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Nonprofit Law/Refund of Charitable Donation

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QUESTION: Our 501(c)3 organization accepted donations for a building fund.  Now the building project will not take place due to a variety of unforeseen reasons. One of the donations was appreciated stock that was subsequently sold by our organization and maintained as cash. We are planning to refund the contributions to all the donors. We may be able to refund the donations before the end of the tax year.  If the refund is in the same tax year as the donation so it had not been claimed as a charitable deduction, and we refund to this donor the value of the appreciated stock at the time it was donated, is there an issue because the donation was appreciated stock and he is getting the value that would have been subject to capital gains tax if he had sold the stock rather than donated it?  If the refund is given in a tax year after the charitable deduction was taken, am I correct that we would issue a 1099-Misc for the amount of the refund and that would have to be claimed as income.

ANSWER: You are correct that a refund in a later tax year would mean that the 501(c)(3) organization would issue a 1099-Misc.

The organization must send to the IRS a 1099-Misc indicating the amounts of the refunds given to persons if the amount is $600 or more and the organization had previously given an acknowledgement of donation to the donor.

See the first column of page 1 under "Specific Instructions" www.irs.gov/pub/irs-pdf/i1099msc.pdf
which is the IRS instructions for form 1099-Misc, "At least $600 in rents, services... other income payments."

Details about recovery rules are on page 22 of www.irs.gov/pub/irs-pdf/p525.pdf "Taxable and Nontaxable Income" The statutory authority is 26 U.S.C 111 "Recovery of Tax Benefit Items" which you may review at:
http://bit.ly/15omZa

As for returns in the same year, if the organization has not yet given to the donor a written acknowledgment of the donation it would not be sending the donor a 1099-Misc.

As to the donor who gave appreciated stock which your organization sold, let me know if, between the time that your organization received the stock and the time that your organization sold the stock, whether the value went down or up. After you give me that information I will reply further.  

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

---------- FOLLOW-UP ----------

QUESTION: Thanks so much for such a quick initial answer.  The value of the stock went up between the time we received and the time we sold it.

ANSWER: That's good.  It might have been a problem if the value went down and you gave him the value at the time of donation, but it went up.  You can give the donors links to this answer.  They would, for refunds of donations where a deduction was taken in a previous year, put that amount on line 21 of their form 1040 as stated in IRS publication 17 on page 84 of www.irs.gov/pub/irs-pdf/p17.pdf -- "Recoveries -- A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule A (Form 1040)."

I have in my profile that this free forum is only for general questions about IRS federal exemption issues for 501(c)(3) organizations.  As to your question about the donor of the stock and his possible capital gains tax exposure, that is an individual tax issue and not an issue to the organization.  If he wants my legal opinion letter that could be useful in a few years, he should contact me directly at my email address below, but I will now state that I do not see any exposure, as the donation value and the refund value is the same.  I might have had another opinion if there was some contract with the donations, for example one that had a reversion clause.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.




---------- FOLLOW-UP ----------

QUESTION: Thanks again. My interest in the individual's tax exposure actually stems from the fact that he is also my client as a tax preparer. Any difference in your answer if he gets the refund in the same year, so nothing actually shows on the tax return but the amount received equals what he would have received had he sold the stock? I promise not to take advantage of your assistance by asking yet another question.  Thanks so much!!

Answer
You are welcome.  I don't see any difference in the bottom line if the refund is in the same year as the donation. If you want an attorney opinion letter to help cover for any possible IRS penalties, please contact me directly to my email address below.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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