Church & Clergy Tax Guide

Chapter Highlights

Introduction

Section 170 of the tax code states that “there shall be allowed as a deduction any charitable contribution . . . ​payment of which is made within the taxable year.” To be deductible, a contribution must meet six conditions. A charitable contribution must be

These conditions are explained below.

Charitable contributions are limited to gifts of cash or property, but almost any kind of property will qualify, including cash, charges to a bank credit card, real estate, promissory notes, stocks and bonds, automobiles, art objects, books, building materials, collections, jewelry, easements, insurance policies, and inventory.

Donated services

No deduction is allowed for a contribution of services. Church members who donate labor to their church may not deduct the value of their labor.

EXAMPLE A church begins a remodeling project. S, a church member, donates 30 hours of labor toward the project. S is a carpenter who ordinarily receives $50 per hour for his services on the open market. S asks the church treasurer for a receipt showing a contribution of $1,500 (30 hours times $50 per hour). The church may issue S a letter of appreciation acknowledging the hours of labor that were donated, but it should clarify that this amount is not deductible as a charitable contribution.

EXAMPLE Same facts as the preceding example except that S asks the church to pay him for his services with the understanding that he will donate the payment back to the church in the form of a contribution. This is a permissible arrangement, but it ordinarily will not result in any tax advantage to S, since his deduction is offset by the inclusion of the same amount in his income for income tax reporting purposes. If S cannot itemize deductions on Schedule A, he will be worse off for tax purposes by having the church pay him the $1,500 for his services, since he will have additional income without any offsetting deduction.

EXAMPLE An attorney donates his time free of charge in representing a church. He is not entitled to a charitable contribution deduction for the value of his donated services. Grant v. Commissioner, 84 T.C. 809 (1986).

EXAMPLE A commercial radio station broadcasts certain religious programs free of charge. It is not entitled to a charitable contribution deduction for the value of the free airtime. Revenue Ruling 67-236.

Unreimbursed expenses incurred in performing donated services

While the value of labor or services cannot be deducted as a charitable contribution, any unreimbursed expenses incurred while performing donated labor for a church may constitute a deductible contribution. The income tax regulations specify:

Unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution. For example, the cost of a uniform without general utility which is required to be worn in performing donated services is deductible. Similarly, out-of-pocket transportation expenses necessarily incurred in performing donated services are deductible. Reasonable expenditures for meals and lodging necessarily incurred while away from home in the course of performing donated services are also deductible. Treas. Reg. 1.170A-1(g).

IRS Publication 526 (Charitable Contributions) states:

You may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be:

EXAMPLE A taxpayer was entitled to deduct as a charitable contribution his out-of-pocket expenses incurred in carrying out evangelistic work for his church. Smith v. Commissioner, 60 T.C. 988 (1965).

EXAMPLE A taxpayer’s unreimbursed out-of-pocket expenses for vestments, books, and transportation while participating in a “diaconate program” of his church were deductible as charitable contributions. Revenue Ruling 76-89.

EXAMPLE A donor claimed a charitable contribution deduction for the cost of an airplane ticket ($1,000) she purchased in 2006 to travel to her native country and provide services to Catholic churches in that country. While she informed the pastor of her home church in Texas of the nature of her trip, she was not working in any official capacity for her church while engaged in rendering charitable services to Catholic churches in her native country.

The donor claimed the cost of her airfare as a deductible unreimbursed expense incurred in the performance of services to a qualified charitable organization. The Tax Court acknowledged that a taxpayer is permitted to deduct an unreimbursed expense made incident to the performance of services to qualified charitable organization and noted that such expenses include transportation expenses and reasonable expenses for meals and lodging while away from home. But the court, in denying any deduction for the donor’s airfare, noted that she had “failed to show that any of the Catholic churches in the foreign country to which she rendered services was a qualified charitable organization.”

The donor also claimed that she was performing missionary services on behalf of her local Catholic diocese while overseas. But the court noted:

Her local diocese did not have control over her services provided to the Catholic churches in the foreign country, and no legally enforceable trust or similar legal arrangement existed between her local church (as a member of that diocese) and the donor. She did not render services in the foreign country under the direction of, or to or for the use of her local church or the local diocese. The record shows only that her priest at her local church had some awareness of her work in her native country. Nor is there any evidence that she provided those services during the year in controversy to or for the use of the [US-based missions agency] of which she did not become a member until 2007. Anonymous v. Commissioner. TC Memo. 2010-87 (2010).

Use of a car in performing donated services

Volunteers often use their own vehicles when performing services on behalf of their church. These expenses may be either reimbursed by the church or unreimbursed.

Unreimbursed expenses

Volunteers who use their vehicle while performing services for a church may claim a charitable contribution deduction for the cost of using their vehicles if they receive no reimbursements from the church. This deduction may be computed in one of two ways:

First, a volunteer can use the charitable mileage rate of 14 cents per mile multiplied by all substantiated miles driven in the course of performing charitable services. Section 170(i) of the tax code specifies that “for purposes of computing the deduction under this section for use of a passenger automobile, the standard mileage rate shall be 14 cents per mile.” This is the rate used to compute a charitable contribution deduction for unreimbursed charitable travel incurred while performing donated services for a charity.

Second, volunteers can deduct the actual cost of using their vehicles while performing charitable services. Actual costs include any out-of-pocket cost of operating or maintaining a vehicle. IRS Publication 526 (Charitable Contributions) states:

You can deduct as a charitable contribution any unreimbursed out-of-pocket expenses, such as the cost of gas and oil, directly related to the use of your car in giving services to a charitable organization. You cannot deduct general repair and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance. If you do not want to deduct your actual expenses, you can use a standard mileage rate of 14 cents a mile to figure your contribution. You can deduct parking fees and tolls whether you use your actual expenses or the standard mileage rate. You must keep reliable written records of your car expenses.

Under either method of valuing a charitable contribution deduction for the use of a vehicle in performing charitable services, you must keep reliable written records of expenses incurred. If you claim expenses directly related to use of your car in giving services to a qualified organization, you must keep reliable written records of your expenses. Whether your records are considered reliable depends on all the facts and circumstances. Generally, they may be considered reliable if you made them regularly and at or near the time you had the expenses. Your records must show the name of the church or charity you were serving and the date each time you used your car for a charitable purpose. If you use the standard mileage rate of 14 cents a mile, your records must show the miles you drove your car for the charitable purpose. If you deduct your actual expenses, your records must show the costs of operating the car that are directly related to a charitable purpose.

The Tax Court has confirmed that the actual cost of using a vehicle for charitable purposes does not include depreciation:

The regulations do not specifically refer to depreciation, but the [IRS] contends that the statute and the regulations do not authorize a deduction for depreciation. We agree. Depreciation is a “decrease in value.” It is not a payment, or expenditure, or an out-of-pocket expense. Hence, it cannot be considered as a contribution, payment of which is made within the taxable year. We accordingly conclude that the [IRS] properly disallowed as a charitable contribution that portion of the amount claimed on the automobile which represented depreciation. Mitchell v. Commissioner, 42 T.C. 953 (1964).

Most volunteers use their vehicles for both charitable and personal purposes and may claim a contribution deduction only for costs associated with their charitable services. In other words, they must determine the percentage of the total miles their vehicle is used during the year for personal and charitable activities. They can then claim a deduction for their actual vehicle expenses multiplied by the percentage of their total miles that represent their charitable services (their “charitable use percentage”). The volunteer must be able to substantiate each charitable travel expense with adequate written records. The Tax Court has observed:

Unreimbursed amounts expended by a taxpayer to enable him to provide his own services to a charitable organization are deductible only if the charitable work is the cause of the payments. When the expenditures are incurred in an activity which also benefits the taxpayer personally, a charitable deduction has not been allowed, even though the charity also benefits. Therefore, travel expenditures which include a substantial, direct, personal benefit, in the form of a vacation or other recreational outing, are not deductible. The burden of proving that such expenditures qualify as charitable contributions rests with petitioner. Tafralian v. Commissioner, T.C. Memo. 1991-33.

A few attempts have been made in Congress in recent years to increase the charitable mileage rate. To illustrate, in 2023, U.S. senators Klobuchar (D-MN), Budd (R-NC), and Smith (D-MN) introduced the bipartisan Volunteer Driver Tax Appreciation Act (S. 3020) to support volunteer drivers. This legislation would lower the financial burden on volunteer drivers by increasing the charitable mileage tax-deduction rate for drivers from 14 cents to 65.5 cents per mile. This proposed legislation attracted minimal support and is now dead.

Example A church member used her personal car to perform volunteer and unreimbursed charitable work for her church and claimed a charitable contribution deduction of $400 for 400 miles of driving. The Tax Court denied this deduction. It acknowledged that a taxpayer may deduct “unreimbursed expenditures made incident to the taxpayer’s rendering services to a charity, including out-of-pocket transportation expenses necessarily incurred in performing donated services.” But it noted that the taxpayer in this case “did not provide a mileage log to substantiate any of the mileage expenses or any written communication or other reliable written record to show that she participated in these charitable activities for her church.” Further, even if she substantiated that she had driven 400 miles, her charitable contribution deduction “would be limited to $56 (400 miles at 14 cents per mile).” The court noted that section 170(j) of the tax code “prescribes the standard rate of 14 cents per mile for purposes of computing the amount of a charitable contribution deduction for miles a taxpayer drives in connection with a charitable organization.” Rhoeda v. Commissioner, T.C. Summary Op. 2018-28.

