Читать книгу The Tax Law of Charitable Giving - Bruce Hopkins R., Bruce R. Hopkins, David Middlebrook - Страница 25

There are two ways to view the concept of a charitable gift: from the standpoint of the contributor and from the standpoint of the recipient charity.

Contributor's Standpoint. Integral to the concept of the charitable contribution deduction, then, is the fundamental requirement that money or property transferred to a charitable organization be transferred pursuant to a transaction that constitutes a gift.² Just because money is paid or property is transferred to a charitable, educational, religious, or like organization does not necessarily mean that the payment or transfer is a gift. Consequently, when a university's tuition, a hospital's health care fee, or an association's dues are paid, there is no gift, and thus there is not a charitable deduction for the payment.³ These are situations in which the absence of a gift is because the payor received a material quid pro quo in exchange for the payment.⁴

Certainly, there is some law, most of it generated by the federal courts, as to what constitutes a gift. Basically, the meaning of the word gift has two elements: It is a transfer that is voluntary and is motivated by something other than consideration.⁵ Thus, the income tax regulations (promulgated in amplification of the business expense deduction rules) state that a transfer is not a contribution when it is made “with a reasonable expectation of financial return commensurate with the amount of the donation.”⁶ Instead, this type of payment is a purchase (of a product and/or a service). Thus, the IRS states that a contribution is:

A voluntary transfer of money or property that is made with no expectation of procuring financial benefit commensurate with the amount of the transfer.⁷

The IRS follows another principle of law:

Where consideration in the form of substantial privileges or benefits is received in connection with payments by patrons of fund-raising activities, there is a presumption that the payments are not gifts.⁸

A corollary of these seemingly simple rules is that, as these guidelines reflect, a single transaction can be partially a gift and partially a purchase, so that when a charitable organization is the payee, only the gift portion is deductible.⁹

In an oft-quoted passage, the Supreme Court observed that a gift is a transfer motivated by “detached or disinterested generosity.”¹⁰ Along this same line, the Court referred to a gift as a transfer made “out of affection, respect, admiration, charity or like impulses.”¹¹ A third element that is sometimes invoked in this context is donative intent.¹² This component of the definition is inconsistently applied.¹³ It is the most problematic of the three, inasmuch as it is usually difficult to ascertain what was transpiring in the mind of a donor at the time of a gift (if, in fact, that is what the transaction was); some courts struggle in an effort to determine the subjective intent of a transferor.¹⁴ The other two factors focus on the external circumstances surrounding the transaction, with emphasis on whether the putative donor received anything of value as a consequence of the putative gift.¹⁵

In one donative-intent case, a partnership was formed to assist a religious center, which was deeply in debt, by borrowing funds and purchasing the center and then leasing it back. Subsequently, the partnership transferred the center to a church after the center defaulted on the lease; a court ruled that the transfer to the church did not give rise to a charitable deduction because the partners' intent was to generate funds to satisfy the mortgage, rather than to benefit the church.¹⁶ By contrast, a court held that donors of a 20 percent interest in a parcel of real estate to a church had the requisite donative intent, even though they agreed to purchase the property and lease it back to the church.¹⁷ Also, donors were found to have donative intent in connection with a contribution of a scenic easement over a portion of their residential estate, even though they pursued a reconveyance of the easement following disallowance of a significant portion of the charitable deduction.¹⁸

Some aspects of the state of the law on this point, as reflected in another view of the Supreme Court, are that a “payment of money [or transfer of property] generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.”¹⁹ This observation was made in the context of an opinion concerning a charitable organization that raised funds for its programs by providing group life, health, accident, and disability insurance policies, underwritten by insurance companies, to its members. Because the members had favorable mortality and morbidity rates, experience rating resulted in substantially lower insurance costs than if the insurance were purchased individually. Because the insurance companies' costs of providing insurance to the group were uniformly lower than the annual premiums paid, the companies paid refunds of the excess (dividends) to the organization; the dividends were used for its charitable purposes. Critical to the organization's fundraising efforts was the fact that it required its members to assign it all dividends as a condition of participating in the insurance program. The organization advised its insured members that each member's share of the dividends, less its administrative costs, constituted a tax-deductible contribution.

The Supreme Court, however, disagreed with that conclusion. It found that none of the “donors” knew that they could have purchased comparable insurance for a lower cost; the Court thus assumed that the value of the insurance provided by the organization at least equaled the members' premium payments. The Court concluded that these individuals failed to demonstrate that they intentionally gave away more than they received. The Court wrote: “The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration. The taxpayer, therefore, must at a minimum demonstrate that he [or she] purposefully contributed money or property in excess of the value of any benefit he [or she] received in return.”²⁰ Thus, by comparing the cost of similar insurance policies, the Court reached the conclusion that the members had received full value for what they paid in the form of insurance premiums.

