properties] we will instruct you to prepare deeds in the name of the purchaser..."

Guest executed a deed conveying title to the property in favor of a partnership the Temple designated.

The IRS argued that because title to the property never had been conveyed to the Temple, Guest was not entitled to a charitable contribution deduction. The Tax Court disagreed, stating: "We conclude that petitioner [Guest] did make a bona fide gift of the Properties to the Temple upon deeding the property to the [partnership]."

4. Using a Charitable Remainder Trust ("CRT") to Reduce Risk

If the donor or a third party (e.g., bank) is the trustee of the CRT, the charity avoids taking title to the real estate. (CRTs are explained below.) The charity has a remainder interest in the CRT, as opposed to a "fee interest" in the real estate. The property owner can be the trustee of his or her own CRT, i.e., John Doe will convey title to John Doe, Trustee of the Doe CRT. Usually the real estate will be sold by the trustee. When the charity eventually receives its remainder, the remainder will consist (in most cases) of securities.

5. "Securitized" Real Estate Is "Sanitized"

As explained below, the state-of-the-art Thornburg Foundation Realty, Inc. ("TFR") technique enables the donor to convert the real estate to shares of stock in a REIT before making the gift to the charity. Thus, the charity never receives a deed to real estate. The REIT shares can be used to fund a CRT or given directly to the charity.

Tax Risks and Risk Strategies

1. Unrelated "Debt-Financed" Income: Trap for the Unwary

Internal Revenue Code §512(b) excludes from the definition of unrelated business taxable income dividends, interest, royalties, rents and capital gains. However, if and to the extent the above items of "passive" income or gain are "debt-financed," Code §514 imposes a tax. Income and capital gain from "unrelated debt-financed property" must be reported by an exempt organization on Form 990-T.

"Debt-financed property" means any property (1) held to produce income for which (2) there is "acquisition indebtedness" at any time during the tax year (or 12-month period before the disposition date of that property). Reg. §1.514(a)-1(a)(iii). The tax imposed by §514 is not limited to income. It also applies to capital gain from the disposition of property.

If substantially all (85% or more) of any property is used for an organization's exempt purposes, the property is not treated as debt-financed property.

"Acquisition Indebtedness" means, for any debt-financed property, the outstanding amount of:

1) The debt incurred by the organization in acquiring or improving the property;

2) The debt incurred before acquiring or improving the property if the debt would not have been incurred without the acquisition or improvement; and,

3) The debt incurred after the acquisition or improvement if the debt would not have been incurred without the acquisition or improvement and incurring the debt was reasonably foreseeable when the property was acquired or improved.

Generally, whenever property is acquired by purchase the outstanding principal debt secured by that mortgage is treated as acquisition indebtedness even though the organization did not assume or agree to pay the debt. There are a number of exceptions. The two most common ones are:

1. If property subject to a mortgage or other encumbrance is conveyed to the exempt organization by testamentary transfer (bequest or devise), the debt will be disregarded for Section 514 purposes for 10 years following the date of the conveyance.

2. The same 10 year "grace period" will apply to encumbered property conveyed as an "inter vivos" gift to the exempt organization if the mortgage (or other debt) was recorded on the property five years prior to the date of the gift and the donor owned the property for at least 5 years.

The above exceptions do not apply if an organization assumes or agrees to pay all or part of the debt secured by the mortgage or makes any payment of the equity in the property owned by the donor or decedent (other than an annuity excluded from the definition of "acquisition indebtedness.") [Code Section 514 (c)(5)].

UBIT from "Operations"

What if a charity aggressively solicits real estate gifts and then quickly liquidates the gifts to raise cash? Assume Charity X specializes in locating "corporate surplus real estate" owned by Fortune 1000 corporations and "burned out" tax-shelter properties owned by limited partnerships. On a nationwide basis, X solicits donations of these types of properties and "wholesales" them soon after receipt.

Is X in the business of real estate brokerage or capital fund-raising? This was the question presented in Technical Advice Memorandum 9431001.

The IRS found this program consisted of two distinct parts: (1) the solicitation of contributions of real property, which is not an activity constituting a trade or business, even if property has associated debt; and (2) the selling of the real property. The IRS noted that pursuant to Code Sections 512(b)(4) and (5), the gain from the sale of contributed properties is normally excluded from UBIT, unless the property is debt financed within the meaning of Section 514. Because all but one of the properties acquired and sold by A to date had no mortgages on them, no UBIT would be due on the gain from those sales.

DONATION FORMATS

Deed to Property

The simplest format is a conveyance by the donor of a undivided present interest in the entire property. This can be a warranty deed or "quit claim" deed (i.e., with no warranty to title).

