The Tax Law of Charitable Giving. Bruce R. Hopkins

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