Thursday April 25, 2024

1.1.2 When is a Gift Deductible?

When is a Gift Deductible

Delivery:  The basic rule is that a gift to a charity is deductible when the property or cash is delivered to a charity.

Cash:  Cash is deductible when it is transferred to the charity.

Checks:  Checks are usually deductible, even though the final transfers are not actually made until the checks clear the banking institution.

Credit Cards:  Credit cards are deductible when the charges are made on the card owner's account.

Electronic Funds Transfers:  In an Internet society, many financial transactions take place electronically.

Securities:  Securities may be transferred by hand delivery, electronic delivery or through the mail.

Real Estate:  Legal title to real estate passes, under state law, when a valid deed is delivered from one party to a second party.

Art:  The delivery date for a gift of art is the date the charity receives actual possession of the work of art.

Pledges:  Pledges are promises to make a future gift.

Promissory Notes:  A donor may give a promissory note that he or she holds as a creditor or make a gift of his or her own note to charity.

Options:  A property owner may grant an option to a charity to acquire real property or family corporate stock.

C Corporations:  If a C Corporation uses the accrual method of accounting, it may make a gift within two and one-half months after the close of the corporation's tax year.

Delivery
The basic rule is that a gift to a charity is deductible when the property or cash is delivered to a charity. The delivery rules are dependent on the type of property gifted and the timing of the transfer. Since title to property is normally governed by state law, the delivery is usually complete when, under state law, the charity has legal ownership of the property. However, there are examples in the income tax regulations that supersede state law.

Cash
Cash is deductible when it is transferred to the charity. Reg. 1.170A-1. The transfer of cash is different from making a pledge or executing a promissory note to make a gift in the future. Even if the pledge or note is enforceable under state law, there is no deduction until the pledge or promissory note has resulted in an actual transfer of cash to the charity. Reg. 1.170A-1(a).

Checks
Checks are usually deductible, even though the final transfers are not actually made until the checks clear the banking institution. In theory, the donor could stop payment on a check and negate the gift prior to that date. However, if the donor mails or delivers a check, the gift is completed on the date of mailing or delivery. Reg. 1.170A-1(b). For example, a donor may transfer a check by U.S. mail prior to December 31 and, under the "mailbox rule," as long as the check clears in the normal course of business, the deduction will be honored for the year in which the donor mailed the letter.

In 1996, Congress made the mailbox rule applicable to IRS-approved "private delivery services" for purposes of IRS and Tax Court filings. The mailbox rule was not explicitly extended to cover charitable contributions carried by private delivery services. See Notice 2004-83.

However, Congress? intent was to allow private delivery services (which meet the USPS's ability to deliver documents quickly and securely) to qualify. Sec. 7502(f)(2) provides that the Service may designate a private delivery service for purposes of the mailbox rule only if it meets the following requirements: (A) it must be available to the general public, (B) it must be at least as timely and reliable on a regular basis as United States mail, (C) it must record electronically to its data base (kept in the regular course of its business) the date on which the item was given to the private delivery service for delivery, or mark such date on the cover of the item to be delivered and (D) it must meet such other criteria as the Service may prescribe.

Credit Cards
Credit cards are deductible when the charges are made on the card owner's account. The donor does not need to wait until the charge is paid off. Because credit card charges are normally immediately created by electronic debit on an account, the credit card gift is immediately deductible. Rev. Rul. 78-38.

Since a legal obligation is immediately created, Treasury does not consider this a mere promissory note or promise to pay. Thus, a donor could make a gift by credit card on December 31 of year one and pay the bill in January of year two. The donation would be deductible in year one. The IRS cautions that credit card statements should show the name of the charity and the transaction posting date. IR 2006-192 (12/14/06).

If the donor directs that a charitable gift be made using a financial institution "pay-by-phone" account, the gift is made as of the date the bank mails, transfers or delivers the funds to the charity. It is important to check monthly bank statements, since the date the donor directs the transfer made may differ from the actual gift date. Rev. Rul. 55-157, 1955-2 CB 293.

Electronic Funds Transfers
In an Internet society, many financial transactions take place electronically. While there are no specific rulings on electronic wire transfers, it is logical that an electronic funds transfer from an account of the donor to the charity's account would be effective on the date of the transfer.

Securities
Securities may be transferred by hand delivery, electronic delivery or through the mail. A security such as a stock certificate may be endorsed and hand delivered. The delivery date is the date the representative for the charity receives the stock certificate.

