Charitable Contribution of Money Market Fund

Technical topics regarding tax preparation.
#1
DAJCPA  
Posts:
869
Joined:
24-Apr-2014 1:05pm
Location:
Colorado
Client donates 100,000 shares of a Vanguard Prime Money Market Fund to a qualified charitable org. The money market share value is always 1.00 per share, therefore the value of the donation is $100,000. Even though this is basically the same as cash, I assume since it is not actually cash but mutual fund shares that is should be reported on Form 8283, correct?
 

#2
WEISSEA  
Posts:
2076
Joined:
21-Apr-2014 5:20pm
Location:
California and Nevada
If wrote check from MM fund then a cash donation. If donate shares of capital assets then non-cash Form 8283. It would be ordinary income property.
 

#3
DAJCPA  
Posts:
869
Joined:
24-Apr-2014 1:05pm
Location:
Colorado
Client did not write a check. They transferred the actual money fund shares. The receipt from the charitable org says it received 100,000 shares of Mutual Fund: Vanguard Prime Money Mkt Fund. Sounds like this should be reported on Form 8283, right?
 

#4
WEISSEA  
Posts:
2076
Joined:
21-Apr-2014 5:20pm
Location:
California and Nevada
Yep, interesting case. The ones I do are appreciated LT cap gain stocks or funds transferred to a Donor advised fund. What was his motivation to transfer MM shares?
 

#5
DAJCPA  
Posts:
869
Joined:
24-Apr-2014 1:05pm
Location:
Colorado
They donated some other appreciated securities as well so it was just the way it was handled. They donated the other securities and just did the MM shares the same way all around the same time. The securities and MM shares did go to a Vanguard Charitable donor advised fund.
 

#6
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
It would be ordinary income property.. Why?
 

#7
makbo  
Posts:
6840
Joined:
23-Apr-2014 3:44pm
Location:
In The Counting House
 

#8
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Fascinating! You omitted the very next sentence. " A capital loss is possible if the shares fall below $1 and are not reimbursed by the fund company." And it seems to me that "The Nest" is not an authoritative source. Section 170 says in relevant part
(e) Certain contributions of ordinary income and capital gain property
(1) General rule The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of—
(A) the amount of gain which would not have been long-term capital gain (determined without regard to section 1221(b)(3)) if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution),
. And the 8283 instruction says (also in relevant part)
The deduction for a gift of ordinary income property is limited to the FMV minus the amount that would be ordinary income or short-term capital gain if the property were sold.
. And I see nothing in section 1221 that excludes money market mutual funds from the definition of capital asset.

While there has probably never been a time when the per share value exceeded $1.00, the Vanguard prospectus simply says
Investment Objective
The Fund seeks to provide current income while maintaining liquidity and a stable share price of $1.
.

So it seems to me it is not ordinary income property, except to the extent its holding period is short-term. Not that it really matters in OP facts.
 

#9
Posts:
3299
Joined:
21-Apr-2014 7:01am
Location:
Near the fridge.
And what about this, from the Code:
(G)Increased limitation for cash contributions
(i)In general
In the case of any contribution of cash to an organization described in subparagraph (A), the total amount of such contributions which may be taken into account under subsection (a) for any taxable year beginning after December 31, 2017, and before January 1, 2026, shall not exceed 60 percent of the taxpayer’s contribution base for such year.
We might be looking for a statutory definition of "cash" now, huh? Somebody really chose the wrong word here... 8-)
 

#10
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Fine pointing out of a fine point. A money market mutual fund is clearly a security, else Vanguard would likely not file its prospectus with the SEC. So, would we tell a client, in certain factual circumstances where the 60% limit is important, to first liquidate the fund shares and then contribute cash? If so, why would this not be a step transaction that IRS might challenge? Would 7701(o)(5)(B) exclude it from the definition? Or is it not so excluded?
 

#11
Posts:
3299
Joined:
21-Apr-2014 7:01am
Location:
Near the fridge.
I found a definition of "cash" in IRC Section 6050I, but I'm quite confident that the 6050I definition is *not* to be used in applying the "Increased limitation for cash contributions" found in Section Code Sec. 170(b)(1)(G) and quoted in my post #9.

Is there another definition of "cash" somewhere in the Code?
 

#12
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Cash or its equivalent (or money) shows up somewhere. Maybe 453, or 331, or 731, or other places.
 

#13
WEISSEA  
Posts:
2076
Joined:
21-Apr-2014 5:20pm
Location:
California and Nevada
"So it seems to me it is not ordinary income property, except to the extent its holding period is short-term. "

By the very nature of its investments its short term gain thereby ordinary income property.