Essentially the same rule was subsequently articulated by the Court when it ruled that an exchange having an “inherently reciprocal nature” was not a gift and thus could not be a charitable gift, even though the recipient was a charity.²¹ In this case, the Court considered the character of payments to the Church of Scientology, which provides “auditing” sessions designed to increase members' spiritual awareness and training courses at which participants study the tenets of the faith and seek to attain the qualifications necessary to conduct auditing sessions. The church, following a “doctrine of exchange,” set forth schedules of mandatory fixed prices for auditing and training sessions, although the prices varied according to a session's length and level of sophistication.

The payors contended that the payments were charitable contributions. The Court disagreed, holding that the payments were made with an expectation of a quid pro quo in terms of goods or services, which are not deductible. The Court focused on the fact that the church established fixed prices for the auditing and training sessions, calibrated particular prices to sessions of particular lengths and sophistication levels, returned a refund if services went unperformed, distributed “account cards” for monitoring prepaid but as-yet-unclaimed services, and categorically barred the provision of free services.

Reviewing the legislative history of the charitable contribution deduction, the Court found that “Congress intended to differentiate between unrequited payments to qualified recipients and payments made to such recipients in return for goods or services. Only the former were deemed deductible.”²² In this case, charitable deductions were not allowed because the payments “were part of a quintessential quid pro quo exchange.”²³ In so holding, the Court rejected the argument that payments to religious organizations should be given special preference in this regard.²⁴ Several years before, the IRS had published its position on the point, holding that payments for the auditing and training sessions are comparable to payments of tuition to schools.²⁵

A third opinion from the Supreme Court on this point held that funds transferred by parents to their children while the children served as full-time, unpaid missionaries of a church were not deductible as charitable contributions to or for the use of the church.²⁶ This opinion turned on whether the funds transferred to the children's accounts were deductible as contributions for the use of the church. In deciding this issue, the Court looked to the legislative history of this term and concluded that this phraseology was intended by Congress to convey a meaning similar to the words “in trust for,” so that in selecting the phrase for the use of, Congress was referring to donations made in trust or in a similar legal arrangement.²⁷ The Court added that although this interpretation “does not require that the qualified organization take actual possession of the contribution, it nevertheless reflects that the beneficiary must have significant legal rights with respect to the disposition of donated funds.”²⁸

The Court thus rejected the claim that a charitable deduction should be allowed when the charitable organization merely has “a reasonable ability to supervise the use of contributed funds.”²⁹ It observed that the IRS “would face virtually insurmountable administrative difficulties in verifying that any particular expenditure benefited a qualified donee” if a looser interpretation of the phrase were utilized.³⁰ The larger interpretation would, wrote the Court, “create an opportunity for tax evasion that others might be eager to exploit,” although the Court was quick to note that “there is no suggestion whatsoever in this case that the transferred funds were used for an improper purpose.”³¹

The Court also found that the funds were not transferred “in trust for” the church. The money was transferred to the children's personal bank accounts on which they were the sole authorized signatories. No trust or “similar legal arrangement” was created. The children lacked any legal obligation to use the money in accordance with church guidelines, nor did the church have any legal entitlement to the money or a cause of action against missionaries who used their parents' money for purposes not approved by the church. Thus, the charitable deductions were denied.³²

Notwithstanding these three Supreme Court opinions, however, the donative intent doctrine, as noted, has its adherents. For example, a court denied an estate tax charitable deduction to an estate because a trust, funded by the estate, from which the gifts were made was modified solely to preserve the estate tax charitable deduction.³³

In that case, the decedent created a trust that was funded with interests in real property. This trust had charitable remainder beneficiaries, but the trust did not qualify for the estate tax charitable contribution deduction³⁴ because it was a defective (for tax purposes) split-interest trust. Following the donor's death, a successor trust was established, with equivalent funding of the income interest beneficiaries outside the trust. The second trust became a wholly charitable trust, and the estate claimed a charitable deduction for the amounts that were paid to the charitable beneficiaries. This process did not constitute a qualifying reformation.³⁵ The IRS disallowed the charitable deduction claimed by the estate, and the Tax Court upheld the disallowance. The court found that the trust “was an attempt to qualify the charitable bequests for the [estate tax charitable] deduction.”³⁶ The court added that “[t]here is no evidence indicating a nontax reason” for the second trust,³⁷ and disallowed the deduction because the trust “was modified for reasons independent of tax considerations.”³⁸ The court added that if it ruled to the contrary, it would be rendering the reformation procedure superfluous, because the trust could be retroactively amended.