It is also possible to obtain a stock power and to mail the certificates in one envelope and the witnessed stock power in a second envelope to the charity. If U.S. mails are used for the transfer, then the "mailbox rule" applies and the transfer is effective on the date when mailed, provided that the securities are received in the "ordinary course of the mails." See the above discussion on applicability of the "mailbox rule" to private delivery services.

Securities frequently are held in "street accounts" with financial services firms. In this circumstance, the charity may create a new account with the same firm and the transfer can occur very rapidly by moving securities from one account to the other account. The financial services institution should send a written acknowledgment to the donor that the transfer has indeed been accomplished. This process is very beneficial for end-of-year transfers.

Another option is for the securities to be reissued in the charity's name. The delivery date is the date the stock is transferred to the charity's name on the books of the issuing corporation. Warning – if securities are sent back to the corporation before they are transferred to the charity account or they are reissued in the charity's name there may be a delay of several weeks before legal transfer takes place. This delay can be a major problem for end-of-year transfers. Reg. 1.170A-1(b).

Mutual fund shares may be transferred to the charity's name, similar to other securities. Mutual fund gifts should be planned in advance, because there may also be a delay before the actual transfer takes place.

Real Estate
Legal title to real estate passes, under state law, when a valid deed is delivered from one party to a second party. Rev. Rul.69-93. In some states, a properly recorded deed is required to effectuate legal transfer. In these states, the delivery date is the date the deed is recorded.

While in many states it is permissible to maintain that the property has been transferred by delivery of a deed alone to charity, it is always preferable to have the deed recorded at the appropriate county Registrar of Deeds before the end of the year. The recording of the deed by the charity forecloses questions that might be raised about the timing of the transfer.

Art
The delivery date for a gift of art is the date the charity receives actual possession of the work of art. Title must also be transferred to the charity on that date.

The 2006 Pension Protection Act clarified that a charity must obtain actual physical possession of a gift of art. If a donor makes fractional gifts of art and the charity fails to take physical possession within one year of the gifts made, the donor's income and gift tax deductions will be recaptured, with interest. Also, the donor's deduction will be recaptured if the charity fails to use the art for a use relate to its exempt purpose. The IRS will impose an additional 10% penalty for recaptured deductions under the possession and related use rules.

Pledges
Pledges are promises to make a future gift. Pledges are deductible in the year they are fulfilled, not the year in which the promise is made. Rev. Rul. 75-348, 1975-2 CB 75. Fulfilling a pledge with property does not result in a taxable event. Rev. Rul. 55-410, 1955-1 CB 297.

Promissory Notes
A donor may give a promissory note that he or she holds as a creditor or make a gift of his or her own note to charity. Where the donor is the debtor, a gift of a promissory note is generally deductible in the year that the note is paid. Petty, 40 TCM 521 (1964). However, if the donor makes a gift of a note he or she holds as a creditor, the note is deductible in the year the gift is made. Woodward, 37 TCM 715 (1978). Note that a gift of a promissory note accelerates the gain under Sec. 453B.

Options
A property owner may grant an option to a charity to acquire real property or family corporate stock. The charitable deduction is allowed at the time the option is exercised. In many respects, the grant of an option is similar to issuing a pledge or promissory note. Rev. Rul. 82-197. A donor does not know the deduction amount until the option is exercised. When the charity exercises the option, the charitable gift is the excess of the fair market value of the property on the date the option is exercised over the exercise price (the price paid for the property).

C Corporations
If a C Corporation uses the accrual method of accounting, it may make a gift within two and one-half months after the close of the corporation's tax year. However, the corporation must designate the amount of contribution prior to the end of the year. Reg. 1.170A-11(b).

Case Studies on When is a Gift Deductible?

A 2004 Gift Finds its Deductibility in 2003:   SmartTech, Inc. is a publicly traded C corporation, which has over 1,000 employees on three different continents. Paul Norman, 51, is President and CEO of SmartTech. Paul is not only a great innovator but also a great philanthropist. By the age of 30, Paul made his first million and, by the age of 40, he created his first private foundation. Because Paul contributes regularly to both public charities and private foundations, he has more tax deductions than he can handle (i.e., he has reached his AGI limits and has numerous carry forwards). Even if Paul decided to make a "nondeductible" gift this year, he would have to consider which of his special charities he would benefit. Given the short amount of time left in the year and his excess charitable deductions, Paul decided not to make a gift in 2003.

Making Gifts of Stock That Arrive Before Santa Does, Year End Gifts – Part 4:   Don Gregory, 60, is a very control-oriented businessman. In fact, his business philosophy is best summed up as “my way or the highway.” While sometimes difficult to work with, Don nevertheless has achieved substantial business success in his life.

