On November 14, 2024, the Internal Revenue Service (IRS) explained that traditional IRA owners could make up to $105,000 in tax-free charitable donations this year through qualified charitable distributions (QCD). The limit has increased from $100,000 in prior years.

In addition, traditional IRA owners who are age 73 or older have a required minimum distribution (RMD). The RMD starts at approximately 3.8% and increases each year as the IRA owner becomes older. The QCD from an IRA will count towards a taxpayer’s RMD.

To qualify as a QCD, the distribution must be sent directly to a qualified charity. Some IRA custodians will send a check to the IRA owner for distribution to the charity, however, the check must be payable only to a qualified exempt organization. Because it may take time for some custodians to process the request, the IRS urges IRA owners to initiate the QCD process by early December. This ensures sufficient time to make certain that the transaction has been completed by December 31, 2024.

The maximum QCD, which is indexed each year for inflation, is $105,000 in 2024. If a married couple are both over age 70½, they could potentially contribute double the limit to charity, up to $210,000.

For IRA owners who are planning for next year, the IRS has released the inflation-adjusted number for 2025. In 2025, individuals will be able to transfer $108,000 from an IRA to charity as a QCD.

If the IRA custodian does make a transfer to a charity, the IRA owner will receive IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans. The IRS Form 1040 for tax year 2024 will require the IRA distribution to be reported on Line 4a. If the full distribution is a QCD, the taxpayer will enter "0" on Line 4b of his or her tax return.

A charity must send the donor a written acknowledgment of the IRA contribution. This is not a receipt because the gift is not included in the donor’s income and is not deductible. However, the written acknowledgment from the charity must state that "no goods or services were received" in return for the IRA gift.

IRS Publication 526, Charitable Contributions and IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) have additional information on the procedures for substantiating a gift from your IRA.

Revocation of University Exempt Status Reversed

In Grand Canyon University v. Michael A. Cardona et al.; No. 23-15124 (9th Cir. 2024), the Ninth Circuit reversed a District Court summary judgment that revoked the exempt status of Grand Canyon University (GCU). The Ninth Circuit determined that the revocation was based on the wrong federal regulation.

Grand Canyon University is a private university located in Arizona. It functioned for several years as a nonprofit, but experienced financial trouble in the early 2000s. As a result, it sold the university to private investors and they operated the university as Grand Canyon Education, Inc. (GCE). After several years, the GCU Board of Trustees determined it would be appropriate to return to nonprofit status.

Nonprofit status requires the institution to qualify under the Higher Education Act of 1965 (HEA). The HEA nonprofit definition states, "The term ‘nonprofit’ as applied to a school, agency, organization, or institution means a school, agency, organization or institution owned and operated by one or more nonprofit corporations or associations, no part of the net earnings of which inures, or may lawfully inure, to the benefit of any private shareholder or individual."

The Department of Education created a regulation based on this rule that the school must be a nonprofit organization under state law and a tax-exempt organization under Section 501(c)(3).

The GCU Board of Trustees created an Arizona nonprofit with the title "Gazelle University." It signed a July 1, 2018, agreement for the purchase of GCU by Gazelle for approximately $853 million. GCE loaned Gazelle the purchase price and Gazelle agreed to transfer "60% of the university's adjusted gross revenues" for an initial term of 15 years. If Gazelle wanted to terminate the arrangement, it would pay GCE a non-renewal fee of 50% of the service fees for the prior 12 months.

Gazelle was recognized as a Section 501(c)(3) by the IRS in 2015 and by the State of Arizona in 2018. In 2018, GCU submitted a request to the Department of Education for recognition as a nonprofit under Title IV. The Department of Education determined that GCU was not qualified because it failed to meet the standard of it being "owned and operated by one or more nonprofit corporations or associations, no part of the net earnings of which benefits any private shareholder or individual."

