One of the most annoying challenges you may face as a planned giving professional is an attorney or an accountant of a donor who is requesting the source in the IRS code for charitable gift annuities.
What makes this such a difficult question (besides the fact that an entire industry uses these things – they work and are accepted!!) is that CGAs were not a one time creation under the IRS Code like charitable remainder trusts. So, we can not point to one CGA section in the Code.
Anyway, I got this question this week and I wanted to go through the roof. At first, I scanned and emailed the entire chapter on CGAs from Tax Economics of Charitable Giving (lots of sources to look up quoted by them). But, I also called a top planned giving attorney to see if he had the info handy. Sure enough, the question was common enough that he went right through the 4 primary sources in the IRS Code and Regulations for CGAs. Here they are:
Section 642(C)(5) – the definition and basic rules for CGAs
Section 501 (M) – Exempts CGAs from being treated as commercial insurance products (as long as the charitable deduction is greater than 10% of the gross gift amount)
Section 72 – This section really deals with commercial annuities but is also the source for how the “tax-free” portion of CGA payments are determined. (note: even though 501(M) says CGAs are not commercial annuities, the code has no problem using section 71 on commercial annuities to help define income issues with CGAs even though they are not supposed to be commercial annuities!)
Regulation 1.1011-2(b), example 8 – This example in the regulations has been an important source for 40 years or more for how CGAs work and how the code treats them as Bargain Sales and this in turn helps us determine the charitable deduction.
I would bookmark this page or print it. Someday you’ll need it.