Tuesday, September 26, 2023

Can You Smell What The Rock is Getting in Bad Tax Advice?

In my recent post, "Can You Smell What the Rock is Donating?", I talked a little bit about a number of different nonprofits that were accepting donations from some high profile folks, such as The Rock, in order to provide charitable support for those involved in the SAG-AFTRA and the (hopefully now ended) Writers' Guild strike.  Well, The Rock and his charitable donations are back, at least indirectly.  With a h/t to this thread started by Andrea Carr CPA (@andreacpa0 on X formerly known as Twitter) - she found the following on the website of the Entertainment Industry Foundation.  The EI Foundation is sponsoring a "People's Fund of Maui," which is giving "direct financial assistance to Maui community members experiencing devestating losses form the fires in Lahaina and Kula."  Apparently the People's Fund will make monthly payments to impacted residents of Maui for as long as it has funds, which include some hefty initial gifts from Oprah and, you guessed it, The Rock.  Which is amazing all around.

In the not-so-amazing category ... in the FAQs for applicants, the website states:

Are there any restrictions on how funds are used?

Financial disbursements provided by the People's Fund of Maui are considered Qualified Disaster Relief Payments and are intended for the following expenses... (edited)

Will I need to report the monthly payments on my taxes?

No, you will not need to report the monthly income payments on your taxes.   Payments will be characterized under the IRS's "charitable gift status" which is non-taxable and only needs to be reported to the IRS if individuals receive $17,500 or more in one year.  Individuals will only need to report this income payment if they received additional cash/asset gifts that bring the total to more than $17,500 a year.

Um... no.  I mean, they aren't taxable, so that part is right but otherwise... no.

Whenever I talk about gifts under Section 102 (and our old friend, Commissioner v. Duberstein) to students in Tax I class, I always mention that the INCOME tax treatment of gifts is different from the ESTATE & GIFT tax treatment of these items.  It is a Federal income tax class so I always debate whether it is worth precious class time to go through the difference, but in my experience there is so much confusion on this point that it comes up year after year.  So thanks, EI Foundation, for validating my teaching.

Revenue Ruling 2003-12 posits the following hypo in Situation 2:

Situation 2. O, a charitable organization described in § 501(c)(3) that is exempt from tax under § 501(a), whose purpose is to provide assistance to individuals who are affected by disasters, also makes grants to distressed individuals affected by the flood described in Situation 1. The grants will pay or reimburse individuals for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise.

Substitute "flood" with "wildfire" and well, you have Situation 2 in Maui - I do note that Situation 1 in the Revenue Ruling involves a Presidentially declared disaster as defined in Code Section 1033(h)(3), which appears to include the Hawaii Wildfires. 

In any event, I'm not sure it really matters. Rev. Ruling 2003-12 concludes with regard to Situation 2 (emphasis added):

In Situation 2, the grants made by O are designed to help distressed individuals with unreimbursed medical, temporary housing, or transportation expenses they incur as a result of the flood. Under these facts, O’s grants are made out of detached and disinterested generosity rather than to fulfill any moral or legal duty. Thus, the grants are excluded from the gross income of the recipients as gifts under § 102. Because payments by non-governmental entities are not considered payments for the general welfare, the grants made by O are not excluded from the recipients’ gross income under the general welfare exclusion. Rev. Rul. 82-106, 1982-1 C.B. 16. It is not necessary to reach the question of whether § 139 applies to the grants.

Accordingly, assistance from a charity to a disaster recipient are straight up gifts under Section 102 and Duberstein.  Revenue Ruling 2003-12 is really clear that you don't need to get to the issue of whether the funds are "Qualified Distaster Relief Payments" under Code Section 139. Code Section 139 is important for GOVERNMENT payments for disaster relief and potentially for disaster relief payments from an EMPLOYER - but not grants from a private charity.

And finally, as Andrea Carr CPA put it on X/Twitter:

i'm tired and exhausted, what is "charitable gift status"?  Does someone know the IRC that covers this?  Where is $17,500 coming from?

I'm guessing here because it is a common mistake, but maybe they are referencing the gift tax annual exclusion under Code Section 2503(b), which is $17,000 for 2023 after inflation adjustment - as one X/Twitter person indicated, $17,500 could be a typo?  Of course, the gift tax doesn't apply to transfers to charity under Code Section 2522 (assuming we don't have DAF or supporting organization issues), so The Rock and Oprah are safe on that.  However, even if that's the case, the gift tax falls on the DONOR of the gift - not the recipient (assuming we don't have a net gift situation), so at no point would the gift tax exclusion impact recipient of the funds - and even then, it would never impact the income tax treatment of the funds.  Because this is a gift tax exclusion.  Different tax.  And the gift tax doesn't even apply here.  So... 

I got nothing on "charitable gift status."

So, EI Foundation, I know I'm coming down pretty hard on you here and I'm sorry for that.  Some on X/Twitter blame AI (see ... all my posts align in the universe).  Maybe there's something we can't tell from the information you've put up on your website that would change this anaylsis.  But let me repeat that the things you are doing, not only for Maui but for all of the other charitable purposes and recipients you fund, are really really awesome and thank you for all you do in that regard.   

Educationally, eww


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