In another donative-intent case, a husband and wife granted to a charitable conservancy organization a scenic easement over 167 acres of their 407 acres of property; they claimed a $206,900 charitable contribution deduction for the gift.³⁹ On audit, the IRS disallowed the deduction, claiming, in part, that the donors lacked the requisite donative intent. The alleged absence of donative intent was based on the assertion that the donors made the gift of the scenic easement for the sole purpose of maintaining their property's value and to receive a tax deduction. The government made much of the fact that the donee conservancy group “recited the estimated tax advantages of a scenic easement conveyance” and that the donors sought reconveyance of the easement once the charitable deduction was disallowed.⁴⁰

The matter went to court, where it was found that the requisite donative intent was present at the time the scenic easement was conveyed. The court said that the federal tax law “permits deductions for bona fide gifts notwithstanding the motivations of a taxpayer.”⁴¹ The court wrote, “In order to be entitled to a tax deduction, the taxpayer must not expect a substantial benefit as a quid pro quo for the contribution.”⁴² “However,” the court continued, the “charitable nature of a contribution is not vitiated by receipt of a benefit incidental to the greater public benefit.”⁴³ While generally agreeing with the IRS's construction of the facts, the court found that the donors' decision to contribute the easement “would invariably encourage other neighboring landowners to impose similar development restrictions on their property.”⁴⁴ The court also found that the donors believed that the imposition of a conservation easement on their property would diminish the value of the property. Thus, the court, in rejecting the IRS's allegations, ruled that any benefit that inured to the donors from the conveyance “was merely incidental to an important, public spirited, charitable purpose.”⁴⁵

The U.S. Tax Court seems to have abjured the donative-intent test. In a recent holding, the court preserved most of donors' charitable contribution deduction for noncash gifts, in the process rejecting the government's argument that the deduction should be denied in full on the ground that the donors lacked the requisite donative intent.⁴⁶ The court stated that, in assessing whether a transaction constitutes a “quid pro quo exchange,” “we give most weight to the external features of the transaction, avoiding imprecise inquiries into taxpayers' subjective motivations.”⁴⁷

There are at least three court opinions holding that when a donor retains sole signatory power over a contribution, the donor is not entitled to a charitable contribution deduction because the gift has not been completed.⁴⁸

Nonetheless, despite all of the foregoing, one federal court of appeals put this matter rather starkly, succinctly observing that this is a “particularly confused issue of federal taxation.”⁴⁹ Not content with that, this appellate court went on to portray the existing Internal Revenue Code structure on this subject as being “cryptic,” with the indictment that “neither Congress nor the courts have offered any very satisfactory definition” of the terms gift or contribution.⁵⁰

Charity's Standpoint. The foregoing analysis reviewed the treatment of a payment as a gift from the standpoint of the (ostensible) contributor. On occasion, however, the issue can arise from the perspective of the recipient. In one such instance, a court ruled that contributions made by members of a church congregation to its pastor on “special occasions” were taxable income, rather than tax-free gifts, to the pastor and his spouse.⁵¹ Cash gifts were collected in the sanctuary; the funds were not recorded in the church's records. The court observed that the cash transfers “were facilitated by and through church personnel, and would not have [arisen] absent the . . . [pastor's and his spouse's] relationship with the church.”⁵² Rejecting the contention that the transfers were merely gifts from individuals, the court found that the transfers were “initiated, sponsored, collected and distributed by the congregation as an aggregate body”; the funds were held to be “processed” through the congregation.⁵³ Concluded the court: “The transfers to the [pastor and his spouse] were not detached or disinterested in the same way as an individual who chooses to send the pastor and his wife ten dollars on a birthday or during the Christmas season.”⁵⁴

This characterization of contributions poses problems for churches, schools, and other such organizations when the constituency, or a portion of it, wants to provide assistance to an individual (member of the clergy, teacher, coach, and the like) with some additional financial support in the form of “gifts.” One can still make gifts to others without the funds being income to the recipient. When the effort is orchestrated through the offices of the organization, however, at some point through some alchemy the funds become transformed into income taxable to the organization.

As to the tax treatment, contributions to a church or similar entity used for salaries are deductible by the donors as charitable gifts, and, of course, the salaries are taxable to those who receive them. Gifts made individually are not deductible by the contributor and are not taxable income to the donee. It is not purely idle speculation to think that some members of the congregation of the church in this case deducted their special-occasion gifts.⁵⁵