Reimbursed expenses

Can the charitable mileage rate be used by charities to reimburse volunteers for expenses incurred during charitable travel? Section 170(i) of the tax code states that “for purposes of computing the deduction under this section for use of a passenger automobile, the standard mileage rate shall be 14 cents per mile.” Technically, this language only makes sense for unreimbursed expenses since no deduction is allowed for reimbursed expenses (assuming the reimbursement is accountable). The mileage rate was created to assist individuals in valuing a charitable contribution deduction for the use of their vehicles in performing charitable services for which no reimbursement was provided. Further, IRS Publication 526 states, “You may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be unreimbursed, directly connected with the services, expenses you had only because of the services you gave and not personal, living, or family expenses” (emphasis added).

Many secular and religious charities reimburse volunteers for expenses they incur in performing charitable work, including miles driven. Neither the IRS nor the Tax Court has officially acknowledged that charities’ reimbursements of the substantiated miles driven by volunteers in performing services on behalf of a charity are nontaxable, so they remain a questionable, though common, practice. At a minimum, reimbursements should satisfy the following requirements:

Some have claimed that the charitable mileage rate (14 cents per mile) is limited to claiming a charitable deduction for the unreimbursed expenses of using a vehicle in performing services on behalf of a qualified charity and that charities (including churches) can use the business mileage rate in reimbursing volunteers for their services as a “working condition fringe benefit” under section 132 of the tax code. This option was explained by an IRS associate chief counsel in a 2000 letter to a member of Congress:

Our [previous reply] described two methods [a charity] can use to reimburse a volunteer for automobile operating expenses without including the amount in the volunteer’s income. We discussed the rules for reimbursing at the charitable standard mileage rate of 14 cents per mile, or for reimbursing actual expenses.

The [charity] also has a third option: using the business standard mileage rate . . . ​to reimburse bona fide volunteers, under § 1.132-5(r)(1) of the Income Tax Regulations. Whether an individual is a bona fide volunteer for this purpose is a question of fact. To receive the reimbursements without including them in income, the volunteers must follow the same rules as employees. They must account to the [charity] for the time, purpose, and number of miles driven for each trip.

This letter is not precedential and cannot be relied on. But it offers a third possible option for churches desiring to reimburse volunteers for their charitable miles (in addition to the charitable mileage rate and actual expenses). There are some conditions that apply, as noted in section 1.132-5(r)(1) of the income tax regulations. This third option is aggressive since it has not been recognized by the IRS or the Tax Court in any official precedent, and so it should not be relied on without the advice of a tax professional or until official guidance is issued. The letter also addresses the tax consequences of reimbursing volunteers in an amount in excess of their actual expenses: “If the [charity] reimburses more than the volunteer’s actual gasoline and oil expenses, the excess amount paid is income to the recipient. If the charity reimburses using the business [mileage] rate . . . , the excess over the 14 cent charitable rate is income to the recipient. This is because the business standard mileage rate includes vehicle ownership expenses such as repair expenses, depreciation, and insurance, which are not costs incurred by the volunteer on behalf of the agency.”

EXAMPLE A church member used his car in performing lay religious activities. While he was denied a charitable contribution deduction for a portion of the depreciation and insurance expenses allocable to the car (they did not represent “payments”), he could deduct his out-of-pocket travel and transportation expenses. Orr v. Commissioner, 343 F.2d 553 (5th Cir. 1965).

EXAMPLE A taxpayer could not deduct as a charitable contribution transportation expenses incurred in attending choir rehearsals at his church. The court concluded that attendance at choir rehearsals was a form of religious worship that benefited the taxpayer directly and that his participation in the choir only incidentally benefited the church. Churukian v. Commissioner, 40 T.C.M. 475 (1980).

EXAMPLE A lay church member drove 2,000 miles during the year for charitable activities associated with her church. She had records to document the charitable nature of these miles. The IRS ruled that she could either (1) claim the charitable standard mileage rate of 14 cents per mile (2,000 miles × 14 cents = $280), or (2) deduct her actual out-of-pocket expenses in operating the car for charitable purposes. Revenue Procedure 80-32.

EXAMPLE A taxpayer performed volunteer activities as a cheerleading coach for a youth football and cheerleading league. She claimed that she made various unreimbursed charitable contributions regarding her cheerleading activities, including car expenses she and her ex-husband incurred in traveling to and from team practices and games. In support, she produced MapQuest directions printouts providing the following information: (1) the distance for each trip; (2) the number of trips taken per week; and (3) the number of weeks during which the trips took place. The court ruled that the taxpayer was entitled to a charitable contribution deduction in the amount of the charitable mileage rate of 14 cents per mile multiplied by the 1,857 miles she and her ex-husband traveled to and from team practices and games during the year. Bradley v. Commissioner, T.C. Summary Opinion 2011-120 (2011).

EXAMPLE A taxpayer owned and operated as a sole proprietorship a lawn-care business. The taxpayer’s church purchased a tract of 10 to 15 acres on which to build a house of worship. The taxpayer cleared the land for the church so it could begin construction. He deducted as a charitable contribution the amount he would have billed the church for his services had he not donated his labor. The IRS audited the taxpayer’s tax return and disallowed any charitable contribution deduction for the services he performed for his church without charge. The Tax Court affirmed the IRS position. It concluded:

The amounts of the taxpayer’s charitable contributions at issue are for services he performed for his church. He testified that he cleared 10 to 15 acres of church-owned land so that a house of worship could be built. He also testified that for each of the years at issue he provided the church financial director a bill for his services. In return taxpayer stated that he was given a receipt from the church confirming he had made a contribution to the church in the amount stated on the bill. He is not allowed charitable contribution deductions for the services he provided to the church. Leak v. Commissioner., U.S. Tax Court, T.C. Summary Opinion 2012-39 (May 1, 2012).

Charitable travel (out of town)

Many church members participate in mission trips or other religious activities that take them away from home. Are persons who participate in such trips entitled to a charitable contribution deduction for their unreimbursed travel expenses?

Section 170(j) of the tax code states that “no deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel.” The key phrase is “no significant element of personal pleasure, recreation, or vacation in such travel.” Unfortunately, the tax code and regulations do not define this phrase. A conference committee report to section 170(j) provides the following clarification:

The disallowance rule applies whether the travel expenses are paid directly by the taxpayer, or indirectly through reimbursement by the charitable organization. For this purpose, any arrangement whereby a taxpayer makes a payment to a charitable organization and the organization pays for his or her travel expenses is treated as a reimbursement.

In determining whether travel away from home involves a significant element of personal pleasure, recreation, or vacation, the fact that a taxpayer enjoys providing services to the charitable organization will not lead to denial of the deduction. For example, a troop leader for a tax-exempt youth group who takes children belonging to the group on a camping trip may qualify for a charitable deduction with respect to his or her own travel expenses if he or she is on duty in a genuine and substantial sense throughout the trip, even if he or she enjoys the trip or enjoys supervising children. By contrast, a taxpayer who only has nominal duties relating to the performance of services for the charity, or who for significant portions of the trip is not required to render services, is not allowed any charitable deduction for travel costs.

The IRS provided the following additional clarification in Notice 87-23:

[Section 170(j)] provides that no deduction is allowed for transportation and other expenses relating to the performance of services away from home for a charitable organization unless there is no significant element of personal pleasure, recreation, or vacation in the travel. For example, a taxpayer who sails from one Caribbean Island to another and spends eight hours a day counting whales and other forms of marine life as part of a project sponsored by a charitable organization generally will not be permitted a charitable deduction. By way of further example, a taxpayer who works on an archaeological excavation sponsored by a charitable organization for several hours each morning, with the rest of the day free for recreation and sightseeing, will not be allowed a deduction even if the taxpayer works very hard during those few hours. In contrast, a member of a local chapter of a charitable organization who travels to New York City and spends an entire day attending the organization’s regional meeting will not be subject to this provision even if he or she attends the theatre in the evening. This provision applies whether the travel expenses are paid directly by the taxpayer or by some indirect means such as by contribution to the charitable organization that pays for the taxpayer’s travel expenses.

EXAMPLE A donor claimed a charitable contribution deduction for the cost of an airplane ticket ($1,000) that she purchased in 2006 to travel to her native country and provide services to Catholic churches in that country. She claimed that she was performing missionary services on behalf of her local Catholic diocese while overseas. But the court noted:

Her local diocese did not have control over her services provided to the Catholic churches in the foreign country, and no legally enforceable trust or similar legal arrangement existed between her local church (as a member of that diocese) and the donor. She did not render services in the foreign country under the direction of, or to or for the use of her local church or the local diocese. The record shows only that her priest at her local church had some awareness of her work in her native country. Nor is there any evidence that she provided those services during the year in controversy to or for the use of the [US-based missions agency] of which she did not become a member until 2007. Anonymous v. Commissioner. TC Memo. 2010-87 (2010).

The current edition of IRS Publication 526 addresses this issue as follows:

Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. This applies whether you pay the expenses directly or indirectly. You are paying the expenses indirectly if you make a payment to the charitable organization and the organization pays for your travel expenses.

The deduction for travel expenses won’t be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don’t have any duties, you can’t deduct your travel expenses.

Publication 526 provides the following examples (each is based on the precedent summarized above):

EXAMPLE You are a troop leader for a tax-exempt youth group and take the group on a camping trip. You are responsible for overseeing the setup of the camp and for providing the adult supervision for other activities during the entire trip. You participate in the activities of the group and really enjoy your time with them. You oversee the breaking of camp, and you transport the group home. You can deduct your travel expenses.

EXAMPLE You sail from one island to another and spend eight hours a day counting whales and other forms of marine life. The project is sponsored by a charitable organization. In most circumstances, you cannot deduct your expenses.

