IRS Warns Charities to Avoid Tax Shelters

By Elizabeth Schwinn

The Internal Revenue Service has declared illegal a tax scheme under which charities and other tax-exempt groups helped companies avoid taxes through fraudulent charitable donations. At the same time, Congress has announced that it will take a closer look at the charities that were involved in such deals.

The IRS action marks the first time that new tax-shelter rules have been applied to charities. “The participation of tax-exempt entities in these abusive transactions is a worrisome trend,” said Commissioner of Internal Revenue Mark W. Everson. “We are acting today to ensure the integrity of our charities. We don’t want Americans to lose faith in a unique and vital part of our nation’s social fabric.”

The IRS said the charities involved accepted gifts of corporate stock that they later sold back to the corporations. The complex transactions enabled the corporations to methodically shelter income from taxation, and also allowed individual donors to take charitable deductions, the IRS said.

The leaders of the Senate Finance Committee have asked the IRS to supply it with the names of charities that participated in the fraudulent arrangements. “It looks like charities might be just as susceptible to the snake-oil salesmen promoting tax-shelter deals as anybody else,” said Sen. Charles Grassley, who is chairman of the Finance Committee. Mr. Grassley, Republican of Iowa, said the committee plans a close scrutiny of all the charities involved in the deals.

The IRS notice follows congressional hearings last November on tax shelters promoted by the KPMG accounting company to its clients. In internal documents, copies of which were obtained by the Senate Permanent Subcommittee on Investigations, KPMG noted that very few charities would be interested in such an arrangement because it would create unrelated-business income for them, on which they would have to pay taxes. The only charities that would be interested, according to the KPMG documents, would be groups with net operating losses that would offset the unrelated income. KPMG officials said at the hearings that the arrangements were permitted under federal tax law.

The IRS announcement, Notice 2004-30, will be published in a forthcoming issue of the Internal Revenue Bulletin. An advance copy of the notice may be obtained online at http://www.irs.gov/pub/irs-drop/n-04-30.pdf.