Gifts of "Partial Interests"

Gifts of "partial interests" in property are generally barred by IRC §170 (f). There are, however, important exceptions.

* A deduction is allowed for the gift of a remainder interest in a "personal residence" or "farm" or a "qualified conservation contribution." [Code Section 170(f)(3)(B)] The life estate reserved by the donor can be for a life (or lives) or term of years. The donor can donate a remainder interest in less than the entire property. See, Rev. Ruls. 78-303 and 87-37. "Qualified conservation easements" must be in perpetuity. See, Reg. §1.170A-14. (Always enter into a written agreement with the owner of the life estate to determine which party pays real estate taxes, insurance, premiums, etc.)

* A deduction is allowed for an "undivided interest in the property," e.g. a 30% tenant-in-common interest. See, Treas. Reg. § 1.170A-7 (b)(1). It is possible to give a specified percentage, e.g., 5%, each year. This enables the donor to plan the deduction so it is fully utilized, i.e., will not be adversely affected by "percentage limits."

* A deduction is permitted for a gift of a remainder interest in the form of a "qualified trust" such as a charitable remainder trust or pooled income fund. [Code Section 170(f)(2)(A).] (See, discussion below.)

Bargain Sales

A "bargain sale" is part sale and part gift.

Example: John Landowner owns Blackacre, a tract of farmland valued at $10,000. John calls the development officer at Landgrant College and offers to sell the property for $2000 in cash. Landgrant College quickly accepts John's proposal and walks away with a valuable piece of property for one-fifth its value.

What is the result to John?

Section 1011(b) of the Code requires John to allocate a portion of his basis in the property to the sale element of the transaction.

Assume John paid $5000 for the land in 1980. He will recognize gain based on the following formula specified by IRC §1011(b):

a) First, John multiplies his basis of $5000 by the fraction of selling price (numerator)/fair market value (denominator). This equation yields the portion of the basis allocated to the sale portion of the transaction to yield capital gain.

b) $5000 x $2000 (selling price)/$10,000 (fair market value) = $1000. Taxable gain is equal to $2000 (sale price) - $1000 = $1000. John's taxable gain is $1000. His charitable contribution deduction is $8000 [$10,000 (fair market value) - $2000 (sale price)]

Assume that instead of selling the property for $2000 to the college, John donated the property to the college and the property was subject to a non-recourse mortgage of $2000. (A non-recourse mortgage does not involve any personal liability on the part of any person. If the mortgage is not paid, the sole remedy of the holder of the mortgage is to foreclose upon the property). What result? The same. John is deemed to have realized proceeds equal to the amount of the debt ($2000), and a bargain sale results. It does not matter whether the debt is "recourse" or "non-recourse."

Charitable Remainder Trusts ("CRTs")

The CRT may be an ideal choice for a real estate gift. A CRT provides the following advantages:

1. Current income tax deduction;

2. Avoidance of capital gains tax when converting low-yield appreciated assets (e.g., unimproved land) to high-yield investments;

3. Accumulation of yield and capital gain tax-free;

4. Deferral of income until years when it may be taxed at a lower rate;

Types of CRTs

There are two types of CRT's: the charitable remainder annuity trust ("CRAT") and the

charitable remainder unitrust ("CRUT"). Because of its flexibility and capacity to receive additional contributions, the CRUT is generally preferred to the CRAT.

The CRUT is available in four models:

1. Standard ("fixed payout") CRUT;

2. Net-income CRUT ("NICRUT");

3. Net-income with make-up provision CRUT ("NIMCRUT")

4. "Flip" CRUT, i.e., NICRUT or NIMCRUT which converts to a standard CRUT.

When real estate is used to fund the CRUT, the NIMCRUT (possibly with the "flip" feature) is the preferred choice.

A CRT must have an least one non-charitable income beneficiary and must pay at least a 5% annual return, either a 5% annuity in the case of a CRAT or an annual payout equal to 5% of the value of the CRUT's assets. As a result of the 1997 Tax Act,⁽⁴⁾ the law provides that a trust cannot be a qualified CRAT if the annuity for any year is greater than 50 percent of the initial fair market value of the trust's assets or be a qualified CRUT if the percentage of assets that are required to be distributed at least annually is greater than 50 percent. Any trust that fails this 50-percent rule will be treated as a complex trust and, accordingly, all its income will be taxed to its beneficiaries or to the trust.

The 1997 Tax Act also requires that the value of the charitable remainder with respect to any transfer to a CRAT or CRUT must be at least 10 percent of the net fair market value of such property transferred in trust on the date of contribution to the trust.