The Department of Education determined that GCU must “meet both an organizational test and an operational test." The operational test prohibits a "private benefit." The Department noted a private benefit "does not necessarily involve the flow of funds from an exempt organization to a related party; it can also include other benefits from the activities of the exempt organization to an unrelated party."

The Department of Education emphasized the agreement was primarily for the purpose of increasing the shareholder value of GCE. The fact that the CEO of GCE was also President of GCU blocked the confidence "that Mr. Mueller's undivided loyalty is to the Institution."

The District Court granted summary judgment to the Department of Education and supported the denial of exempt status.

The Ninth Circuit noted the HEA requirements state an exempt university must be operated by a nonprofit corporation and there can be no part of the net earnings that benefit a private shareholder. However, the Department of Education incorporated the IRS "operational test” in this HEA definition. The Ninth Circuit stated, "The Department thus invoked the wrong legal standards by relying on IRS regulations that impose requirements that go well beyond the HEA's requirements and that instead implement a portion of Section 501(c)(3) that has no counterpart in HEA Section 103(13).

Therefore, the "operated exclusively" requirement does not extend to the HEA two-part test for exempt status. The judgment of the District Court was reversed.

Editor's Note: The District Court will need to review the decision. There remains a determination whether the contract is permissible or constitutes a violation of the "private inurement" provisions. The District Court, GCU and the Department of Education will undoubtedly review and analyze this requirement.

IRS Moves Forward with Generative AI

At a November meeting of the American Institute of CPAs Fall Tax Division, representatives of the Internal Revenue Service (IRS) discussed the efforts of the IRS to incorporate artificial intelligence (AI) in their new programs. Randy Soper is the IRS Chief of AI for Technology. He indicated the IRS is now reviewing the use of generative AI models. Because the models are built by third-party vendors, this is a significant difference from IRS previous machine learning and AI efforts.

Soper stated that generative AI starts "with something that somebody else has built with all the capability that it has, but also all the risks that are packaged in that box."

The generative AI solution is fundamentally different from traditional AI machine learning. It includes new requirements for the IRS to review from "a risk management standpoint in order to deliver those digitally safely."

The IRS is studying the potential for workflow improvements and attempting to analyze and reduce the risks. The Inflation Reduction Act (IRA) provided funding to modernize IRS information technology systems. However, the efforts must include both a combination of modernization and assurance that the mission objectives of the IRS are protected.

The Taxpayer Advocate Service (TAS) is exploring the use of AI to help case advocates research information. National Taxpayer Advocate Erin Collins spoke at the AICPA conference. She indicated TAS is studying the use of AI to assist in case management. TAS plans to launch an AI platform by the summer of 2025.

The new AI software will create a "customer relationship management system" to replace the existing 20-year-old platform. It will initially be available to TAS staff. A longer-term goal is to allow the new platform to generate information that may be available to individual taxpayers.

Collins also explained the TAS system may have similarities to the Taxpayer 360 customer service platform being developed by the IRS.

The IRS is hoping to deploy Taxpayer 360 in 2025. It will provide comprehensive overviews of taxpayer information to IRS service representatives. The hope is that this AI system will enable the IRS service representatives to provide a higher level of taxpayer support.

The IRS is exploring multiple uses of AI, including powering chatbots and processing vast amounts of data to highlight the opportunities for IRS staff to audit large, complex taxpayers. The new AI products may substantially enhance the research capabilities of IRS staff.

Collins was asked about the possibility that additional IRA funding may be reduced by the House of Representatives in 2025. The initial $80 billion IRA funding has been reduced to $57.8 billion, with substantial cuts to IRS enforcement. Collins indicated she felt there may be additional cuts in the IRS enforcement budget, but funds for added customer service and related support would likely be available.

Applicable Federal Rate of 4.4% for November: Rev. Rul. 2024-24; 2024-45 IRB 1 (15 October 2024)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2024. The AFR under Sec. 7520 for the month of November is 4.4%. The rates for October of 4.4% or September of 4.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”