The Tax Law of Charitable Giving. Bruce R. Hopkins

Overview of Law

The law of charitable organizations is more fundamentally the province of the law of tax-exempt organizations.²⁸⁵ There is not, however, absolute parity between the law of tax-exempt organizations and the law of charitable giving on this point. That is, there are organizations that are considered charitable for purposes of federal income tax exemption but not for purposes of the federal income tax charitable contribution deduction. Likewise, there are organizations that are considered charitable for purposes of the federal charitable deductions that are not charitable entities under the tax-exempt organizations rules. This is because federal tax law defines organizations that are charitable ones for charitable deduction purposes in a provision of the Internal Revenue Code that is different from that used for purposes of tax exemption; for charitable giving purposes, the charitable status does not derive from an organization's tax exemption but from its treatment as a charitable donee.

      Four Internal Revenue Code sections require highlighting at this point:

      1 The one providing federal income tax exemption for charitable organizations²⁸⁶

      2 The federal income tax charitable contribution deduction rules, which classify eligible charitable donees²⁸⁷ and provide that organizations that are charitable entities under the tax exemption rules are eligible charitable donees for purposes of that deduction²⁸⁸

      3 The federal gift tax charitable contribution deduction rules, which classify eligible charitable donees²⁸⁹

      4 The federal estate tax charitable contribution deduction rules, which classify eligible charitable donees²⁹⁰

The gift and estate tax rules in this regard are discussed elsewhere.²⁹¹ This analysis, then, is confined to the federal income tax rules.

Nearly every organization that is considered a charitable organization for purposes of the federal income tax exemption²⁹² is considered a charitable organization for purposes of the federal income tax charitable contribution deduction.²⁹³ The only exception to this rule is the organization that tests for public safety. Such an organization, though embraced by the tax exemption rules as a charitable entity, is omitted from charitable donee status for purposes of the income tax charitable contribution deduction.²⁹⁴

      There are, however, certain organizations that cannot qualify for tax exemption purposes as charitable organizations that can qualify, for purposes of the law of charitable giving, as charitable donees. Nonetheless, these entities are all tax-exempt organizations. They are:

       A state, a possession of the United States, a political subdivision of a state or U.S. possession, the United States, or the District of Columbia—but only if the contribution is made for exclusively public purposes²⁹⁵

       A post or organization of war veterans, or an auxiliary unit or society of, or trust or foundation for, such a post or organization, that is organized in the United States or any of its possessions, if no part of its earnings inures to the benefit of any private shareholder or individual²⁹⁶

       A domestic fraternal society, order, or association, operating under the lodge system, but only if the contribution is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals²⁹⁷

       A cemetery company owned and operated exclusively for the benefit of its members, or a corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, if the company or corporation is not operated for profit and no part of its net earnings inures to the benefit of any private shareholder or individual²⁹⁸

In summary, organizations that are tax-exempt pursuant to federal tax law generally receive that exemption pursuant to an exemption provision²⁹⁹ by virtue of a particular listing.³⁰⁰ Organizations that are charitable donees for federal income tax law purposes have that status under another provision³⁰¹ by virtue of another listing.³⁰²

Occasionally, the IRS will allow deductibility of a contribution, as a charitable contribution, when the recipient is a type of tax-exempt organization that does not qualify as a charitable donee, as long as the gift is made for a charitable purpose. Instances of organizations of this nature include exempt title-holding companies³⁰³ and business and professional organizations.³⁰⁴

(b) Charitable Organizations—Criteria

A summary of the law of charitable organizations, for purposes of the law of charitable giving, is difficult because the term charitable is used in many ways. This portion of the analysis is confined to a summary of the law pertaining to those organizations that are charitable in the sense that they are also charitable organizations for federal tax exemption purposes.³⁰⁵

This type of organization is a charitable donee if it is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.³⁰⁶

      In addition, the following criteria must be met for an organization to be considered a charitable donee:

       It is created or organized in the United States or in a possession of the United States, or under the law of the United States, a state, the District of Columbia, or a possession of the United States.³⁰⁷

       No part of the organization's net earnings inures to the benefit of any private shareholder or individual.³⁰⁸

       It does not have as a substantial part of its activities attempts to influence legislation. The amount of permissible lobbying in this context is defined by the substantial part test or, if the charitable organization makes an election, the expenditure test.³⁰⁹ The federal tax law concerning attempts to influence legislation by charitable organizations is discussed extensively elsewhere.