Who may be the trustee? Anyone. The donor, the income beneficiary, and the charity all can be the trustee. So, too, of course, can a third-party, such as a bank or trust company. There is no restriction against the donor (sometimes called "grantor") serving as the trustee and the income beneficiary. The reason why this is allowed is the trust instrument, to qualify under IRC §664, must irrevocably dedicate the remainder interest to one or more qualified §501(c)(3) organizations.

As a result of the new "flip" CRUT regulations, it is now possible (depending on state law) to provide that post-contribution capital gains will be treated as "income" for CRT accounting purposes. See, Treas. Reg. §664-3(a). This should be considered when real estate is used to fund the CRUT.

A CRT may be established for either a fixed term of years, up to 20, or for the life (or lives) of individuals who must be alive at the time the CRT is formed. It is possible to use a combination of a fixed term plus a life or lives, so long as the fixed term sets the "outside" date. For example, "to my son for life and then to my daughter for the shorter of her life or a term of years not to exceed 20 years."

It is possible to nominate a "non-natural" person, e.g., corporation, trust, or LLC, as the income beneficiary, but in such case a term of years must be used.

Is it possible to have more than one income beneficiary? Yes, but all lives must be "in being" at the time the trust is formed.⁽⁵⁾

Exempt From Capital Gains Tax.

CRT's are tax-exempt pursuant to IRC §664(c), except to the extent they have "unrelated business income," as defined in IRC §513⁽⁶⁾.

This means that a CRT does not incur capital gains tax when it sells low-basis property and reinvests in higher-yield forms of investment. This also means that a CRT can accumulate surplus income tax-free. In other words, if a CRT has income in excess of what is needed to make the annual payment to the non-charitable income beneficiary, the surplus is not subject to tax. It remains available (retaining the character of ordinary income) for distribution in later years.

This is particularly important to a NIMCRUT, (i.e. to a CRUT with "net income/make-up" feature). This combination of "zero capital gains" and "tax-free accumulation of income" makes it possible to use the CRUT as a flexible "income shifting" vehicle, i.e., from years when the need for income is low to years when the need is expected to be more pressing. (This is not possible with a CRAT which pays a fixed, certain sum annually.)

Example

Distributions Are Taxed When Received by Income Beneficiary

How are the non-charitable income beneficiaries taxed? Unlike grantor trusts, which utilize a "pro rata" (proportional) system of tax, the income from a CRT is taxed to the recipient on a "tier" system. First, to the extent the CRT has generated ordinary income, this is distributed to the beneficiary. Second, to the extent of undistributed capital gains, these are distributed. Third, if there is "other income" e.g., "tax-exempt income," this is next distributed. Finally, if there is return of principal, this is distributed. (In contrast, income from grantor trusts is treated as proportionately distributed, i.e, within each installment there are "blended" layers of ordinary income, capital gain, etc.)

Real Estate Subject to Debt and the CRTTreasury regulations applicable to pooled income funds state that transfers of property subject to debt to pooled income funds are subject to the bargain sale rules (discussed above). The donor is considered to receive proceeds equal to the amount of the debt, resulting in taxable gain. The regulations governing charitable remainder trusts are silent on this issue. Logic would dictate that the same result would occur for transfers of debt-encumbered property to charitable remainder trusts.

Donors, generally, should avoid funding a CRT with property subject to debt for which they remain liable. In Private Letter Ruling 9015049, the Service ruled that a transfer of such property to a CRT disqualified the CRT because the trust income could be used to pay the donor's obligation, who was deemed the "owner" of the trust. If the donor is treated as the owner, the trust is not valid under the CRT rules.

Even if the donor agrees to indemnify the trustee against the debt there still may be a problem. The property contributed is technically "subject to" the mortgage. It is possible the IRS will treat the trust as a grantor trust until the debt is paid and removed. See, PLR 9015049.

To avoid these problems, a donor who wishes to make a contribution of encumbered property to a CRT should consider funding the CRT with an option to buy the property at a "below-FMV" price. The trustee can sell the option. Since the property itself is never contributed to the CRT, the trustee never becomes liable for the indebtedness. Arguably, the CRT should qualify. However, PLR 9501004 precluded donor from obtaining an income tax deduction for the gift of the option unless a charity (rather than the ultimate purchaser) exercises the option.

If the property is subject to debt, the donor should consider conveying the real estate in exchange for a charitable gift annuity or long-term promissory note secured by deed of trust, i.e., installment bargain sale. These "non-trust" vehicles pose fewer problems.

The Thornburg Foundation Realty Technique (discussed below) is designed to handle debt-encumbered real estate. This innovative technique should also be considered in the case of "major" real estate, i.e., with a value of at least $1,000,000.

