This week discussion is very interesting. We have Muhammad wishing to support one of his
passions, cricket, by donating a substantial amount to the Pakistani Cricket Foundation in Islamabad.
Which in turn will support cricket in his homeland, Pakistan. His good intentions, however, may not
be enough to benefit him in reducing his taxable income in a form of a deduction. Let us explore
Muhammad’s situation in more detail.
According to the Internal Revenue Code Section 170(a)(1), a taxpayer can deduct a charitable
contribution of money or property made to or for the use of a qualified organization, in the tax year
on which they are donated. Now, this comes with limitations to the deductibility of charitable
contributions, as outline in IRC section 170(b), the amount of the deduction may not exceed 50% of
the taxpayers adjusted gross income (AGI) for the taxable year. In Muhammad case, it seems like he
is donating 50% of his annual salary and bonus/incentive compensation income, so based on these
facts alone, he should be under those limitations. The main issue, however would be if the Pakistani
Cricket Foundation in Islamabad is a qualified organization under the regulations established in the
US. Under IRC Section 170(c) we found that a “qualified organization” generally includes nonprofit
groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to
prevent cruelty to children or animals. In addition, a qualified organization needs to be registered in
the US and meet with the IRC Section 501(c)(3) rules and regulations. It seems like the Pakistani
Cricket Foundation does not meet the qualifications to be a “qualified organization”, which would
deem Muhammad’s donation not deductible from his income tax.
When it comes to persuade Muhammad to be more patient and make the donation in his will, the
situation may not change a lot. As the estate tax deductions have similar restrictions to income tax
deductions (as per IRC Section 2055) and it seems unlikely that the IRS would allow a deduction for
bequest to a non-U.S. registered charity like the Pakistani Cricket Foundation. The possible benefit of
waiting is if Muhammad’s estate would be subject to estate tax, as in this case the donation would
reduce his taxable estate, also reducing his estate tax liability. Moreover, I would also consider
Muhammad’s wishes, what if he would like to make the donation while he is alive so he can see the
impact his generosity has in the organization. These would be points to discuss with the client.
[I do wonder if there is a way to structure a Charitable Trust in a way that it will help the Pakistani
Cricket Foundation. Something like the court case we read this week (Buder v. United States]
It is not likely Muhammad will get an income tax deduction for his donation of $1 million. “Only U.S.-
based charities are eligible to receive tax-deductible charitable contributions from U.S. taxpayers.”
(CCH, 2022) To qualify for a charitable deduction, the donation must be to an organization described
in the IRC §2055 and made only for a purpose allowed by the IRC §2055. If he had chosen a U.S.
Charity a “deduction for charitable contributions generally can't be more than 60% of your AGI, but
in some cases 20%, 30%, or 50% limits may apply.” (IRS, 2022)
There are situations that one can put themselves in where “depending on the foreign jurisdiction, a
U.S. charity may be able to form a subsidiary charitable organization within that country that is
qualified to receive contributions that are deductible for income tax purposes in both the United
States and that foreign country.” (CCH, 2022) This would permit foreign subsidiary be treated as a
branch of U.S Charity and as a subsidiary donation made by U.S. parent charity will be donations for
U.S. tax purposes. I can see how this may not apply here but good for future reference.
As the financial advisor I would recommend forming a charitable remainder trust. Charitable
remainder trusts are irrevocable trusts that let you donate assets to charity and draw annual income
for life or for a specific time.” (IRS, 2022) We would provide instructions for the income to go to
family or whomever he designates and remainder or however much to be determined and turned
over to the Pakistani Cricket Foundation.
References:
Buder v. United States, 7 F.3d 1382, 1993 U.S. App. LEXIS 28005, 93-2 U.S. Tax Cas. (CCH) P60,149
(United States Court of Appeals for the Eighth Circuit October 29, 1993, Filed). c https://advance-lexis-
com.ezproxy.snhu.edu/api/document?collection=cases&id=urn:contentItem:3S4X-BS60-003B-P2Y8-
00000-00&context=1516831.
CCH Answer Connect Editoria (October 25, 2022) Deductions for foreign charitable giving Retrieved
on: https://www.wolterskluwer.com/en/expert-insights/deductions-for-foreign-charitable-
giving#:~:text=Individuals%20wishing%20to%20donate%20to,charitable%20contributions%20from%
20U.S.%20taxpayers.
IRC § 20.2055-1(a)(2)
IRS 22-Aug-2022 Charitable Remainder Trusts Retrieved on: https://www.irs.gov/charities-non-
profits/charitable-remainder-
trusts#:~:text=Charitable%20remainder%20trusts%20are%20irrevocable,File%20all%20required%20t
ax%20documents