EXAMPLE You work for several hours each morning on an archeological dig sponsored by a charitable organization. The rest of the day is free for recreation and sightseeing. You cannot take a charitable contribution deduction, even though you work very hard during those few hours.

EXAMPLE You spend the entire day attending a charitable organization’s regional meeting as a chosen representative. In the evening you go to the theater. You can claim your travel expenses as charitable contributions, but you cannot claim the cost of your evening at the theater.

Contributions of less than a donor’s entire interest in property

Contributions of less than a donor’s entire interest in property ordinarily are not deductible unless they qualify for one of the following exceptions:

A contribution (not in trust) of an irrevocable remainder interest in a personal residence or farm

To illustrate, a donor who wants to give his home or farm to his church, but who wants to retain possession during his life, can retain a “life estate” in the property and donate a “remainder interest” to the church. The donor may deduct the value of the remainder interest that he has conveyed to the church, though this interest represents less than the donor’s entire interest in the property. The valuation of a remainder interest is determined according to income tax regulation 1.170A-12.

Example You keep the right to live in your home during your lifetime and give your church a remainder interest that begins upon your death. You can deduct the value of the remainder interest.

A contribution (not in trust) of an undivided interest in property

Such an interest must consist of a part of every substantial interest or right the donor owns in the property and must last as long as the donor’s interest in the property lasts. To illustrate, assume that a church member owns a 100-acre tract of land and that she donates half of this property to her church. While this represents a gift of only a portion of the donor’s interest in the property, it is nevertheless deductible. Treas. Reg. 1.170A-7.

A contribution of an irrevocable remainder interest in property to a charitable remainder trust

A charitable remainder trust is a trust authorized by section 664 of the tax code, which provides for a specified distribution, at least annually, to one or more noncharitable income beneficiaries for life or for a term of years (ordinarily not more than 20), with an irrevocable remainder interest to a charity. Many churches and other religious organizations have found such trusts to be an excellent means of raising funds since they provide the donor with a current charitable contribution deduction plus a stream of income payments, as well as assuring the charity that it will receive the trust property at some specified future date.

Charitable remainder trusts can be either annuity trusts or unitrusts. The specified distribution to be paid at least annually must be a certain sum that is not less than 5 percent of the initial fair market value of all property placed in trust (in the case of a charitable remainder annuity trust) or a fixed percentage which is not less than 5 percent of the net fair market value of the trust assets, valued annually (in the case of a charitable remainder unitrust).

Transfers subject to a condition

The income tax regulations provide:

If as of the date of a gift a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. If an interest in property passes to, or is vested in, charity on the date of the gift and the interest would be defeated by the subsequent performance of some act or the happening of some event, the possibility of occurrence of which appears on the date of the gift to be so remote as to be negligible, the deduction is allowable. For example, A transfers land to a city government for as long as the land is used by the city for a public park. If on the date of the gift the city does plan to use the land for a park and the possibility that the city will not use the land for a public park is so remote as to be negligible, A is entitled to a deduction under section 170 for his charitable contribution. Treas. Reg. § 1,170A-1(e).

Rent-free use of a building

A contribution of a partial interest in property that does not fit within one of the three categories described above ordinarily is not deductible as a charitable contribution. To illustrate, an individual who owns an office building and donates the rent-free use of a portion of the building to a charitable organization is not entitled to a charitable contribution deduction, since the contribution consists of a partial interest in property that does not fit within one of the exceptions described above.

This principle is illustrated in the income tax regulations with the following example: “T, an individual owning a 10-story office building, donates the rent-free use of the top floor of the building . . . ​to a charitable organization. Since T’s contribution consists of a partial interest to which section 170(f)(3) applies, he is not entitled to a charitable contribution deduction for the contribution of such partial interest.”

The same principle would apply to rent-free use of equipment. IRC 170(f)(3)(A).

EXAMPLE C owns a vacation home at the beach and sometimes rents it to others. For a fund-raising auction at church, C donated the right to use the vacation home for one week. At the auction, the church received and accepted a bid from D equal to the fair rental value of the home for one week. C can’t claim a deduction because of the partial interest rule. D can’t claim a deduction either, because of the received benefit equal to the amount of D’s payment. IRS Publication 526.

EXAMPLE A taxpayer used a spare bedroom in his home to perform services for a local charity and claimed a charitable contribution deduction of $100 per month. The IRS disallowed any deduction, and the Tax Court agreed. The court noted that the taxpayer “cannot deduct the $100 per month for the portion of the rent attributable to the second bedroom since the ‘contribution’ consists of less than his entire interest in the property.” The tax code specifies that a charitable contribution must consist of the transfer of a donor’s entire interest in the donated property, with three limited exceptions not relevant in this case. Since the donor in this case was not donating a partial interest in his property to charity, it could not be claimed as a charitable contribution. Sizelove v. Commissioner, T.C. Summary Opinion 2008-15 (2008).

Pledges

Pledges and subscriptions are commitments to contribute a fixed sum of money or designated property to a church or other charity in the future. Many churches base their annual budget or the construction of a new facility on the results of pledge campaigns.

Pledges raise two questions of interest to church leaders: (1) can pledges be deducted as charitable contributions, and if so, when; and (2) are pledges legally enforceable? Both questions are addressed below.

Can pledges be deducted as charitable contributions?

The income tax regulations specify that “any charitable contribution . . . ​actually paid during the taxable year is allowable as a deduction in computing taxable income irrespective of the method of accounting employed or of the date on which the contribution is pledged.” Treas. Reg. 1.170A-1.

EXAMPLE The IRS ruled that “the satisfaction of a pledge” is a tax-deductible charitable contribution. Revenue Ruling 78-129.

EXAMPLE A federal appeals court ruled that pledges not paid during the year are not allowed as charitable contribution deductions for that year. Mann v. Commissioner, 35 F.2d 873 (D.C. Cir. 1932).

Are pledges legally enforceable?

Are such commitments enforceable by a church? Traditionally the courts refused to enforce pledges on the basis of contract law. Since donors who make a pledge normally receive nothing in exchange for the pledge, their commitment was considered “illusory” and unenforceable. In recent years, however, several courts have enforced pledge commitments. In most cases enforcement is based on the principle of detrimental reliance. That is, a church that relies to its detriment on a pledge in assuming debt or other legal obligation should be able to enforce the pledge. One court has noted:

The consideration for a pledge to an eleemosynary [i.e., charitable] institution or organization is the accomplishment of the purposes for which such institution or organization was organized and created and in whose aid the pledge is made, and such consideration is sufficient. We therefore conclude that pledges made in writing to eleemosynary institutions and organizations are enforceable debts supported by consideration, unless the writing itself otherwise indicates or it is otherwise proved. Hirsch v. Hirsch, 289 N.E.2d 386 (Ohio 1972). See also Estate of Timko v. Oral Roberts Evangelistic Association, 215 N.W.2d 750 (Mich. 1974).

Another court observed that “the real basis for enforcing a charitable [pledge] is one of public policy—enforcement of a charitable pledge is a desirable social goal.” The court continued: “Lightly to withhold judicial sanction from such obligations would be to destroy millions of assets of the most beneficent institutions in our land, and to render such institutions helpless to carry out the purposes of their organization.” Jewish Federation v. Barondess, 560 A.2d 1353 (N.J. Super. 1989).

EXAMPLE The Alabama Supreme Court ruled that a $250,000 pledge to a Jewish temple was legally enforceable. A temple member had paid only $4,000 of his pledge at the time of his death, and the temple asked a court to determine if the balance of the $250,000 pledge was enforceable. Heirs of the donor insisted that the pledge was unenforceable because the donor never signed a pledge card. The court disagreed:

Alabama law is clear that an unsigned pledge, when met with detrimental reliance, rises to the level of an enforceable pledge. The evidence in this case showed that the Temple detrimentally relied on [the donor’s] pledge. The temple had used the pledge to encourage others to donate to the campaign. The temple even publicized the pledge in its newsletters and other advertisements. Moreover, the evidence indicated that, before his death, the donor had even made appearances at various meetings and fund-raising activities to show his support for the campaign. Ruttenberg v. Friedman, 2012 WL 1650388 (Ala. 2012).

EXAMPLE A Georgia court ruled that a person who promised to make a $25,000 contribution to a church could be compelled to honor his commitment. A church purchased property from an individual for $375,000. In the contract of sale the seller promised to donate $5,000 to the church each year for the next five years (for a total contribution of $25,000). When the promised donations were not made, the church sued the seller for breach of contract. The seller claimed that his promise to make the donations was unenforceable because of lack of “consideration” for his promise. A trial court ruled in favor of the seller, concluding that a commitment or promise is not enforceable unless the promisor receives something of value (“consideration”) in return.

The court concluded that the seller received no value for his promise to make the donations, and therefore the promise was not enforceable. The church appealed, and a state appeals court agreed with the church. It observed: “Although [the seller] asserts the promise to pay the church $25,000 was without consideration . . . ​nothing in the [record] shows that to be the case. [The sales contract] recites that the promise to pay $25,000 was made as additional consideration for the church to buy [the seller’s] property.” First Baptist Church v. King, 430 S.E.2d 635 (Ga. App. 1993).

EXAMPLE An Iowa court ruled that a pledge a donor made to his church was legally enforceable. The donor informed various relatives of his intent to pay for the church projects. He was later informed that the projects would cost between $115,000 and $150,000. Prior to the donor’s death, and in reliance on his agreement to provide funds, work was begun on several projects. After the donor’s death, some of his heirs challenged the enforceability of the pledge. A state appeals court concluded that it was enforceable, even without proof of “consideration” or “detrimental reliance” by the church. All that was needed was a definite promise to transfer funds or property. As the court noted, “where a subscription is unequivocal the pledgor should be made to keep his word.” In re Estate of Schmidt, 723 N.W.2d 454 (Iowa App. 2006).

