Charitable Contributions by an Investment Club

Rip West on

Caryn Axelrad asked recently.........

Our partnership made a charitable contribution, which I believe can be passed through to the members. However, I don't see that as a choice under the Expenses.

Caryn is correct. At this point, none of the accounting programs for investment clubs, including bivio, support making charitable contributions from the club. She is also correct that, under IRS rules, a partnership can make a charitable contribution and pass that deduction along to its members.

I hope that bivio will, someday, support this feature. Until that time, there is a work-around which can accomplish the same thing. Here is what I suggest........

The best way to make a donation is for the club to donate appreciated stock. In this way, members will get a deduction for a charitable contribution on their tax return for their
share of the total fair market value of the stock donated. By doing it this way, the members get credit for the contribution at the fair market value of the stock gift and no capital gain is realized for either the club or its members. Having said that, it is also possible for the club to make a cash donation and pass the deduction along to its members.

The first thing you have to decide is how the gift should be split up among the members. It seems logical to me that you would do it in the ratio of the units held at the time you are making the gift. In other words, a person owning 90 percent of the units would be getting 90% of the gift, and his/her share of the total club's value would be decreased by 90% of the value of the gift. It would be possible to split the deduction equally among the members, if the club decides that is the better method.

Here are the steps to take.

Prepare a valuation statement as of the date you wish to make the gift.
Compute, using a spreadsheet or some other method, the amount of the contribution to be credited to each member.
Make partial withdrawals for each member in the amounts computed in (2) above. If stock is to be used, you will have to compute the number of shares coming from each partner.
If stock is being used, instruct the broker to make the transfer of the total number of shares to the charity. If the contribution is in cash, write the check to the charity.
Write a letter to the charity, stating that a contribution is being made on behalf of the members. If stock is being used, list the members' names and the number of shares for each. If cash is being used, list the amount for each member. Ask the charity to acknowledge the gift.
Prepare a letter to each member, telling them that they should claim a charitable contribution on their individual return for the current year. Show the amount each member should claim. If shares are being used, show the number of shares for that particular member.

If the contribution is made in this manner, it will not appear on the k-1's for the year. Each member will have to claim the deduction in his/her individual return.

Admittedly, this is not an ideal solution. Having the software able to reflect the contribution is certainly preferable. However, until that day arrives, this method will work and will result in the correct treatment for each member.

Rip West
Saint Paul, MN
trez_talk@bivio.com

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