The Tax Law of Charitable Giving. Bruce R. Hopkins

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

(b) Availability of Charitable Deduction

The federal tax law provides for an income tax charitable contribution deduction for “any charitable contribution” made by a donor to or for the use of⁵⁶ a charitable organization.⁵⁷ Amounts paid to a charitable entity for the benefit of a specified individual are generally not deductible as charitable contributions.⁵⁸ Charitable deductions are also available in the gift tax context⁵⁹ and the estate tax context.⁶⁰

In a sense, every charitable contribution made by a donor who itemizes tax deductions gives rise to a quid pro quo because of the economic value (reduction in tax owed) of the resulting charitable contribution deduction. Yet, the jurisprudence is clear that the tax benefit resulting from a federal or state charitable deduction is not regarded as a type of return benefit that negates donative intent, thus reducing or eliminating the deduction.⁶¹ Similarly, when the contribution is made with appreciated property, the value of the deduction has not been treated as an item of gross income in the form of an amount realized on the transfer.⁶²

Thus, generally, a government-provided tax benefit resulting from a charitable gift is treated for federal tax purposes as a reduction or potential reduction in tax liability. As such, it is reflected in a reduced deduction for the payment of state or local tax,⁶³ not as consideration that might constitute a quid pro quo for purposes of the federal income tax charitable contribution deduction or an amount realized includible in income.⁶⁴

The IRS's Office of Chief Counsel concluded that there is no reason, in this regard, given this body of law, to distinguish between the value of a state tax deduction and the value of a state tax credit, including a transferable state tax credit. Thus, it was held that donors may take a federal income tax charitable deduction for the full amount of their charitable gifts of money or appreciated property when they receive a state tax credit.⁶⁵

(c)