EXAMPLE The Nebraska Supreme Court ruled that pledges made by donors to a church are legally enforceable. The court concluded:

From early times academies, colleges, missionary enterprises, churches, and other similar institutions for the public welfare, have been established and often maintained upon private donations and subscriptions [i.e., pledges]. Some early cases advanced the view that a subscription to charity was purely gratuitous, not enforceable at law, and performance was left to the conscience and honor of the subscriber. But many courts, including this court, began to enforce eleemosynary subscriptions [to churches and other charities]. This change flowed from a commendable regard for public policy and a desire to give stability and security to institutions dependent on charitable gifts. Shadow Ridge v. Ryan, 925 N.W.2d 336 (Neb. 2019).

EXAMPLE A New York court ruled that pledges made by members of a synagogue were legally enforceable. The court conceded that pledges, like any promise, generally are not legally enforceable unless the person making the pledge receives something of value (called “consideration”) in return. But there are exceptions to this requirement, and one of them is “detrimental reliance.” According to this exception, if a charity relies to its detriment upon the pledges of members, then those pledges are enforceable even though not supported by consideration in a traditional sense. The court applied this principle to pledges made to the synagogue: “The synagogue entered into contracts and incurred liability in reliance upon the pledge made by [its members]. Thus, [members] became legally bound to pay the full dues when billed. Since the synagogue relies upon persons’ membership as of the time of budgeting, and the dues being billed, [members are] estopped from refusing to pay the dues.” Temple Beth Am v. Tanenbaum, 789 N.Y.S.2d 658 (Dist. Ct. 2004).

Gifts of blank checks

A blank check is a check that is complete in all respects except for the designation of a payee. The person issuing the check specifies the date and an amount and signs the check but does not identify a payee. Occasionally a church will receive a blank check in the offering or in the mail. This can occur for several reasons. Some elderly church members may forget to complete the check. Others may assume that the church will insert (or stamp) its name as payee, so why bother. Can church members claim a charitable contribution deduction for a blank check? Possibly not, according to a Tax Court case summarized in the following example.

EXAMPLE A husband and wife claimed a charitable contribution of $34,000 to their church. The couple attempted to substantiate their deductions with canceled checks and carbon copies of checks from their two personal checking accounts on which they left the payee lines blank. The Tax Court ruled that “because these canceled blank checks fail to list [the church] as the donee, these checks do not establish” that the couple made tax-deductible charitable contributions to the church. Dorris v. Commissioner, T.C. Memo. 1998-324.

Contributing rebates to charity

A company offers rebates on the sale of certain products and gives consumers the choice of receiving the rebates themselves or donating them to a designated charity. The IRS ruled that consumers who elect to have their rebates donated to charity are entitled to a charitable contribution deduction in the amount of the rebate. IRS Letter Ruling 199939021. In reaching this conclusion, the IRS referred to two previous rulings:

Tax-free distributions from IRAs for charitable purposes

A qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must be at least age 70 1/2 when the distribution is made. Also, you must have the same type of acknowledgment of your contribution that you would need to claim a deduction for a charitable contribution.

The maximum annual exclusion for QCDs is $105,000. Any QCD in excess of the $105,000 exclusion limit is included in income as any other distribution. If you file a joint return, your spouse can also have a QCD and exclude up to $105,000. The amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.

For more information, see IRS publications 526 (Charitable Contributions) and 590-B (Distributions from Individual Retirement Arrangements) or contact a tax professional.

Contributions by credit card and electronic
funds transfers

Section 170(a)(1) of the tax code specifies that “there shall be allowed as a deduction any charitable contribution . . . ​payment of which is made within the taxable year.” The term charitable contribution is defined in the tax code and regulations as a contribution of cash or property to a qualified charity.

The income tax regulations clarify that a charitable contribution of cash or money includes “a transfer of a gift card redeemable for cash, and a payment made by credit card, electronic fund transfer (as described in section 5061(e)(2)), an online payment service, or payroll deduction.”

Section 5061(e)(2) of the tax code defines the term electronic fund transfer (EFT) to mean “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account.”

The current edition of IRS Publication 526 (Charitable Contributions) confirms this conclusion by noting that “contributions charged on your bank credit card are deductible in the year you make the charge.”

EFT is a safe and efficient process for making tax payments that is being used with increasing frequency to pay bills and make various kinds of payments. All transactions are governed by strict, nationally established rules, regulations, and security procedures and occur between financial institutions only at your request. Benefits of making contributions by EFT include the following:

To substantiate a charitable contribution, a donor must maintain adequate records to show that the contribution was made. For contributions by credit cards, which are considered like a cash contribution, you must keep the credit card statement that shows the name of the charitable organization, the amount of the contribution, and the date of the contribution. Additional requirements apply to any individual charitable contribution (including by credit card) of $250 or more. Generally, these contributions can be substantiated only with a written acknowledgment from the donee charity that meets certain requirements.

Gift tax returns

The federal gift tax applies to the transfer by gift of any property. The general rule is that any gift is a taxable gift. However, this rule has many exceptions, including gifts of one’s entire interest in property to charity, gifts to a spouse, and gifts that are not more than the annual exclusion for the calendar year. A separate annual exclusion applies to each person to whom a taxpayer makes a gift.

For 2024, the annual exclusion was $18,000. This means taxpayers could give up to $18,000 each to any number of people in 2024, and none of the gifts would be taxable. The annual exclusion amount is adjusted for inflation in $1,000 increments. It increases to $19,000 for 2025. The exemption of gifts to charity applies only to gifts of a donor’s entire interest in property to a church or charity. It does not apply to a gift of a partial interest in property.

EXAMPLE John contributed $25,000 in cash to his church in 2024. He is not required to file a gift tax return with the IRS, because he has made a gift of his entire interest in the funds to his church.

EXAMPLE Joan donated her home to her church in 2024. She is not required to file a gift tax return with the IRS, even though the home is worth more than $18,000, because she gave her entire interest in the property to the church.

EXAMPLE J owns a 10-story office building and donates rent-free use of the top floor to her church. Because she still owns the building, she has contributed a partial interest in the property and can’t take a deduction for the contribution.

Ordinarily, a contribution is made at the time of delivery. For example, a check that is mailed to a church (or other charity) is considered delivered on the date it is mailed. A contribution of real estate generally is deductible in the year that a deed to the property is delivered to the charity. A contribution of stock is deductible in the year that a properly endorsed stock certificate is mailed or otherwise delivered to the charity. A promissory note issued in favor of a charity (and delivered to the charity) does not constitute a contribution until note payments are made. Contributions charged to a bank credit card are deductible in the year the charge was made. Pledges are not deductible until actually paid.

Predated checks

The first worship service in January often presents problems regarding the correct receipting of charitable contributions. For example, the first Sunday in January 2025 is January 5. Can a member who contributes a personal check to her church on Sunday, January 5, deduct the check on her 2024 federal tax return if the check is backdated to read “December 31, 2024”?

Many churches advise their congregations during the first worship service in January that checks contributed on that day can be credited to the previous year if they are dated December 31 of the previous year. This advice is incorrect and should not be given. Section 1.170A-1(b) of the income tax regulations states: “Ordinarily, a contribution is made at the time delivery is effected. The unconditional delivery or mailing of a check which subsequently clears in due course will constitute an effective contribution on the date of delivery or mailing.”

According to this language, a check dated December 31, 2024, but physically delivered to a church in January 2025, is deductible only on the donor’s 2025 federal tax return. This is so whether a donor predated a check to read “December 31, 2024” during the first church service in January 2025 or in fact completed and dated the check on December 31, 2024, but deposited it in a church offering in January of 2025.

The only exception to this rule is a check that is dated, mailed, and postmarked in the preceding year. The fact that the church does not receive the check until January of the following year does not prevent the donor from deducting it on his or her prior year’s federal tax return.

Postdated checks

Churches occasionally receive a postdated check (a check that bears a future date). For example, Frank writes a check for $1,000 on December 15, 2024, that he dates January 1, 2025. Such checks often are received at the end of the year, when some donors decide they will be better off for tax purposes if they delay their contribution until the following year. Other donors make gifts of postdated checks before leaving on an extended vacation or business trip.

One court defined a postdated check as follows: “A postdated check is not a check immediately payable but is a promise to pay on the date shown. It is not a promise to pay presently and it does not mature until the day of its date, after which it is payable on demand the same as if it had not been issued until that date.” In other words, a postdated check is treated like a promissory note. It is nothing more than a promise to pay a stated sum on or after a future date. It is not an enforceable obligation prior to the date specified.

Since a postdated check is no different than a promissory note, it should be treated the same way for tax purposes. If someone issues a note to a church, promising to pay $1,000 in one year, no charitable contribution is made when the note is signed (assuming the donor is a “cash basis” taxpayer). Rather, a contribution is made when the note is paid. Until then, there is only a promise to pay. Like a promissory note, a church ordinarily should simply retain a postdated check until the date on the check occurs. There is no need to return it. A bank may be willing to accept such a check for deposit before the date on the check has occurred, with the understanding that the funds will not be available for withdrawal.