Post#7: Money market instruments consist of short-term Treasury bills, short-term commercial debt, certificates of deposit and other interest-bearing securities and contracts with very short lifetimes.
 

#14
makbo  
Posts:
6840
Joined:
23-Apr-2014 3:44pm
Location:
In The Counting House
Nilodop wrote:Fascinating! You omitted the very next sentence. " A capital loss is possible if the shares fall below $1 and are not reimbursed by the fund company." And it seems to me that "The Nest" is not an authoritative source.

That's why I included a link, so you could judge for yourself. You simply asked "why", you didn't state that you already had your own answer. So I provided an answer to your "why", not even one that I came up with on my own.

Pub 526 wrote:Property is ordinary income property if you would have recognized ordinary income or short-term capital gain had you sold it at fair market value on the date it was contributed. [...]

Property is capital gain property if you would have recognized long-term capital gain had you sold it at fair market value on the date of the contribution. Capital gain property includes capital assets held more than 1 year.

Capital assets. Capital assets include most items of property you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.

Yeah, I know, pubs are not "authoritative sources" either, but good enough for most purposes -- at least, they usually make more sense to me than the convoluted language of the code.

So, one would not have recognized either ordinary income or long-term capital gain had one sold the MMF share at FMV, but maybe it falls into the "capital gain property" definition simply by virtue of being a capital asset held more than one year?
 

#15
Posts:
3299
Joined:
21-Apr-2014 7:01am
Location:
Near the fridge.
Here's a quote from page 14 the current Pub 526 that might connect to this thread somehow:
If you make cash contributions during the year to an organization described earlier under First category of qualified organizations (50% limit organizations), your deduction for the cash contributions is 60% of your adjusted gross income


Slam dunk!!! "...your deduction for the cash contributions is 60% of your adjusted gross income." You think somebody didn't really understand what he/she/it/they were writing in this Pub? And publishing? And putting up on the internet? Those guys over at Forms Division may have been drinking. Again. Still.
 

#16
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
By the very nature of its investments its short term gain thereby ordinary income property.. Incorrect. The property that is being evaluated for whether it is a capital asset is the stock in the money market fund, not the assets of the fund. Else the sale of the stock of many an operating corporate business would not yield capital gain/loss treatment merely because its assets consisted of receivables and inventory.

... but maybe it falls into the "capital gain property" definition simply by virtue of being a capital asset held more than one year?. That would be correct.
 

#17
Posts:
3299
Joined:
21-Apr-2014 7:01am
Location:
Near the fridge.
But it's "capital gain property" for this purpose only if, were it sold at its fair market value, there would be a long-term capital gain, which isn't the case, from what I can see from inside the refrigpbrerator. There won't be a gain of any kind... burp.
 

#18
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
But it's "capital gain property" for this purpose only if, were it sold at its fair market value, there would be a long-term capital gain, which isn't the case, .... Indeed the poorly drafted law (because it does not even consider OP's facts) does say that, here:
(iv) For purposes of this paragraph, the term “capital gain property” means, with respect to any contribution, any capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain.
. So would a court toss that as absurd and re-phrase it the way Spell Czech would have written it? I know with a high degree of certitude that Spell would have writ
(iv) For purposes of this paragraph, the term “capital gain property” means, with respect to any contribution, any capital asset the sale of which at a gain and at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain.
.

And I wonder, in fact would like to know, how exactly the MM funds are able to maintain the share price at $1.00. Sure, I know the nature of their investments, as described in #7 above (which, by the way are mostly "securities"), along with the use of algorithms to keep the value at $1.00, works well. But surely there must be times where, for a variety of reasons, unexpected changes in market interest rates occur rapidly and increase, however temporarily, the share value. That's probably why the fund prospectus says it "seeks" to maintain that value.
 

#19
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
I would argue that the Vanguard Prime Money Market Fund is a security, not cash. This is based on the following that Vanguard says about this fund on its website:
Vanguard Prime, Federal, and Treasury Money Market Funds: You could lose money by investing in the Funds. Although the Funds seek to preserve the value of your investment at $1.00 per share, they cannot guarantee they will do so. An investment in the Funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
 

#20
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
I'd argue that too. I even did, up above. A money market mutual fund is clearly a security, ...
 

Next

Return to Taxation



Who is online

Users browsing this forum: AlexCPA, Google [Bot], Google Adsense [Bot], JoJoCPA and 60 guests