Friday April 19, 2024
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1.1.1 Gift or No Gift?
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Charitable Gift Definition
Gifts to charities are deductible because they serve the public interest. A gift to a friend or family member is not deemed to serve the public interest and thus is not deductible. However, gifts for helping with relief efforts, education, medical services for the needy, social services or religious organizations are deemed to benefit the greater public interest and are therefore deductible for income, gift or estate tax purposes.
Gifts may be made for a designated purpose. It is permissible to make a gift to an educational institution to provide scholarships to deserving students. However, the gift may not be subject to certain kinds of contingencies.
For example, a gift transferred to a charitable organization that requires all staff of that charity to run a mile in four minutes or to lose 10 pounds this month would not be deductible. Reg. 1.170A-1(e). However, a contingency that is extremely remote will not defeat the gift. For example, if the gift is contingent upon a university remaining in existence and the university has been conducting classes for several decades, then the probability for fulfillment of the contingency will be deemed negligible and the deduction will be permitted.
Generally, gifts may be subject to reasonable designations or restrictions. However, a restriction may cause the charitable deduction to be lowered. For example, the gift to a charity of property subject to a conservation easement may reduce the value of that property to the charity. In this circumstance, the charitable deduction would be reduced to reflect the actual value transferred to the charity.
Personal Benefit From Transfers To Charity
Several types of gifts do not result in deductions or produce reduced deductions. These are the "personal benefit" transfers. For example, payment of tuition to an organization for your child or grandchild produces no deduction. See Sklar v. Commissioner. The benefit of education for the child is equal to the tuition paid and there is no charitable gift. In some reported cases, the government has claimed both civil and criminal liability for intentional charitable deduction of tuition. While the risk of criminal tax fraud liability may be low, the Service is clearly taking hard line positions on tuition deductions.
Similarly, payment to a charity for specific services is not deductible. For example, in Hernandez v. Commissioner, the Supreme Court determined gifts of fixed amounts to the Church of Scientology for personal counseling were not deductible. These gifts were more appropriately considered payments for services than true charitable contributions.
Auctions are frequently held by charities and some purchasers have mistakenly believed that their successful bids were deductible. However, since the individual receives the auction property, there is usually no deduction. There is an exception to this rule if the bid can be shown to be in excess of the fair market value of the item. In such a case, the excess amount is deductible. The charity may make a "good faith estimate" of the value transferred. Reg. 1.170A-1(h)(5), Example 2.
Token Benefits
Finally, token benefits are permitted. Many charities desire to give recognition, plaques, memorabilia and other items to donors. In 2024, the token benefit is disregarded if it is less than 2% of the payment up to $132, indexed for inflation. If the gift is $66.00 or greater, indexed for inflation, then a token item such as a mug, poster or key chain with the charity's name or logo and an indexed value of up to $13.20 may be given. The benefits to an individual do not include intangible religious benefits. See Rev. Proc. 2017-58, Reg. 1.170A-1(h)(3), Reg. 1.170A-13(f)(8)(i)(A).
Token Gift Limits
| Gift Amount | Applicable Limit |
| $0 to $66.00 | Token up to 2% of gift value permitted |
| $66.00 to $660 | Token up to $13.20 permitted |
| $660 to $6,600 | Token up to 2% of gift value permitted |
| Over $6,600 | Token up to $132 permitted |
Token Benefit - Usually a mug, plaque, poster or similar item with the logo of the charity. If value of item given by the charity to the donor exceeds the token benefit, then the donor's charitable deduction is reduced.
Deductions Not Permitted
Several categories of transfers produce no charitable deduction. These include partial interests, gifts of art with intervening interests, gifts of the use of property, gifts of time and gifts of ordinary income property.
Under income, gift and estate tax rules, partial interests are generally not deductible. A partial interest gift occurs when a donor transfers less than his or her entire interest in a property. For example, if a donor gives surface rights to land and retains the mineral rights, there is no deduction because only part of the property was transferred. However, an undivided interest gift is permitted, so long as the donor gives an undivided percentage of each and every interest he or she owns in the property. For example, a donor who owns land could give an undivided 50% of the land by deeding that portion to charity. A further exception is created for charitable gifts to unitrusts, annuity trusts, pooled income funds and gifts of remainders in a home or farm. Sec. 170(f)(3).