EXAMPLE Jane writes a check in the amount of $1,000 to her church during the last service of 2024 and drops it in the offering. She dates the check January 1, 2025, in order to claim a deduction in 2025 rather than in 2024. She does so because she believes her taxable income will be higher in 2025 and so the deduction will be “worth more” in that year. The check is a postdated check, which on the day it is given to the church is nothing more than a promise to pay, and so no charitable contribution has occurred. The charitable contribution occurs on January 1, 2025. On that date the check becomes more than a mere promise to pay. It is a legally enforceable commitment. The church should record the check as a 2025 contribution.

EXAMPLE Jack makes weekly contributions of $100 to his church. In anticipation of a month-long business trip, he writes four checks in the amount of $100 each that he postdates for the next four Sundays. He places the checks in the offering during a church service prior to leaving on his trip. The church should record each check as a contribution on the date specified on the check.

EXAMPLE Lynn mails a check to her church on December 29, 2024, that is dated January 1, 2025, and that is received by the church on January 3, 2025. A contribution in the form of a check is effective on the date of delivery with one exception—a check that is dated, mailed, and postmarked in one year is deductible in that year, even though it is not received by the church until the next year. This assumes that the check is accepted for deposit by the bank. In this case, however, the “mailbox rule” does not apply, since the check was postdated. The church treasurer should record Lynn’s check as a 2025 contribution.

Promissory notes

Churches occasionally receive gifts of promissory notes. For example, during a church building campaign in 2025, Bob gives his church a promissory note in which he promises to pay the church $10,000 over a three-year term. How much does the church treasurer report as a charitable contribution for year 2025? The full amount of the note? Some other amount?

The Tax Court has addressed this question. An attorney gave his church a promissory note for a substantial amount and then claimed a charitable contribution deduction for the entire face amount of the note, even though very little had been paid that year. The court ruled that the attorney could claim a charitable contribution deduction only for amounts he actually paid on the note in the year in question, not for the entire amount of the note. Investment Research Associates v. Commissioner, T.C. Memo. 1999-407 (1999).

Credit card charges

The current edition of IRS Publication 526 (Charitable Contributions) states that “contributions charged on your bank credit card are deductible in the year you make the charge.”

The word contribution is synonymous with the word gift, and so a contribution is not deductible unless it is a valid gift. Since no gift occurs unless a donor absolutely and irrevocably transfers title, dominion, and control over the gift, it follows that no charitable contribution deduction is available unless the contribution is unconditional. Similarly, no charitable contribution deduction is permitted if the donor receives a direct and material benefit for the contribution, since a gift by definition is a gratuitous transfer of property without consideration or benefit to the donor other than the feeling of satisfaction it evokes.

If a donor receives a return benefit in exchange for a contribution, then a charitable contribution exists only to the extent that the cash or property transferred by the donor exceeds the fair market value of the benefit received in return. These two requirements of a charitable contribution—unconditional transfer without personal benefit to the donor—are illustrated by the following examples:

EXAMPLE A church member purchases a church bond. No charitable contribution will be permitted for this purchase, since the purchaser receives a return benefit. However, a charitable contribution will be available if the member gives the bond back to the church. Revenue Ruling 58-262.

EXAMPLE A religious broadcaster offers a “gift” (a free book) to anyone who contributes $50 or more. Contributors who give $50 and who receive the book can claim a charitable contribution of only the amount by which their check exceeds the fair market value of the book.

EXAMPLE A taxpayer was interested in purchasing a tract of land owned by a church. Accordingly, he offered to “donate” $5,000 to the church if the church would give him preferential consideration in the purchase of the land. It also was understood that if he purchased the land, the purchase price would be reduced by the amount of the $5,000 “contribution.” A federal appeals court denied the taxpayer a charitable contribution deduction under these facts since the $5,000 payment obviously was not unconditional and without personal benefit to the donor. Wineberg v. Commissioner, 326 F.2d 157 (9th Cir. 1964).

EXAMPLE A church charges a fee of $250 for each marriage occurring on its premises. The fee is designed to reimburse the church for utilities, wear and tear, custodial services, and other costs it incurs as a result of the ceremony. A taxpayer’s daughter was married at the church, and he paid the $250 fee. On his federal income tax return for that year, the taxpayer claimed a charitable contribution deduction for this fee. The Tax Court denied the deductibility of the fee since it was not a charitable contribution. The court noted that the taxpayer received a material benefit in exchange for his fee that was of commensurate value. Summers v. Commissioner, 33 T.C.M. 696 (1974).

EXAMPLE A church trustee lived in the pastor’s home. He did not pay rent or any of the expenses of the home. He claimed a charitable contribution deduction to the church that was disallowed by the IRS because the claimed deduction did not exceed the value of the free “room and board” received by the trustee. The Tax Court agreed. It observed: “It is further reasonable to infer that any contributions made by [the trustee] to the [church] benefited him and were in anticipation of such housing or other benefits and, thus, did not proceed from detached and disinterested generosity. Based on the record before us, we hold that [the trustee] has failed to prove that he made a contribution or gift to the church.” Williamson v. Commissioner, 62 T.C. 610 (1991).

EXAMPLE A church honors donors of large amounts to a building program by inscribing their names on a memorial plaque. Does the public disclosure, for many years to come, of the major donors’ identity on a memorial plaque constitute a benefit received in exchange for the contributions that nullifies any charitable contribution deductions for these donors? The IRS has observed: “Payments an exempt organization receives from donors are nontaxable contributions where there is no expectation that the organization will provide a substantial return benefit. Mere recognition of a . . . ​contributor as a benefactor normally is incidental to the contribution and not of sufficient value to the contributor to [preclude a charitable contribution deduction]. Examples of mere recognition [that do not nullify a charitable contribution deduction] are naming a . . . ​building after a benefactor.” IRS News Release IR-92-4.

EXAMPLE The Tax Court ruled that a woman who made contributions to a religious organization was not entitled to a charitable contribution deduction because the organization provided her with the necessities of life. Ohnmeiss v. Commissioner, T.C. Memo. 1991-594.

EXAMPLE In 1989 the Supreme Court ruled that “contributions” made to the Church of Scientology for “auditing” were not deductible as charitable contributions. Hernandez v. Commissioner, 109 S. Ct. 2136 (1989). Auditing involves a counseling session between a church official and a counselee during which the counselor utilizes an electronic device (an “E-meter”) to identify areas of spiritual difficulty by measuring skin responses during a question and answer session. Counselees are encouraged to attain spiritual awareness through a series of auditing sessions. The church also offers members doctrinal courses known as “training.”

The church charges fixed “donations” for auditing and training sessions (the charges are set forth in published schedules). For example, the published charges for a particular year were $625 for a 12-hour basic auditing session, $750 for a 12-hour specialized auditing session, and $4,250 for a 100-hour package. A 5-percent “discount” was available to persons who paid their charges in advance, and the church offered refunds of the unused portions of prepaid charges in the event that a person discontinued the services before their completion. The system of fixed charges was based on a tenet of Scientology (the doctrine of exchange) that requires persons to pay for any benefit received in order to avoid “spiritual decline.”

The Supreme Court ruled that payments made to the Church of Scientology for auditing and training services are not deductible as charitable contributions. The court emphasized that a charitable contribution is a payment made to a qualified charitable organization with no expectation of a return benefit. If a return benefit is received, then the payment is a contribution only to the extent that it exceeds the value of the benefit received in exchange. The court concluded that payments made to the Church of Scientology for auditing and training sessions were a nondeductible reciprocal exchange since “the Church established fixed price schedules for auditing and training sessions in each branch church; it calibrated particular prices to auditing or training sessions of particular lengths and levels of sophistication; it returned a refund if auditing and training services went unperformed; it distributed account cards on which persons who had paid money to the Church could monitor what prepaid services they had not yet claimed; and it categorically barred provision of auditing or training services for free. Each of these practices reveals the inherently reciprocal nature of the exchange.

In other words, “contributions” to the church (1) were mandatory, in the sense that no benefits or services were available without the prescribed payment, and (2) represented a specified fee for a specified service.

The court rejected the church’s claim that it would be unfair to permit members of more conventional churches to deduct contributions for which they undeniably receive benefits (i.e., sacraments, preaching, teaching, counseling) but deny Scientologists a deduction for payments they make for auditing and training. The court emphasized that “the relevant inquiry in determining whether a payment is a [deductible] contribution is, as we have noted, not whether the payment secures religious benefits or access to religious services, but whether the transaction in which the payment is involved is structured as a quid pro quo exchange” [emphasis added].

Scientologists clearly receive a specified benefit in exchange for a mandatory and specified fee, and this fact distinguishes payments by Scientologists for auditing and training from most voluntary contributions made by donors to more conventional churches. The typical contribution to a conventional church is voluntary (in the sense that religious benefits ordinarily are not withheld if the individual does not make a contribution), and specified religious benefits are not available only upon the payment of a specified fee. The typical church member receives a number of general benefits, none of which is associated with a prescribed fee, regardless of whether he or she contributes to the church. These facts demonstrate that the typical contribution to a conventional church does not constitute a “quid pro quo exchange” of a specified service for a specified and mandatory fee. Hernandez v. Commissioner, 109 S. Ct. 2136 (1989).

For further discussion of the requirement that a contribution is deductible by a donor only to the extent that it exceeds the fair market value of any premium or merchandise received in exchange, see “Substantiation of Charitable Contributions” on page .

The Supreme Court has summarized these rules as follows:

The [essence] of a charitable contribution is a transfer of money or property without adequate consideration. The taxpayer, therefore, must at a minimum demonstrate that he purposely contributed money or property in excess of any benefit he received in return. [A contribution is deductible] only if and to the extent it exceeds the market value of the benefit received . . . ​[and] only if the excess payment [was] made with the intention of making a gift. United States v. American Bar Endowment, 106 S. Ct. 2426 (1986).

