The Tax Law of Charitable Giving. Bruce R. Hopkins

selected by the cardholders. For the fourth calendar quarter, these transfers will be made before the end of the calendar year. The cardholders do not receive anything in exchange for the payments to charitable organizations of their rebates.

      Instead of causing the company to pay their rebates to a charitable organization, however, cardholders may obtain the rebates for their personal use. Unless they advise the company of their intention to obtain the rebates for themselves, cardholders' rebates are automatically paid over to the designated charities. When the company makes a payment to a charitable organization on behalf of a cardholder, the company provides the organization with the amount of the cardholder's contribution, together with the cardholder's name and address. The company also provides each cardholder with an annual statement reflecting the total amount transferred to a charitable organization on behalf of that cardholder.

The IRS concluded that these rebates paid to charitable organizations are gifts to the organizations by the cardholders. In finding satisfaction of the requirements that a gift be made voluntarily and with charitable intent, the IRS observed that each cardholder has the choice of directing the company to refund rebates to the cardholder or to transfer them to a charitable organization. Moreover, the cardholders also have the opportunity to select the charitable organizations that will receive payments of their rebates. The IRS ruled that the opportunity to decide whether payments will be made to a charity, together with the ability to designate the charity to receive the payments, renders the payments voluntary. The IRS also ruled that these directed rebates are deductible charitable gifts.²¹³

In connection with another variation of these plans, the IRS ruled that an individual who purchases scrip from a charitable organization and elects to allow the charity to retain an amount of money in the nature of a rebate has made a charitable contribution of that amount. The organization purchases scrip at a discount and sells it at face value to individuals. The purchasers have the option of receiving in cash a portion of the difference between the face value of the scrip and the charity's cost for it. An individual may also elect to allow the charity to retain this amount.²¹⁴

(j) Dividends Paid to Charitable Organizations

When a for-profit corporation transfers, without consideration, money or property to a charitable organization that is its sole shareholder, the transfer is treated for federal tax purposes as a distribution constituting a dividend²¹⁵ and not as a charitable contribution.²¹⁶

The reasoning underlying this rule of law was articulated by a federal court of appeals in 1967.²¹⁷ The court observed that (1) the rationale of the unrelated business income rules is to treat, for tax purposes, tax-exempt organizations with unrelated business income the same as for-profit organizations;²¹⁸ (2) to allow a subsidiary of an exempt organization a charitable deduction for amounts distributed to its exempt parent would permit the exempt organization to receive a greater return on its investment in its unrelated business (conducted indirectly by means of the subsidiary) than a nonexempt organization; and (3) it is from this competitive advantage that Congress intended to protect competing for-profit businesses not linked to an exempt organization by taxing unrelated business income of exempt organizations and by limiting an exempt organization's charitable contribution deduction from unrelated business income to grants made to other exempt organizations.²¹⁹ This appellate court concluded that an ostensible contribution made by a for-profit subsidiary to its exempt parent is not a contribution considered to be made to another exempt organization, and therefore the benefits of the charitable deduction are not available to it for property transfers of this nature.²²⁰

Dividend treatment in this context can arise even when the charitable organization receiving a payment from a for-profit corporation is not a stockholder. In one case, a for-profit corporation, organized and operated for the purpose of benefiting a university, distributed funds to the university out of its earnings and profits. The university was not a stockholder of the corporation and did not exercise any control over it. Nonetheless, noting that the profits of the corporation were distributed only to the university, a court held that the university was a beneficial owner of the corporation and applied the dividend treatment rationale accordingly.²²¹

(k) Requirement of Completion

Explicit and implicit in the foregoing discussion is the concept that, to constitute a gift, the transaction must be completed. Thus, to make a charitable gift, the donor must part with all right, title, and interest in the donated property.²²²

Two situations nicely illustrate the point. A court held that a bargain sale²²³ of real estate to a charity, in a transaction that used a contract for deed, gave rise to a charitable deduction in the year the contract was entered into, because the charity essentially received equitable title to the property.²²⁴ In 1994, a married couple signed a contract for sale of real property to a church. The purchase price was to be paid in installments, beginning January 1, 1995. Basically, a contract for deed is an arrangement under which, once a down payment is made, the buyer becomes entitled to immediate possession of the property. Legal title, however, remains in the seller until the purchase price is paid in full. In this case, the charity also agreed to insure the property, keep it in good repair and condition, and pay property taxes. The charity was prohibited from assigning, selling, pledging, or mortgaging the property without the donors' consent. Legal title was conveyed to the charity at the end of 1997.

The IRS did not contest the value of the property used to calculate the charitable deduction.²²⁵ The charity was a qualified charitable donee;²²⁶ the IRS conceded that the donors had the requisite charitable intent.²²⁷ The sole issue before the court was whether the donors' entry into the contract for deed effected a completed gift of the property during 1994. Framing the issue this way, the court had to determine (1) whether the interest conveyed was sufficient to constitute a completed gift, and (2) when the sale and gift were completed. The IRS took the position that this type of contract did not give rise to a completed gift at the time it was entered into.

      State law controls the determination of the nature of the property interest conveyed by one party to another. This law usually is found in pronouncements by the state's highest court. The court in this case, following this analysis, concluded that the purchaser under a contract for deed becomes the equitable owner of the property.

      The question of whether a sale of property is complete for tax purposes is one of fact, which is resolved by an examination of all the facts and circumstances. Essentially, the matter comes down to a consideration of when the “benefits and burdens” of ownership shifted. In the case of real property, a sale generally is considered to have occurred at the earlier of the transfer of legal title or the practical assumption of these benefits and burdens.

The court wrote: “A closed transaction for Federal tax purposes results from a contract of sale which is absolute and unconditional on the part of the seller