Will Muhammad likely get an income tax deduction for his planned $1 million donation? Why or
why not?
Muhammad will not receive a tax deduction for $1 million donation. According to IRS Publication
526 t the foreign organization is deemed a non-qualified organization. There are certain Canadian,
Israeli, or Mexican organization that could qualify but not for Islamabad. The U.S. has tax treaties
with those countries and that is why it is allowable for certain organization in those countries.
Should you try to persuade Muhammad to be more patient and make the donation in his will? Why
or why not?
Yes, Mr. Muhammad should be persuaded to be patient and donate in will. He does not receive
income tax deduction but can receive benefit of estate taxes in accordance to IRC 2055. c Charitable
contribution can be deducted from gross estate.
Charitable deductions for income tax purposes are allowed under IRC §170, where any charitable
contribution made within the taxable year is deducted with a 50% limitation under IRC §170(b). The
contribution is further defined under IRC §170(c)(1) as a gift for the use of a state, a possession of
the United States, or any political subdivision of the foregoing, or the United States or the District of
Columbia, but only if the contribution or gift is made for exclusively public purposes. As such, an
income tax deduction is not applicable for any contribution to a foreign entity and Muhammad
would not see a legal deduction for $1 million contribution made to the Pakistani Cricket Foundation
in Islamabad.
Despite this, charitable contributions and transfers made at the bequest of a will are defined
differently. IRC §2055 allows for the deduction of transfers from an estate to organizations with a
public, religious, charitable, scientific, literary, or educational purposes, a fraternal society, veteran’s
organization, or employee stock ownership plan. CFR §642.1(c)-1 permits an unlimited deduction for
any part of the gross income of an estate or trust for payments made to entities with purposes
specified in IRC §170(c). In addition, CFR§642(c)-1(a)(2) allows for contributions and transfers to be
made to a corporation or trust as defined by IRC §170(c) even if the entity is not created or
organized in the United States, any State, the District of Columbia, or any possession of the United
States. Although, Muhammad would not receive an income tax deduction for a current donation, he
may specify an amount in his will that would allow for his estate to take advantage of a charitable
contribution deduction despite the geographical and originating location of the foundation without
the monetary or percentage limitations prescribed by IRC §170.
26 CFR §642-1
26 IRC §170
26 IRC §2055So unfortunately, Muhammad will not be getting the income tax deduction for this
donation of $1 million. This is because the Pakistani Cricket Foundation is not a registered U.S.
charity. The governance for qualified charities can be found in I.R.C § 501(c)(3). We can also find
more in-depth information about what charitable contributions qualify as deductions to which
organizations. Listed on the “not deductible as charitable contributions” side is money or property
given to foreign organizations. However, it is interesting to add that charitable contributions to
qualified charities in Israel, Canada, and Mexico can be deducted. In regards to advising Muhammad
to be patient and make a qualified donation in his will or not, I think the answer of this depends. If
Muhammad is set on contributing to the Pakistani Cricket Foundation, then it would not matter
whether he donate now or wait and donate through his will. This is because as stated above, the
organization is not a qualified charity. Now if Muhammad decides to change his donation to a
qualified charity, I believe that he should wait and have it outlined in his will. This is because
“charitable contributions generally can’t be more than 60% of your AGI, but in some cases 20%,
30%, or 50% limits apply.” (IRS Publication 526) However, donations made from your estate have no
limit and he would be allowed an unlimited deduction to a charity which is under the governance of
IRC § 2055.
Sources:
I.R.C. § 501(c)(3)
I.R.C. § 2055
IRS Publication 526