Only those contributions made to qualified organizations are deductible. Section 170(c) of the tax code defines qualified organizations to include, among others, any organization that satisfies all of the following requirements:

(1) created or organized in the United States (or a United States possession);

(2) organized and operated exclusively for religious, educational, or other charitable purposes;

(3) no part of the net earnings of which inures to the benefit of any private individual; and

(4) not disqualified for tax exempt status under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate or intervene in any political campaign on behalf of any candidate for public office.

Tax Exempt Organization Search (formerly Select Check) is an online search tool on the IRS website (IRS.gov) that allows users to search for and select an exempt organization and check certain information about its federal tax status and filings. It consolidates three former search sites into one, providing expanded search capability and a more efficient way to search for organizations that are eligible to receive tax-deductible charitable contributions. Users may rely on this list in determining the deductibility of their contributions. However, the IRS cautions that certain eligible donees (i.e., churches and entities covered by a group exemption ruling) may not be listed in this database. In addition, “doing business as” (DBA) names of organizations are not listed in this database.

To be deductible, a contribution must be made to or for the use of a qualified organization. In a 1990 ruling, the United States Supreme Court gave its most detailed interpretation of the requirement that a charitable contribution be “to or for the use of” a qualified charitable organization. Davis v. United States, 495 U.S. 472 (1990). The case involved the question of whether the parents of Mormon missionaries can deduct (as charitable contributions) payments they make directly to their sons for travel expenses incurred in performing missionary activities. This case is addressed under “Missionaries” on page .

Contributions to foreign charities

Church members sometimes make contributions directly to religious organizations or ministries overseas. Or they make contributions to a United States religious organization for distribution to a foreign organization. Are these contributions tax-deductible? Federal law specifies that a charitable contribution, to be tax-deductible, must go to an organization “created or organized in the United States or in any possession thereof.” In addition, the organization must be organized and operated exclusively for religious or other charitable purposes. This means that contributions made directly by church members to a foreign church or ministry are not tax-deductible in this country.

A related question addressed by the IRS in a 1963 ruling is whether a donor can make a tax-deductible contribution to an American charity with the stipulation that it be transferred directly to a foreign charity. The IRS ruled that such a contribution is not deductible, since in effect it is made directly to the foreign charity. Revenue Ruling 63-252.

EXAMPLE The Tax Court ruled that a taxpayer who sent contributions to a mosque in his family’s hometown in Iran was not entitled to a charitable contribution deduction. The court noted that to be deductible, a charitable contribution must go to a charity organized in the United States. Alisobhani v. Commissioner, T.C. Memo. 1994-629 (1994).

EXAMPLE A donor claimed a deduction of $9,024 for a gift of cash or by check to charity. She testified that during 2008, she made numerous gifts totaling $10,000 to the Church of the Immaculate Conception, a Catholic church in Nigeria, within the Catholic Archdiocese. The Tax Court, agreeing with the IRS that this donation was not deductible, noted that the tax code defines a charitable contribution as a contribution or gift “to or for the use of” an organization “created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States.” The donor “has failed to prove that Immaculate Conception, in Nigeria, was created or organized within the United States or any of its possessions, or under any law of the United States, any State, the District of Columbia, or any possession of the United States. She has, thus, failed to show that Immaculate Conception is a qualified organization . . . ​and therefore we sustain the disallowance of the deduction.” Golit v. Commissioner, T.C. Memo. 2013-191.

Gifts to Canadian, Mexican, and Israeli charities

You may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada. To deduct your contribution to a Canadian charity, you generally must have income from sources in Canada. See IRS Publication 597 (Information on the United States–Canada Income Tax Treaty) for information on how to figure your deduction.

You may be able to deduct contributions to certain Mexican charitable organizations under an income tax treaty with Mexico. The organization must meet tests that are essentially the same as the tests that qualify U.S. organizations to receive deductible contributions. The organization may be able to tell you if it meets these tests.

To deduct your contribution to a Mexican charity, you must have income from sources in Mexico.

You may be able to deduct contributions to certain Israeli charitable organizations under an income tax treaty with Israel. To qualify for the deduction, your contribution must be made to an organization created and recognized as a charitable organization under the laws of Israel. The deduction will be allowed in the amount that would be allowed if the organization was created under the laws of the United States but is limited to 25 percent of your adjusted gross income from Israeli sources.

EXAMPLE A member (the “donor”) of a Catholic church in Texas was an ardent supporter of churches in her native country that were experiencing persecution from the government. Fearing that direct contributions to these churches would be confiscated by the government, the donor wired money to the personal bank account of her cousin. The cousin then transferred the money to selected Catholic churches in that country. Other than her membership in a Catholic church, the cousin did not have any formal role with any other Catholic institutions in that country.

During 2006 the donor wired $25,000 to her cousin’s account pursuant to her plan. She claimed these transfers as charitable contributions on her tax return for that year since the ultimate beneficiary of the transfers was the Roman Catholic Church, a qualified charitable organization. The court disagreed, noting that section 170(c)(2) of the tax code defines a charitable contribution as a contribution or gift “to or for the use of” an organization “created or organized in the United States . . . ​or under the law of the United States.” It added: “[The donor] did not make the wire transfers to or for the use of an organization created or organized in the United States or under the laws of the United States. Her contributions were made to her cousin, who distributed them for the benefit of foreign Catholic churches. Therefore, her wire transfers of $25,000 are not deductible as charitable contributions.”

The donor also claimed that the Catholic Church is a universal organization, and therefore Catholic churches in foreign countries are qualified charitable contribution recipients. The court disagreed: “[We have] no basis to find that the Catholic churches in that foreign country to which the donor’s wire transfers were sent were created or organized in the United States or under the laws of the United States.” The court added that “the language of section 170(c)(2) is explicit, and this court must follow such plain language.” Anonymous v. Commissioner. TC Memo. 2010-87 (2010).

The amount of a charitable contribution deduction may be limited to either 20 percent, 30 percent, or 60 percent of a donor’s adjusted gross income, depending on the type of property given and the nature of the charity.

Property subject to debt

What if a donor gives property to a church that is subject to a debt (such as a mortgage)? What is the value of the charitable contribution? That depends on whether the donor transfers the debt to the church. If the debt is transferred to the church, then the value of the charitable contribution is the fair market value of the donated property less the amount of the outstanding debt.

Giving property that has decreased in value

A donor who donates property with a current fair market value that is less than the donor’s “basis” (cost) can only claim the current value as a charitable contribution deduction. The donor cannot claim a deduction for the amount between the property’s basis and its current value.

EXAMPLE A church member owns a computer that she purchased two years ago for $4,000. The current value of the computer is $1,000. The member donates the computer to her church. The amount of her charitable contribution deduction is the donated property’s fair market value ($1,000), not its cost basis ($4,000).

EXAMPLE A woman purchased steeply discounted items at a Talbot’s clothing store for $2,500, donated them to charity, and claimed a charitable contribution deduction in the amount of the original retail value of the donated items ($34,000). The Tax Court acknowledged that the value of a charitable contribution of property generally is its fair market value, but contrary to the donor’s view,

the FMV of an item is not the price at which a hopeful retailer initially lists that item for sale. By the time the donor purchased her clothing, Talbots had marked down the prices of those items three or four times. She purchased each item for a small fraction of its original list price. No rational buyer having knowledge of the relevant facts would have paid for these items a price higher than the price Talbots was then charging. The donor has failed to establish for the donated items an FMV higher than her acquisition cost. Grainger v. Commissioner, T.C. Memo. 2018-117.

Giving property that has increased in value

A donor who donates property with a fair market value that is more than the donor’s basis (cost) in the property may have to reduce the amount of a charitable contribution deduction by the amount of appreciation (increase in value). Consider the following two rules:

Ordinary income property

If a donor contributes appreciated “ordinary income property” that would have resulted in ordinary income had the property been sold at its fair market value on the date of the gift, the amount of the contribution ordinarily is the fair market value of the property less the amount that would have been ordinary income or short-term capital gain if the property had been sold at its fair market value. Generally, this rule limits the deduction to the donor’s basis in the property. Ordinary income property includes capital assets (including stocks and bonds, jewelry, coins, cars, and furniture) held for one year or less.

EXAMPLE Jill donates to her church stock that she held for five months. The fair market value of the stock on the day of the donation was $1,000, but she paid only $800 (her basis). Because the $200 of appreciation would be short-term capital gain if she sold the stock, her deduction is limited to $800 (fair market value less the appreciation).

Capital gain property

Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than one year. Capital assets include most items of property that are used for personal purposes or investment. Examples are stocks and bonds, jewelry, coin and stamp collections, cars, furniture, or real estate used in the donor’s business.

Amount of deduction. In general, donors who contribute capital gain property can claim a charitable contribution deduction in the amount of the property’s fair market value.

Exceptions. In some situations the donor must reduce the fair market value by an amount that would have been long-term capital gain if the property had been sold for its fair market value. In most cases this means reducing the fair market value to the property’s basis. A donor must make this reduction in the value of the contribution in either of the following two situations:

Tangible personal property is any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.

An unrelated use is a use that is unrelated to the exempt purpose of the charitable organization.

EXAMPLE Jane donated an item of jewelry to her church this year. The jewelry was purchased in 2002 for $2,000 but has a current market value of $8,000. The church sold the jewelry shortly after the contribution but never used it for a “related purpose.” Since the church did not use the donated tangible personal property in furtherance of its exempt purposes, Jane’s charitable contribution deduction is limited to the property’s cost basis ($2,000) rather than its market value ($8,000).