Gifts of art and other tangible personal property are not deductible if there are "intervening interests." For example, if a person gives a painting to a museum but does not actually deliver the painting and retains it in her home, then the gift is not complete until the actual delivery to the museum occurs. At that time, the gift is deductible. Sec. 170(a)(3). The obvious purpose of the rule is to allow the deduction only when the charity actually has ownership and control of the art or other personal property.
Use of property and gifts of services are not deductible. Reg. 1.170A-1(g). The use of property or providing services such as advertising would otherwise generate ordinary income to the donor. Since there is no recognition of income, there is no charitable deduction. This principle also applies to gifts of time, since time is an ordinary asset.
Volunteer Expenses - The "No Smile" Rule
Volunteers may deduct out-of-pocket expenses. The charity must provide the volunteer with a description of the contributed services and state whether there has been any transfer from the charity of goods or services back to the donor. In addition to out-of-pocket expenses, mileage is deductible at the rate of 14 cents per mile. Sec. 170(f)(8).
If a donor travels to attend a meeting or conference that is sponsored by the charity, then there is a deduction only if there is "no significant amount of personal pleasure" in the meeting. The "no smile" rule is applied on a factual basis, but the principal purpose of the conference must be to further the charitable goals. The typical alumni excursion does not qualify for a deduction but a meeting or conference with morning and afternoon sessions usually will qualify. Sec. 170(j).
"Quid Pro Quo" Gifts
A donor may make a transfer to a charity and receive a benefit in return that is not excluded under the "token benefit" rules. If the gift by the donor is over $75, then any "quid pro quo" transfer requires documentation by the charity. If the benefit transferred is greater than a token benefit and the gift exceeds $75, deductions for "quid pro quo" gifts are equal to the fair market value less the benefit transferred by the charity to the donor.
Gifts to religious organizations for religious services or a benefit such as the naming of a building are excluded from this rule. However, tangible benefits such as a dinner, attendance at a sports or art event or transfer of valuable items to a donor will trigger the "quid pro quo" rule.
For example, assume that a theater group offers donors premier seating for a Shakespearean play. If the donors pay $100 and the normal price for the seats is $40; the excess of $100 over the regular $40, or $60, would then be deductible. Sec. 6115(b).
Pledge Agreements
Pledges are a very common strategy for capital campaigns. If the nonprofit plans to build a structure, it is important to have enforceable and legally binding pledges. It is also common to require a legally-binding pledge for a building project naming opportunity.
A pledge agreement is a contract that is supported by consideration. Consideration may be a promise or an action by the nonprofit in reliance on the agreement. The consideration does not require a specific value or comparability with respect to the gift. Even a modest level of consideration is sufficient to support a contract. For the pledge to be enforceable, there must be both consideration and a clear statement in the pledge agreement that it is legally binding. A pledge must be signed by both the donor or donors and an officer of the nonprofit. If an agent has authority to make charitable gifts, he or she could also be a qualified signer of the agreement.
The primary value of a binding pledge is that it is a clear statement that the donor intends to make a gift of the stated value. In most cases, the donor will make this gift during his or her lifetime. However, if the gift has not been completed, then the nonprofit may file a "creditor's claim" with the donor's estate.
A donor advised fund (DAF) or a private foundation (PF) raises additional issues with respect to a pledge. A legally binding pledge may not be fulfilled by a DAF or PF. The fulfillment of a legally binding pledge by a DAF violates Sec. 4967(d) and could be a Sec. 4958 excess benefit transaction. A private foundation is subject to the Sec. 4941 Self-Dealing rules. Fulfilling a legally binding pledge by the donor through his or her PF violates the self-dealing rules.
However, under Notice 2017-73; 2017-51 IRB 1, it is possible for a DAF to fulfill a non-binding pledge. The donor and the nonprofit do not attempt to determine whether a pledge is binding, but the non-profit host of the DAF is permitted to make distributions to the selected charity. The DAF sponsor making the distribution must make no reference to the pledge, the donor must not receive a benefit that is more than incidental, and the donor may not receive a charitable deduction for the fulfillment of that pledge.
Specimen Pledge Agreement
Favorite Charity
123 Green Street
Hometown, IN 54300
IRS Tax Number: 12-0045678
1. Pledge Agreement. The donors _____________________ pledge a gift contribution under the terms of this binding pledge agreement to Favorite Charity (Charity) with the above address and IRS tax number. The donors reside at ___________________, City of __________, State of _____________, Zip Code of _______________, Phone of ______________ and email address of ________________.
