The Tax Law of Charitable Giving. Bruce R. Hopkins

Treasury and the IRS stated, in the preamble to the proposed regulations, that “[c]ompelling policy considerations” mandate these rules, in that “[d]isregarding the value of all state tax benefits received or expected to be received in return for charitable contributions would precipitate revenue losses that would undermine and be inconsistent with the limitation on the deduction for state and local taxes adopted by Congress.”¹³⁶

The quid pro quo principle applies with respect to a contribution irrespective of whether the party providing the quid pro quo is the donee or a third party. A person is treated as receiving goods or services in consideration for the person's payment or transfer to a charitable organization if, at the time the person makes the payment or transfer, the person receives or expects to receive goods or services in return.¹³⁷ The phrase in consideration for embraces goods or services provided by the charitable donee “or any other party” in return for the payment.¹³⁸

In some circumstances, a benefit to a donor will not cause loss or reduction of a charitable contribution deduction but instead will trigger taxation of gain in addition to a tax deduction. This involves the step transaction doctrine, which is discussed elsewhere.¹³⁹ Nonetheless, it is appropriate to illustrate the point here. In one case, an individual contributed appreciated securities to a charitable organization with the understanding that the charity would liquidate the stock and purchase his yacht with the sales proceeds. The charity completed the transaction; the donor was found to be taxable on the gain realized as the result of liquidation of the stock.¹⁴⁰ The appellate court wrote that “where there is an understanding that a contribution of appreciated property will be utilized by the donee charity for the purpose of purchasing an asset of the contributor, the transaction will be viewed as a matter of tax law as a contribution of the asset—at whatever its then value is—with the charity acting as a conduit of the proceeds from the sale of the stock.”¹⁴¹ The court added: “This makes the taxpayer/putative-donor taxable on the gain of the stock though entitled to deduct the value of the asset given, whatever that value in fact is.”¹⁴²

(d) Incidental Benefits

      When a benefit to a donor is incidental, the benefit will not defeat the charitable deduction. The following are instances of application of that rule.

       A tornado destroyed several homes in a town. The local chapter of the American National Red Cross provided food and temporary shelter to an individual whose home was destroyed. The individual, motivated by gratitude, made a (deductible) contribution to the chapter. 143

       An individual owned a home in an area served by a volunteer fire department. Neither state nor local taxes were used to support the fire department. The individual made a (deductible) contribution to the volunteer department's annual fund drive.¹⁴⁴

       An individual's daughter was a member of a local unit of the Girl Scouts of America. The individual made a (deductible) contribution to the Girl Scouts of America.¹⁴⁵

       Merchants and owners of property in a city made (deductible) contributions to the city to enable it to provide railroad companies with new facilities outside the city, in exchange for the railroads' removal of their inner-city facilities and relinquishment of their right of way through the city (even though the merchants and property owners received some benefit from removal of the railroad facilities).¹⁴⁶

       An organization made (deductible) contributions to a police department to assist the department, as a regular part of its operations, in offering rewards for information leading to the apprehension and conviction of persons engaging in criminal activity within the community in which the organization was located.¹⁴⁷

       A parent of a murdered individual made a (deductible) contribution of reward money to the police department of a political subdivision for information leading to the conviction of the murderer, with some or all of the money available for public purposes if not needed to pay the reward.¹⁴⁸

       An individual made a (deductible) contribution of a tract of land to the federal government and retained the right during his lifetime to train his hunting dog on the trails extending over the tract.¹⁴⁹

       A developer of a residential community made a (deductible) contribution of real estate, tangible personal property, and cash to a state to assist in the construction of a highway (even though the highway would benefit the planned community).¹⁵⁰

       An individual made a (deductible) contribution of a tract of land and a house to an educational organization for a conference and retreat center. The contribution was deductible even though the donor retained an adjoining lot for personal use and a nonexclusive easement for pedestrian and vehicular ingress and egress over the existing driveway on the contributed lot.¹⁵¹

       A member of a federal advisory committee, who incurs unreimbursed travel and other out-of-pocket expenses while performing services without compensation as a member of that committee, is entitled to a charitable deduction for the expenses as long as the requirements for the deduction are satisfied (“other than those relating to the expectation of any benefit or financial return”).¹⁵²

When a private foundation¹⁵³ is a charitable donee and the donor is a disqualified person¹⁵⁴ with respect to the foundation, care must be exercised that the contribution is not an act of self-dealing.¹⁵⁵ An act of self-dealing can be caused if the making of a gift bestows a benefit of some consequence on the disqualified person/donor. When the benefit is merely “incidental and tenuous,” however, an act of self-dealing will not result.¹⁵⁶

The application of rationales other than the quid pro quo test in relatively recent years is somewhat surprising, in that Congress, speaking by means of legislative history in 1954, wrote that gifts are “contributions which are made with no expectation of a financial return commensurate with the amount of the gift.”¹⁵⁷ Thus, it would seem that the quid pro quo test should, unquestionably, be the law.

(e) Requirement of Transfer of Value

In some instances, a federal income tax charitable contribution deduction is denied because nothing of substance or value was transferred to a charitable organization. For example, in one case, a charitable contribution deduction for the transfer by