Bargain sales

A bargain sale is a sale of property to a charity at less than its fair market value. Many churches have received substantial contributions through such an arrangement. It is especially attractive to taxpayers who have property that has greatly appreciated in value. The church obtains property at a greatly reduced price, and the donor receives a significant charitable contribution deduction and reduces the amount of taxable gain he or she would have realized had the property been sold for its fair market value.

A bargain sale results in a transaction that is partly a sale and partly a charitable contribution. A special computation must be made to compute (1) the amount of any deductible charitable contribution, and (2) the taxable gain from the part of the transaction that is a sale. In general, the adjusted basis of the property must be allocated between the part sold and the part given to charity.

Charitable contribution

Figure the amount of the charitable contribution in three steps:

Taxable gain on sale

Part of a bargain sale may be a contribution, but part may be a sale that can result in a taxable gain to the donor. If a bargain sale results in a charitable contribution deduction, the adjusted basis of the property must be allocated between the part of the property sold and the part of the property given to charity. The adjusted basis of the contributed part is computed by multiplying the adjusted basis of the entire property by the fair market value of the contributed part, divided by the fair market value of the entire property. To determine the fair market value of the contributed part, the donor subtracts the amount received from the sale (the selling price) from the fair market value of the entire property. The adjusted basis of the part sold is computed by multiplying the selling price by the adjusted basis for the entire property, divided by the fair market value of the entire property.

Bargain sales are illustrated in the following examples:

EXAMPLE G sells ordinary income property with a fair market value of $10,000 to a church for $2,000. G’s basis is $4,000, and his AGI is $20,000. G makes no other contributions during the year. The fair market value of the contributed part of the property is $8,000 ($10,000 − $2,000). The adjusted basis of the contributed part is $3,200 ($4,000 × [$8,000/$10,000]). Because the property is ordinary income property, G’s charitable contribution deduction is limited to the adjusted basis of the contributed part. He can deduct $3,200.

EXAMPLE A church member sells ordinary income property with a fair market value of $10,000 to his church for $4,000. If his basis (cost) in the property is $4,000 and his AGI is $30,000, the contribution from the sale is $6,000 ($10,000 fair market value less $4,000 selling price). But since the amount of ordinary income the donor would have received had he sold the property for its fair market value is $6,000 ($10,000 fair market value less $4,000 basis), and since the contribution must be reduced by this amount, the taxpayer is left with no charitable contribution deduction.

EXAMPLE Same facts as the preceding example, except that the donated property was capital gain property held for more than one year. Unlike gifts of ordinary income property, which must be reduced by the amount of ordinary income that would have been realized had the property been sold at its fair market value on the date of the contribution, gifts of long-term capital gain property made to a church ordinarily do not have to be reduced. Therefore, a deduction of $6,000 is permitted, assuming the percentage limitations discussed above are not exceeded.

EXAMPLE In 2013 a company made a noncash charitable contribution in the form of a land sale to a church. The company sold the land to the church for $1,020,000. The appraised value of the property was $1,540,000. The company reported a contribution of $520,000. The Tax Court, in reviewing this deduction, noted that the amount of a charitable contribution of property must be reduced by the amount of gain that would not have been long-term capital gain (i.e., by the amount of gain that would have been ordinary gain) if the property had been sold by the taxpayer at its fair market value. The court concluded: “In 2013 [the company] sold undeveloped land in a bargain sale to a church [and] claimed a charitable contribution deduction for the difference between the sale price and the land’s fair market value.” The court concluded that the company’s charitable contribution was the difference between the sale price and the land’s fair market value if it held the land as a long-term capital asset. The company acquired the land in 2005 and sold it to the church in 2013. It held all of its land for investment and did not sell land in the ordinary course of business. It held the land as a long-term capital asset at the time of sale and, therefore, was entitled to a charitable contribution deduction of the difference between the sale price the church paid and the property’s fair market value. Conner v. Commissioner, T.C. Memo. 2018-6.

Inventory

If a donor contributes inventory (property sold in the course of the donor’s business), the amount that can be claimed as a contribution deduction is the smaller of its fair market value on the day it was contributed or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that would otherwise be included in opening inventory for the year of the contribution.

The amount of any contribution deduction must be removed from opening inventory. It is not part of the cost of goods sold. If the cost of donated inventory is not included in opening inventory, the inventory’s basis is zero, and no charitable contribution deduction is available.

EXAMPLE In 2025, T, an individual using the calendar year as the taxable year and the accrual method of accounting, contributes property to a church from inventory having a fair market value of $600. The closing inventory at the end of 2024 included $400 of costs attributable to the acquisition of such property, and in 2024, T properly deducted under section 162 $50 of administrative and other expenses attributable to such property. The amount of the charitable contribution allowed for 2025 is $400 ($600 − [$600 − $400]). The cost of goods sold to be used in determining gross income for 2025 may not include the $400 which was included in opening inventory for that year. Treas. Reg. 1.170A-1(c)(4).

EXAMPLE Same facts as the previous example, except that the contributed property was acquired in 2025 at a cost of $400. The $400 cost of the property is included in determining the cost of goods sold for 2025, and $50 is allowed as a deduction for that year under section 162. T is not allowed any deduction for the contributed property, since the amount of the charitable contribution is reduced to zero ($600 − [$600 − $0]). Treas. Reg. 1.170A-1(c)(4).

Carryovers of excess contributions

Contributions in excess of the 60-percent or 30-percent ceilings can be carried over and deducted in each of the five succeeding years until they are used up. Your total charitable deduction for the year to which you carry your contributions cannot exceed 60 percent of your adjusted gross income for the year.

EXAMPLE A church member has AGI of $100,000 in 2024 and contributed $75,000 to her church in that year (she made no other contributions). If she itemizes her deductions, she may deduct $60,000 in 2024 ($100,000 × 60 percent) and may carry over the remaining $15,000 to 2025.

EXAMPLE A married couple were generous contributors to their church. In 2002 they donated $122,214. In 2003 they donated $33,155. In 2004 they donated $16,995. In 2005 they donated $35,920. In 2004 the IRS selected their 2002 return for an audit examination. The couple’s 2002 charitable contributions were substantiated, and it was determined that petitioners had a charitable contribution carryover of $61,150. They did not amend their already-filed 2003 return to claim any part of the carryover amount they were eligible for in that year. When they filed their 2004 federal income tax return, they reported charitable contributions of $16,995 and claimed a carryover of $17,033 from 2002. In 2005 they reported charitable contributions of $35,920. They also claimed a charitable contribution carryover of $10,000 from 2002. The IRS disallowed the $10,000 deduction and determined that the couple was entitled to a carryover of $1,944 from 2002 to 2005.

On appeal the Tax Court noted that the tax code provides that if the amount of a charitable contribution made to a church exceeds 50 percent of a taxpayer’s “contribution base” for that year (adjusted gross income calculated without regard to any net operating loss carryback), any excess contribution is treated as a charitable contribution paid in each of the five succeeding taxable years in order of time, according to a formula contained in section 170(d)(1)(A) of the Code. The court noted that “the carryover is good for the 5 years immediately following the charitable deduction, and some portion of the deduction expires each year whether it is actually used or not.” The court rejected the couple’s claim that they should have been allowed to use the carryover credit as they saw fit so long as they did so within the allowable time period following the original charitable contribution. Maddux v. Commissioner, T.C. Summary Opinion 2009-30 (2009).

Itemized deductions

Charitable contributions are available only as an itemized deduction on Schedule A (Form 1040). This means that taxpayers who do not itemize deductions cannot claim a deduction for charitable contributions. As a result, most taxpayers are prevented from deducting any portion of their charitable contributions, since it is estimated that 90 percent of all taxpayers have insufficient deductions to use Schedule A due to the significant increase in the standard deduction in tax years 2018 through 2025.

Limitation on charitable contribution deductions for high-income taxpayers

In the past, the total amount of most itemized deductions was limited for certain upper-income taxpayers by the so-called “Pease limit” (named after the congressman who proposed it). In general, the total amount of itemized deductions was reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income exceeded a threshold amount.

The Tax Cuts and Jobs Act (2017) suspended the Pease limit through 2025. It will not apply to taxable years beginning after 2025 unless extended by Congress.

Corporations

Corporations may deduct charitable contributions of up to 10 percent of taxable income in 2025 ($25,000 for 2024) computed without regard to certain items. IRC 170(b)(2). They can carry over contributions in excess of this limit over the next five years, with some limitations. IRC 170(d)(2).

Section 170 of the tax code, which authorizes deductions for charitable contributions, states that a charitable contribution shall be allowable as a deduction only if verified. Because of the importance of this issue, it is addressed in a separate section of this chapter (see “Substantiation of Charitable Contributions” on page ).

The CARES Act (2020) encouraged Americans to contribute to churches and charitable organizations by permitting them to deduct up to $300 of cash contributions whether they itemize their deductions or not. Congress extended this deduction through 2021 and increased it to $600 for married couples filing a joint return. However, this deduction expired at the end of 2021, and will not be available in 2024 or future years unless extended by Congress.

In the past, churches were adversely impacted by federal bankruptcy law in two ways. First, many courts ruled that bankruptcy trustees could recover contributions made to a church by a bankrupt donor within a year of filing a bankruptcy petition. Second, church members who declared bankruptcy were not allowed by some bankruptcy courts to continue making contributions to their church.