CRAT Specifics

A CRAT must pay a fixed annuity equal to at least 5% (but no more than 50%) of the fair market value of the assets when conveyed initially to the CRAT. The annuity paid by a CRAT need not be expressed as a stated dollar amount to qualify as a "sum certain." It may also be expressed as a fraction or percentage of the initial net fair market value of the property conveyed to the CRT. Thus, if H's will provides for one-half of H's residuary estate to be conveyed to a CRAT to pay W an annuity equal to 5% of the initial net fair market value of the property, determined for federal tax purposes, the "sum certain" requirement is met. See, Treas. Reg. §1.664-2(a)(1)(iii).

A CRAT must pay an annuity (which may be paid monthly, quarterly, semi-annually, or annually) which cannot vary. This can be viewed as an advantage, since the annuitant is certain to receive the specified income---even if the trustee must invade principal in order to pay it. But it can also be a disadvantage. A CRAT does not provide any "hedge" against inflation.

No additional sums may be contributed to a CRAT. If you want to contribute additional assets to increase income, you must set up a second CRAT. A CRAT must prohibit additional contributions. This prohibition must be included in the trust instrument or the CRAT will not qualify.

CRUT Specifics

A CRUT is much more flexible. The CRUT must be re-valued annually. This means, unlike a CRAT, which pays an unvarying, fixed annual income, the income paid by a CRUT could increase or decrease, depending on the performance of investments.

The CRUT can receive additional contributions of assets.⁽⁷⁾ This makes it ideal for "staggered" contributions of acreage, etc.

A unitrust pays out an annual amount based on the trust's investment performance, which can fluctuate. The annual payout can't be less than 5% of the trust's asset value nor can it be more than 50% of the asset value. If an annuity trust's annual earnings are not enough to cover the annual payout, it must, as noted, invade principal or accumulated earnings to make the payout. A unitrust, however, can be set up so that it pays only the lesser of net income or the stated percentage payout. It can make up the "short fall" in later years. (This is the "make-up" provision, previously described in connection with the NIMCRUT.)

"Flip Unitrusts"

The IRS on December 9, 1998 issued regulations⁽⁸⁾ regarding "flip unitrusts."

Some donors may fund a CRUT with illiquid assets (such as real estate) that produce little or no income. These donors often want the income beneficiary or beneficiaries of the CRUT to receive a steady stream of payments based on the total return available from the value of the assets. The donors recognize, however, that the CRUT cannot make these payments until it can convert the unmarketable assets into liquid assets that will generate income to pay the fixed percentage amount. These donors establish CRUTs that use one of the income exception methods (NICRUT or NIMCRUT) to calculate the unitrust amount until the unmarketable assets are sold. Following the sale, the donors may prefer that the CRUT use the "fixed percentage" method (NICRUT or NIMCRUT) to calculate the unitrust amount. A trust using such a combination of methods is a "flip unitrust."

The proposed regulations provide that a donor may establish a flip unitrust that qualifies as a CRUT if the following conditions are satisfied.

The trustee may not have discretion to change the method used to calculate the unitrust amount. The governing instrument must provide that the CRUT will use an income exception method (NICRUT or NIMCRUT) until the earlier of: (a) specific date; or (b) occurrence of a specific event which is neither discretionary with nor subject to the control of the trustee, grantor, or income beneficiary.

To ensure the CRUT will use the fixed percentage method after the unmarketable assets are sold, the CRUT must switch exclusively to the fixed percentage method for calculating all remaining unitrust amounts payable to any income beneficiary at the beginning of the first taxable year following the year in which the earlier of the above events occurs.

Because the fixed percentage method does not provide for a makeup amount, any "makeup amount" is forfeited when the trust switches to the fixed percentage method. This forfeiture must be given due consideration when deciding whether a "flip" provision should be included in the NICRUT or NIMCRUT.

If a trust was created before the effective date of this amendment and its governing instrument contains a flip provision other than the one permitted by the regulations, the trust may be amended or reformed to comply with the final regulations it reformation proceedings are complete by June 30, 2000.

The "TFR Technique": An Innovative Method to "Securitize" Real Estate

The 1998 EPIC Award for Philanthropy was awarded by Trusts & Estates to American Foundation Realty, Inc. (now known as Thornburg Foundation Realty, Inc. or "TFR"), the corporate general partner of Foundation Realty Limited Partnership. TFR is an "UPREIT," an "all equity" real estate investment trust⁽⁹⁾.

The "TFR" technique is the "brain-child" of Garret Thornburg and John Grab. The EPIC Award is well deserved. The TFR Technique solves many of the problems associated with real estate giving, both from the standpoint of the charity and the standpoint of the donor.

