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Exempt Organizations
November 2001 Supplement

Leave-based donation programs

In Notice 2001-69 (released 10/24/01), the IRS announced that payments by an employer to charity pursuant to a leave-based donation program will not result in taxable income to its employees. A leave-based donation program is one in which employees forego vacation, sick or personal leave in exchange for the employer contribution of the value of the foregone leave to charity.

Under long-standing “assignment of income” and “constructive receipt” principles, an employee wishing to donate accumulated leave would normally be required to include the value of such leave in income. The employee could claim a corresponding charitable deduction. However, employees who did not itemize deductions would receive no benefit from the deduction.

Notice 2001-69 allows employees to donate leave without an income inclusion. Although the Notice allows employees to avoid including the value of foregone leave in income, it also prohibits the employee from claiming a charitable deduction.

From an employer’s standpoint, Notice 2001-69 provides that the payment of the leave benefits to charity will not be treated as deductible as a charitable deduction under IRC §170, but will instead be deductible as a trade or business expense under §162. This is beneficial to the employer, since the charitable deduction rules cap the charitable deduction at 10% of taxable income.

For W-2 reporting purposes, the amount of contributed leave is not required to be reported as employee wages in Box 1, 3 or 5.

This is an interim measure issued to provide further relief in the aftermath of the September 11th tragedy; the IRS will study whether a permanent rule should be created. Notice 2001-69 will apply to payments made before January 1, 2003.

Although a leave donation program may not be appropriate for your organization, this may offer an alternative approach to generating contributions from your corporate supporters.

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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