The trustee of the Thornton Trust was approached by the development director of the Orr-field Symphony Orchestra (OSO) for a gift of $1 million toward the OSO building campaign. The parties agreed that because of the size of the gift, the trust would need to obtain the funds by accumulating the income from its investment portfolio over a three-year period.
The trust's gift would be made at the end of year 3, and it would represent three years' worth of trust income from its taxable investments, plus the investment earnings on the accumulation during the three-year period. Specifically, the gift would consist of the following amounts.
Investment earnings, accumulated from year 1 ......................... $300,000
Investment earnings, accumulated from year 2 ........................... 300,000
Investment earnings from year 3 ........................................... 300,000
Additional earnings realized from the prior years' accumulations .... 100,000
All of the investment earnings of the trust consisted of taxable interest, dividends, and capital gains.
Tiffany Thornton, the tax adviser to the trust, asks you whether the Federal income tax law would allow for a year 3 charitable deduction for the whole $1 million, or would the deduction be limited to only the $300,000 current-year gross income? Also, would a deduction be allowed for the $100,000 earnings on the accumulations that were realized during the three-year period? Address Tiffany's concerns in a memo for the tax research file?