The Tax Law of Charitable Giving. Bruce R. Hopkins

destroyed by a flood or replacing an individual's income after the individual becomes unemployed as the result of a civil disturbance. This “issue,” the IRS writes, is “especially relevant when the volume of contributions received in response to appeals exceeds the immediate needs.” The IRS states that a charitable organization “is responsible for taking into account the charitable purposes for which it was formed, the public benefit of its activities, and the specific needs and resources of each victim when using its discretion to distribute its funds.”

The IRS guidelines address the matter of charitable organizations' documentation obligations. The rule is that a charitable organization in this context must maintain “adequate records” to show that the organization's payments further its charitable purposes and that the victims served are “needy or distressed.” Moreover, these charities are required to maintain “appropriate records” to show that they have made distributions to individuals after making “appropriate needs assessments” based on the recipients' financial resources and their physical, mental, and emotional well-being.

      The IRS states that this documentation should include a complete description of the assistance provided; the costs associated with provision of the assistance; the purpose for which the aid was given; the charity's objective criteria for disbursement of assistance under each program; how the recipients were selected; the name and address of, and the amount distributed to, each recipient; any relationship between a recipient and directors, officers, and/or key employees of, or substantial contributors to, the charitable organization; and the composition of the selection committee approving the assistance.

      With respect to short-term emergency aid, the IRS guidelines recognize that charities proving that type of assistance are only expected to maintain records showing the type of assistance provided; the criteria for disbursing assistance; the date, place, and estimated number of victims assisted; the charitable purpose intended to be accomplished; and the cost of the aid. By contrast, organizations that are distributing longer-term assistance are required to keep the more detailed records.

The IRS guidance differentiates among employer-sponsored programs utilizing public charities,²⁴⁰ donor-advised funds,²⁴¹ and private foundations.²⁴²

Charitable Giving Considerations. It is common for a for-profit corporation with a large number of employees to have or otherwise participate in a program, administered by a separate organization, by which the employees are provided financial assistance, in the form of gifts and/or loans, in times of temporary extreme hardship due to circumstances such as natural disasters. The IRS has struggled with the tax law aspects of this over the years, ruling on occasion that these organizations are tax-exempt charitable entities, with the private benefit to the employer incidental, and on other occasions that these entities cannot qualify for exemption because the private benefit to the employer is more than insubstantial. Also, if the separate organization is a private foundation,²⁴³ the IRS has on occasion taken the position that the provision of this type of assistance can amount to self-dealing and the making of taxable expenditures.²⁴⁴ Another issue is whether contributions to an organization administering this type of program, often made by the corporation's employees, are deductible as charitable gifts.

In one instance, the IRS ruled that contributions made to such an entity constituted deductible gifts.²⁴⁵ The employer was a large corporation engaged in retail sales worldwide, with many employees. The principal activity of a public charity, not controlled by the employer, was the making of gifts or loans to employees (and their dependents) of the corporation and its subsidiaries who were in demonstrated need. The IRS was of the view that the class of eligible recipients was sufficiently broad to constitute a charitable class.²⁴⁶ (About 5 percent of the employees held salaried management-level positions.) The assistance was provided in cases of “unexpected temporary extreme financial hardship.”

Selection of aid recipients was based on objective criteria and demonstration of need, and was made by an independent selection committee or under adequate substitute procedures. The charitable organization was expected to be principally funded by the corporation's employees; contributions could be made by means of an automatic payroll deduction system. The corporation did not reimburse or otherwise compensate its employees for contributions made to the charity, nor did it require the making of gifts or participation in the payroll deduction plan as a condition of employment. The corporation did not charge the charity for any of its services pursuant to the payroll plan. In this situation, the IRS was of the view that charitable purposes were primarily being furthered, that the benefit to the employer was no more than insubstantial, and that contributions to the charitable organization were, as noted, deductible gifts.²⁴⁷

In another instance, this type of a program was established by a public charity as a fund within it for the benefit of its employees who required emergency services because they had become financially needy or suffered economic hardship due to accident, loss, or disaster.²⁴⁸ Again, the IRS ruled that gifts to the fund qualified for the charitable contribution deduction.

(m) Mandatory Payments

The concept of the mandatory contribution has an oxymoronic ring to it, and for good reason, in that deductible charitable contributions are generally required to be voluntary.²⁴⁹ Yet there are transfers to charitable organizations that are mandated by law, court order, contract, or even the charitable entity itself.²⁵⁰ Intermixed with this topic is another general rule, which is that deductible contributions are often expected to be supported with donative intent.²⁵¹

An illustration of a mandatory payment to a charitable entity was the dedication of a parcel of land by an individual to a county for use as a public street; the transfer was disallowed as a charitable contribution because the individual was obligated by contract to sell the land to a church.²⁵² Similarly, an individual was not allowed to deduct a sum paid to fill a gully in a city street, inasmuch as the payment was made in compliance with an order issued by the city.²⁵³ Likewise, a payment made to a tax-exempt retirement home to reserve a room for the payor or a relative of the payor was not a deductible charitable gift.²⁵⁴ Further, a seller of a home in conjunction with a down payment assistance program conducted by a nonprofit organization, who was obligated to make a “contribution” to the organization in an amount equal to the down payment grant provided by the organization to the purchaser of the home, was advised by the IRS that payment was a fee for service and not a deductible contribution.²⁵⁵ Moreover, payments made by a company to various public charities in order to comply with rules of a governmental entity, where failure to make the payments could jeopardize the company's continued business operations, were ruled by the IRS to not be deductible as charitable gifts.²⁵⁶ A court ruled that a transaction “bears the classic feature of a quid pro quo exchange,” where a grant of an easement (claimed as a gift) was