2. Pledge Amount. The donors promise to give Charity a Pledge Amount of $_______________ with payments as specified in the following terms:
3. Legal Obligation. The Pledge Amount is a binding legal obligation of the donors and their heirs, successors, and legal representatives. The Charity relies on this Pledge Amount to fulfill its charitable goals and purposes. The Charity will suffer a material detriment or liability if the Pledge Amount is not fulfilled. Therefore, the Pledge Amount by donors is valid and enforceable and may not be revoked or modified without the prior written consent of the Charity. This binding pledge is governed by the laws of the State of _____________.
4. Purpose and Restrictions. This legal obligation of donors may be used by the Charity for its general purposes, or as specified in this provision:
Signatures of Donors
Donor: ___________________________________ Date: ________________
Donor: ___________________________________ Date: ________________
Acceptance of Pledge by Officer of Charity
Under the authority delegated to me by the Board of Directors of Charity, I accept this binding pledge as an officer of Charity. To the extent the Purpose and Restrictions are lawful and practical, the Charity agrees to comply with these provisions.
Charity Officer:_____________________________ Date: ________________
Mary Officer, Vice President
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Private Letter Rulings
PLR
199933029 Gifts for Fraternity House Deductible:
Normally, gifts to a fraternity house would not be deductible, since the fraternity is a Sec. 501 entity and not a Sec. 501(c)(3) charity. However, a creative counsel proposed that the fraternity corporation grant a conservation easement under Sec. 170(h) to a qualified charity.
PLR
200142019 Gifts of Rebates Entitle Donor to an Income Tax Deduction:
Company B is a for-profit corporation that operates a website that sells consumer products from a wide variety of merchants. The web site is accessible either directly through Company B or through links on certain charities' web pages. For each purchase on the web site, shoppers are entitled to a rebate, which is based upon the total purchase price.
PLR
200228001 Donor Allowed a Charitable Deduction for Credit Card Rebate Gifts:
Company is a for-profit corporation that has developed a brand-name affinity credit card program. Company's credit card program will help charities raise funds through "rebates" in connection with credit card transactions.
PLR
200301025 Gifts to State-Created Instrumentality are Tax Deductible:
Council is an unincorporated organization that was created pursuant to a state statute. Council was created to develop and implement a statewide trauma care system. As a result, five counties entered into an agreement to form Council.
PLR
200445002 No Gross Income When Lawsuit Claims Assigned to Charity:
Mid City Corp. filed a lawsuit against Defendant asserting various claims. The trial has ended but the trial court has not issued its opinion. Moreover, there are no settlement negotiations underway between Mid City Corp. and Defendant.
PLR
200445023 Donors May Manage and Invest Their Charitable Contributions:
In this letter ruling, Donors propose to make donations of cash and stocks to Public Charity (PC). PC is a Sec. 501(c)(3) college. Under the proposed gift scenario, Donors and PC will enter into an agreement at the time of the gift. Under the terms of the agreement, all of Donors' donations will be placed in an investment or brokerage account under PC's name and for PC's exclusive benefit. Donors' contributions will be unconditional and irrevocable. The agreement further provides that PC has the right at any time or for any purpose the power to withdraw any or all of the assets held in the account.
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Related Topics on Gift or No Gift?
1.1.3
Deduction Limits - 60%, 50%, 30%, 20%:
There are several limits on deducting charitable gifts. Generally, cash gifts and appreciated gifts to public charities are deducted first. Then, cash and appreciated gifts to private foundations are deducted. If there are carry-forwards in either category, those are deducted next if the current gifts have not reached the applicable deduction limits.
1.1.4
Gift Reduction Rules:
Gifts of cash are deductible at face value. Most gifts of appreciated property are deductible at fair market value. Value is usually defined as the price that a willing buyer would pay to a willing seller. Reg. 1.170A-1(c)(1). However, some types of property gifts are not deductible at fair market value. For specific policy reasons, these gifts will be reduced in value for deduction purposes.
Derby:
In Charles A. Derby et al. v. Commissioner; T.C. Memo. 2008-45; Nos. 10930-02, 10931-02,10932-02, 10933-02, 10934-02, 10935-02, 10936-02, 10937-02, 10939-02, 10941-02, 10942-02, 10943-02, 10945-02 (28 Feb 2008), the Tax Court denied a charitable deduction for the transfer of goodwill from a group of medical doctors to a nonprofit medical center.