Private Letter Rulings

PLR 200141018 Transfer of Stock Options to Charity Produces Charitable Deduction:   X is a for-profit corporation, and Y is a private foundation. X pledged to Y an option to acquire common stock of X at a specified price, which represented the fair market value of the stock on the date the option was pledged. Under the terms of the option, Y can exercise the option by delivering written notice and payment to X.

PLR 200202034 Pledged Stock Options Produce Charitable Deduction when Exercised by Charity:   Corporation is a publicly held company that has its common stock listed on an established securities market. Recently, Corporation pledged options to Private Foundation. Private Foundation is a non-profit corporation that is a tax-exempt Sec. 501(c)(3) organization.

PLR 200444003 Trust Granted Additional Time to Deduct Charitable Gifts:   Gary Grantor created Trust during his lifetime. Upon his death, Trust was to distribute the entire trust principal in equal shares to eight of the ten named beneficiaries. Eight of the 10 named beneficiaries are charitable organizations described in Sec. 170(c). Gary died and Trust began to fulfill its obligations under the trust document.

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.

PLR 200817018 Cooperative Transfers Deductible Gifts:   Taxpayer is a member of Cooperative, a for-profit cooperative company in the business of selling products to customers of the general public and to its members. Cooperative annually distributes patronage dividends to its members (usually a percentage of their purchases from Cooperative) which members can choose to redeem either in cash or Cooperative merchandise.

PLR 201202019 Trust Granted Extension to Make Charitable Election:   Trust made a charitable contribution to Foundation in year two. The trustee intended to make a Sec. 642(c)(1) election to treat the contribution as made in year one but neglected to do so. Thereafter, the trustee requested an extension of time, under Reg. 301.9100-3, to make the election.

Related Topics on When is a Gift Deductible?

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.

Payne:    In Margaret Payne v. Commissioner; T.C. Summ. Op. 2013-64; No. 3517-12S (13 Aug 2013), the Tax Court denied charitable deductions for years 2008 and 2009 and also assessed penalties.

Taxpayer Payne had served for 20 years as an IRS Revenue Agent in the Manhattan, New York office. She traveled three times per month to gamble at various casinos. Payne claimed that she gave cash winnings to charity and deducted $6,047 for 2008 and $14,000 for 2009 as gifts to Living Stone Baptist Church (LSBC) in Brooklyn, New York. The pastor for the past 12 years at LSBC was Lemuel M. Mobley. An IRS secretary named Juanita Stevenson was a friend of Payne and had attended LSBC for 49 years.

Payne was audited and supported the $6,047 and $14,000 deductions with letters on LSBC stationery purportedly signed by Pastor Mobley. When the IRS contacted him, Pastor Mobley stated that he knew all 75 church members, he had never met Payne, she was not a member and the letters were not authentic.

After phone conversations with Payne, Pastor Mobley recanted and on May 11, 2013 signed a letter claiming that the gifts were made as reported. He also stated that he understood that Juanita Stevenson and Payne were the same person.

The Tax Court stated that the "record in this matter is full of inconsistencies, contradicting testimony, fabricated documents, and simple untruths" Payne had made "a misguided and inept attempt to support claimed charitable contribution deductions through a fictional account of the past."

With the contradictions, Payne failed to present "any credible evidence that she made the contributions to LSBC reported on her 2008 and 2009 tax returns." Because Payne had accounting expertise and did not act in good faith, the Sec. 6662(a) penalty also applied.

Editor's Note: Nonprofits are permitted to assist donors with gifts, but only within the law. This case is a clear warning that shows how easily the IRS and the Tax Court can expose staff of charities with good intentions and poor ethical standards. Protecting charitable deductions requires all staff of charities to exercise good judgment in following the contemporaneous written acknowledgment rules.
Zavadil:    In Larry Zavadil et ux. v. Commissioner; T.C. Memo. 2013-222; No. 17403-10 (18 Sep 2013), the Tax Court restored a portion of charitable deductions that the IRS had disallowed.

Smith:    In Thad DeShawn Smith v. Commissioner; T.C. Memo. 2014-203; No. 6195-13 (2 Oct 2014), the Tax Court denied a claimed deduction for gifts of furniture and clothing valued at $27,767. It also assessed a Sec. 6662(a) accuracy penalty.

Dowdy:    In Warren McKinnley Dowdy v. Commissioner: T.C. Summ. Op. 2006-111; No. 20836-04S (17 Jul. 2006), the taxpayer operated a "candy store" in Brooklyn, New York and was employed by the New York Times.

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