March 7, 2002 | Read Time: 2 minutes
In a case that some observers fear could dampen charitable giving, Minnesota’s tax court has ruled that a couple can’t deduct from their state income taxes gifts they made through a donor-advised fund that benefited local charities.
The couple, R. Austin and Nadine Chapman, gave $1.6-million to the Fidelity Charitable Gift Fund between 1994 and 1996 and deducted the gifts from their state taxes. The couple reasoned that because the money was put into a donor-advised fund and then distributed at their recommendation to Minnesota charities, the donations met the state’s requirement that taxpayers who are subject to the state’s “alternative minimum tax” may deduct only gifts to in-state charities. The alternative minimum tax is designed to capture tax from wealthy people who otherwise would have so many deductions that they would pay little or no tax.
But the tax court, in its opinion, said that because Fidelity is located in Boston, the donations cannot be deducted from state income taxes — even if Fidelity then gives the money to Minnesota charities. The court said that Fidelity is not legally required to follow donors’ wishes and could choose to give the money to out-of-state charities. The Chapmans, the court ruled, owe more than $145,000 in additional taxes and penalties.
Tax experts say Minnesota is the only state with such a law. The law has been on the books since 1984, but the state only began enforcing it within the past few years.
Craig Wruck, chairman of the government-relations committee of the National Committee on Planned Giving, said the court decision and the law could make people in Minnesota hesitant about giving. One problem is that donors won’t know until after they’ve made a gift whether they will be subject to the alternative minimum tax and whether their charitable deduction might be denied, he said. “Charitable giving is voluntary behavior. If you make it even one wrinkle more complicated, people will just choose not to do it,” Mr. Wruck said.
Thomas J. Wesely, a Minneapolis accountant who does charitable-gift planning, said the state also began applying the law to charitable remainder trusts established by Minnesotans about a year ago. Unless Minnesota charities are irrevocably named as beneficiaries, the gifts are subject to state tax, he explained. Charities tried last year to persuade the legislature to change the law by getting rid of the in-state requirement for taxpayers subject to the alternative minimum tax. But the state has estimated that to do so would cost Minnesota several million dollars a year in lost tax revenue.