Tucker:
In Paul L. Tucker Jr. et ux. v. Commissioner; T.C. Summ. Op. 2008-78; No. 5854-06S (2 Jul 2008), the taxpayers had claimed business deductions and charitable deductions. Mr. Tucker is a pilot for Southwest Airlines and resides in Birmingham, Alabama. His principal position with Southwest is as a line captain and check pilot at Midway Airport. He deducted $28,536 for employee expenses and $19,979 for charitable gifts for tax year 2002.
Sklar CA9th:
In Michael Sklar et ux. v. Commissioner; No. 06-72961 (12 Dec 2008), the Ninth Circuit affirmed a tax court decision and denied a deduction for tuition payments to a religious school.
Jones:
In Sherrel Jones et vir v. Commissioner; No. 08-9001 (27 Mar 2009), the 10th Circuit determined that attorney Leslie Steven Jones was not entitled to a charitable contribution deduction for gifts of the trial preparation materials for Oklahoma City bomber Timothy McVeigh.
Viralam:
In Setty Gundanna Viralam et ux. v. Commissioner; 136 T.C. No. 8; No. 21355-03 (13 Feb 2011), the Tax Court denied a deduction for a charitable gift to an organization maintaining donor advised funds for doctors. In addition to not receiving the charitable deduction, the doctor was subject to capital gains tax on sale of the stock and an accuracy-related penalty.
Rolfs:
In Theodore Rolfs et al. v. Commissioner; No. 11-2078 (8 Feb 2012), the 7th Circuit affirmed a Tax Court decision. Taxpayers had given a home to the Village of Chenequa Fire Department and it was burned down as part of normal firefighter training. The Tax Court denied a deduction.
Graev:
In Lawrence G. Graev et ux. v. Commissioner; 140 T.C. No. 17; No. 30638-08 (24 Jun 2013), the Tax Court denied a deduction for a gift of a façade easement because the charity sent a "side letter" promising to return the gift if the IRS denied the deduction.
Sklar CA9th:
In Michael Sklar, et ux. v. Commissioner, No. 00-70753 (29 Jan 2002), the Ninth Circuit Court of Appeals held that payments to a religious school for tuition were not deductible.
Addis:
In Charles H. Addis, et ux. v. Commissioner; 118 T.C. No.32; No. 6628-00 (10 Jun 2002), the Tax Court refused to allow any charitable deduction for $72,285 in charitable gifts.
Atkinson:
In John A. Atkinson et ux. et al. v. Commissioner; T.C. Memo. 2015-236; Nos. 2683-11, 2693-11, 2694-11, 2695-11, 2700-11, 18938-12 (9 Dec 2015), the Tax Court rejected a North Carolina conservation easement because it did not qualify for a charitable deduction.
Carroll:
In Douglas G. Carroll III et ux. v. Commissioner; 146 T.C. No. 13; No. 5445-13 (26 Apr 2016), the Tax Court denied a deduction for a conservation easement. The owner of the property drafted the agreement and it did not fulfill the “granted in perpetuity” requirement of Sec. 170(h).
RP Golf LLC:
In RP Golf LLC et al. v. Commissioner; T.C. Memo. 2016-80; No. 27873-08 (28 Apr 2016), the Tax Court denied a $16.4 million conservation easement deduction because mortgages were not subordinated when the deed was signed.
Fakiris:
In Fakiris, George v. Commissioner; No. 18292-12; T.C. Memo. 2017-126 (27 Jun 2017), the Tax Court denied a $3 million deduction because the donor could recover the gifted property.
Addis CA9th:
In Charles H. Addis, et ux. v. Commissioner; No. 02-73628 (9th Cir., 8 Jul 2004), the Court of Appeals held that there was no deduction for charitable reverse split dollar plans.
Roark:
Charitable reverse split dollar (CRSD) plans were a concept heavily promoted by the life insurance industry and some charitable organizations in the late 1990s. The deductions claimed were often far in excess of the value actually transferred to charity. The abuses resulted in the passage of Sec. 170(f)(10), which eliminated the CRSD plans (effective on February 8, 1999). However, those unfortunate donors who became involved in these plans are now in litigation with the IRS over additional taxes and penalties.
Sklar:
In Sklar v. Commissioner, T.C. Memo. 2000-18 (April 5, 2000), Michael and Marla Sklar had claimed charitable deductions for 55% of the tuition for their children at two religious schools. The 55% amount was determined by the school to be the portion of the education that related to religion. Under the theory that the religious education should be deductible, Mr. Sklar, a CPA, claimed a charitable deduction.
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