From the charity's point of view, the problems (discussed above) are overcome. There is: (1) no "unrelated debt financed income;" (2) no environmental perils; (3) no liability from non-environmental sources, i.e., accidents at the property; and (4) no "carrying costs", both direct (insurance, management) and indirect (staff and administrative time).

When the shares of the REIT are registered with the SEC and state securities commissions, the final problem--immediate liquidity--also will be overcome. (This registration will occur in the future, when TFR has acquired a sufficient portfolio and market conditions are ripe.)

From the property owner's perspective, the conversion of real estate to partnership units (tradeable on a 1-to-1 basis for shares in TFR) is highly advantageous. The transfer of the property to the LP is regarded as a capital contribution, as opposed to a sale. In the typical transaction, this greatly reduces the tax on the transfer, when compared to a bargain sale or conventional sale.

On September 23, 1999, the IRS issued a private letter ruling approving of the TFR technique on all major points. While a PLR is not a "binding precedent" which other taxpayers may rely on, it nonetheless indicates the reasoning of the IRS. There is nothing per se "tricky" about any one aspect of the elements which go into the TFR technique. The "beauty of the idea" is the combination of these elements to form a unique solution to many of the problems which have hampered real estate giving.

Here is how it works:

The donor transfers "Blackacre" to Foundation Realty, LP (a limited partnership) in exchange for partnership units equal to the owner's "equity." The mortgage on "Blackacre" is immediately paid off by TFR (the general partner), thus avoiding the Code §514 problem discussed above.

After the debt is paid off, and the donor receives the partnership units, he or she may contribute the units to a charity- or use them to fund a CRT. The charity can exchange the units for TFR stock.

TFR will pay dividends on its stock. When TFR "goes public," there will be a market to ensure liquidity.

TFR's basic criteria for property are: (1) located in the U.S., (2) a $1 million minimum value, (3) $500,000 in minimum equity, and (4) maximum debt to value ration of fifty percent.

Properties are considered by TFR if they are income producing properties with positive cash flow, e.g., warehouses, office buildings, shopping centers, net leases, apartments , hotels and ground leases. "Non-producing" real estate also will be considered, if AFR believes it is readily saleable.

NOTE

This outline is not intended, nor is it provided, as specific legal service, but, rather, only as a general discussion of concepts and principles. Please consult with the author or another attorney before utilizing any techniques stated herein. Of necessity, this material has not addressed all issues, principles, exceptions, and exclusions which may apply to a specific transaction.

About the Author

Mr. Canter earned his B.A. at Randolph-Macon College, M.A. at The George Washington University, M.Div. at Yale University (in conjunction with a year of study at Oxford University), and J.D. at The University of Virginia Law School.

Copilevitz & Canter, LLC, with offices in Washington, D.C. and Kansas City, represents over one hundred twenty-five tax-exempt organizations. Mr. Canter has written many articles in the areas of charitable contributions and tax-exempt organizations law, is the co-editor for tax issues of Philanthropy Monthly and is a lecturer to state societies of certified public accountants for their CPE programs in tax law. Mr. Canter belongs to the bars of Virginia, Maryland, the District of Columbia, and Missouri.

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1. The Wall Street Journal (10/13/99), p.2

2. Internal Revenue Code §1223(3). The asset must be owned in excess of twelve (12) months to qualify as "long term" for charitable contributions purposes.

3. Contributions to private foundations (not qualified as maximum deduction donees) are restricted to cost basis and are subject to a 20% AGI limit.

4. Officially known as the "Taxpayer Relief Act of 1997."

5. A "special factor" must be secured from the IRS to calculate the IRC §170 deduction if more than two lives are involved.

6. In any year when a CRT has unrelated business income, it is (for that year) not tax-exempt. See, Newhall Unitrust v. Commissioner, 104 T.C. 236 (1995). All income is taxed, not just the "unrelated business income."

7. The unitrust instrument must explicitly either permit future contributions or must prohibit them. CRAT's must specifically prohibit future contributions.

8. These regulations may be found at T.D. 8791 (12/9/98). See, Treas. Reg. sec. 664-3(a), et seq.

9. A REIT is a business trust defined under Code §856 that combines the capital of many investors to acquire real estate. A REIT operates much like a mutual fund for real estate in that investors obtain the benefit of a diversified portfolio managed by professionals. A REIT does not pay corporate income tax so there is no double taxation on the income to its shareholders. This means that most of the REIT's funds from operation can be distributed to shareholders in the form of dividends. A REIT is required to distribute at least 95% of its annual taxable income to shareholders.