These restrictions were eliminated in 1998, when Congress enacted the Religious Liberty and Charitable Donation Protection Act. The Act, which was an amendment to the bankruptcy code, provides significant protection to churches and church members. This section will review the background of the Act, explain its key provisions, and demonstrate its application with practical examples.

Section 548(a) of the bankruptcy code authorizes a bankruptcy trustee to “avoid” or recover two kinds of “fraudulent transfers” made by bankrupt debtors within a year of filing for bankruptcy:

In the past, many bankruptcy trustees contacted churches, demanding that they return donations made by bankrupt debtors within a year of filing for bankruptcy. They argued that charitable contributions made by bankrupt debtors to a church are for less than “reasonably equivalent value”; therefore they can be recovered by bankruptcy trustees under the second type of “fraudulent transfer” mentioned above.

Donors and churches protested such efforts. They insisted that donors do receive valuable benefits in exchange for their contributions, such as preaching, teaching, sacraments, and counseling. Not so, countered bankruptcy trustees. These benefits would be available regardless of whether a donor gives anything, so it cannot be said that a donor is receiving “reasonably equivalent value” in exchange for a contribution. Many courts agreed with this logic and ordered churches to turn over contributions made by bankrupt debtors. This created a hardship for many churches. After all, most churches had already spent the debtor’s contributions before being contacted by the bankruptcy trustee, so returning them (especially if they were substantial) was often difficult.

The Religious Freedom and Charitable Donation Protection Act

In 1998 Congress enacted the Religious Freedom and Charitable Donation Protection Act in order to protect churches and other charities from having to turn over charitable contributions to a bankruptcy trustee. The key to the Act is the following provision, which is an amendment to section 548(a)(2) of the bankruptcy code:

A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer [subject to recovery by a bankruptcy trustee] in any case in which—(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or (B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.

What if a bankrupt debtor makes a contribution to a church in excess of 15 percent of annual income? Is the entire contribution avoidable by the bankruptcy, or only the amount above 15 percent of annual income? A federal appeals court ruled that contributions of more than 15 percent of annual income are entirely recoverable by the bankruptcy trustee, including the first 15 percent. In the case before the court, a married couple donated more than 15 percent of their annual income to their church during the year prior to filing for bankruptcy protection. The bankruptcy trustee attempted to recover (“avoid”) all of the contributions from the church, while the church claimed that it was only required to return the contribution the couple made during the preceding year that exceeded 15 percent of their annual income. The court’s ruling is relevant to every church. If members make donations in excess of 15 percent of their annual income, all of the contributions may be recoverable by the bankruptcy trustee, not just the amount of the contributions that exceed 15 percent of annual income. In re McGough, 737 F.3d 1268 (10th Cir. 2014).

Examples

Let’s illustrate the impact of this provision with some practical examples.

EXAMPLE Bob has attended his church for many years. For the past few years, his contributions to his church have averaged roughly $50 per week, or about $2,500 per year. Bob’s gross annual income for 2024 and 2025 is about $40,000. On May 15, 2025, Bob files for bankruptcy. A bankruptcy trustee contacts the church treasurer and demands that the church turn over all contributions made by Bob from May 15, 2024, through May 15, 2025. The Religious Freedom and Charitable Donation Protection Act applies directly to this scenario and protects the church from the reach of the trustee since (1) the amount of Bob’s annual contributions in both 2024 and 2025 (the years in which the contributions were made) did not exceed 15 percent of his gross annual income (15 percent of $40,000 = $6,000); and (2) the timing, amount, and circumstances surrounding the contributions, as well as the lack of any change in the debtor’s normal pattern or practice, suggest that Bob did not commit intentional fraud, so the trustee cannot recover contributions on this basis. See step 4 in the sidebar on page .

EXAMPLE Same facts as the previous example, except that in addition to his weekly giving, Bob made a one-time gift to the church building fund on December 1, 2024, in the amount of $5,000. Bob’s total giving for the year preceding the filing of his bankruptcy petition now totals $7,500, or nearly 19 percent of his gross annual income. As a result, he is not eligible for the 15-percent “safe harbor” rule described in step 4 of the sidebar. The trustee will be able to recover the $7,500 in contributions made by Bob to the church within a year of filing the bankruptcy petition unless Bob can demonstrate that giving 19 percent of his gross annual income is consistent with his normal practices in making charitable contributions. It is unlikely that Bob or the church will be able to satisfy this condition since the gift to the building fund was a one-time, extraordinary gift for Bob that was unlike his giving pattern in any prior year.

EXAMPLE Barb believes strongly in giving to her church, and for each of the past several years, she has given 20 percent of her income. On June 1, 2025, she files for bankruptcy. A bankruptcy trustee contacts the church treasurer and demands that the church turn over all contributions made by Barb from June 1, 2024, through June 1, 2025. The Religious Freedom and Charitable Donation Protection Act applies directly to this scenario and protects the church from the reach of the trustee since (1) the amount of Barb’s annual contributions in both 2024 and 2025 (the years in which the contributions were made) exceeded 15 percent of her gross annual income, but she had a consistent practice in prior years of giving this amount; and (2) the timing, amount, and circumstances surrounding the contributions, as well as the lack of any change in the debtor’s normal pattern or practice, suggest that Barb did not commit intentional fraud, so the trustee cannot recover contributions on this basis. See step 5 in the sidebar on page .

EXAMPLE Bill has attended his church sporadically for the past several years. For the past few years, his contributions to his church have averaged less than $1,000 per year. Bill’s gross annual income for 2024 and 2025 is about $80,000. Bill is facing a staggering debt load due to mismanagement and unrestrained credit card charges. He wants to declare bankruptcy, but he has a $15,000 bank account that he wants to protect. He decides to give the entire amount to his church to keep it from the bankruptcy court and his creditors. He gives the entire balance to his church on June 1, 2025. On July 1, 2025, Bill files for bankruptcy. A bankruptcy trustee contacts the church treasurer, demanding that the church turn over the $15,000 contribution. The Religious Freedom and Charitable Donation Protection Act does not protect Bill or the church. The timing, amount, and circumstances surrounding the contribution of $15,000 strongly indicate that Bill had an actual intent to hinder, delay, or defraud his creditors. This conclusion is reinforced by the fact that the gift was contrary to Bill’s normal pattern or practice of giving. As a result, the trustee probably will be able to force the church to return the $15,000. See step 2 in the checklist below.

EXAMPLE A federal court in California ruled that a bankruptcy trustee could not recover charitable contributions made by a church member to his church in the year preceding his filing of a bankruptcy petition since the amount of his contributions was less than 15 percent of his gross annual income. The court rejected the trustee’s claim that gross annual income meant annual income less expenses, or “disposable income.” It concluded: “When Congress [enacted] the Religious Freedom and Charitable Donation Protection Act, it was aware of the term ‘disposable income’ and chose not to use this term. Instead ‘gross annual income’ was used. . . . ​If Congress wanted to have business gross income reflect deductions for operation of a business, it would have used the term ‘disposable income.’” In re Lewis, 401 B.R. 431 (C.D. Cal. 2009).

EXAMPLE A bankruptcy court in Colorado addressed the authority of bankruptcy trustees to recover charitable contributions made by bankrupt debtors within a year of filing a bankruptcy petition. A married couple (the “debtors”) filed for Chapter 7 bankruptcy relief on December 31, 2009. Throughout 2008, the debtors made 25 donations to their church totaling $3,478. In 2009 the debtors’ gross earned income was $7,487, and they received $23,164 in Social Security benefits. Throughout 2009, the debtors made seven donations totaling $1,280 to their church. The bankruptcy trustee attempted to avoid these charitable contributions and have the church return them to the court. The court concluded that Social Security benefits are not included in computing gross annual income, and as a result, only 15 percent of the debtors’ other income was shielded from the bankruptcy trustee. The court also concluded that if a bankruptcy debtor contributes more than 15 percent of gross annual income to his or her church, the bankruptcy trustee can recover only the contributions in excess of 15 percent of gross annual income. It observed: “It is doubtful that Congress would protect a debtor’s right to donate 15 percent of their gross annual income to a charitable organization but allow a trustee to avoid all donations if one cent over the 15-percent threshold is donated.” In re McGough, 2011 WL 2671253 (D. Colo. 2011).

The previous section addressed the authority of bankruptcy trustees to recover contributions made by bankrupt debtors within a year prior to filing a bankruptcy petition. However, a second bankruptcy issue is of equal relevance to churches: can church members who file for bankruptcy continue to make regular contributions to their church? This issue was also addressed by the Religious Freedom and Charitable Donation Protection Act. The bankruptcy code says that a court may not approve a bankruptcy plan unless it provides that all of a debtor’s “projected disposable income to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan.” In addition, a court can dismiss a bankruptcy case to avoid “substantial abuse” of the bankruptcy law. Many courts have dismissed bankruptcy cases on the ground that a debtor’s plan called for a continuation of charitable contributions.

The Act clarifies that bankruptcy courts no longer can dismiss bankruptcy cases on the ground that a debtor proposes to continue making charitable contributions. This assumes that the debtor’s contributions will not exceed 15 percent of his or her gross annual income for the year in which the contributions are made (or a higher percentage if consistent with the debtor’s regular practice in making charitable contributions).

The committee report accompanying the Act states:

In addition [the bill] protects the rights of certain debtors to tithe or make charitable contributions after filing for bankruptcy relief. Some courts have dismissed a debtor’s chapter 7 case . . . ​for substantial abuse under section 707(b) of the bankruptcy code based on the debtor’s charitable contributions. The bill also protects the rights of debtors who file for chapter 13 to tithe or make charitable contributions. Some courts have held that tithing is not a reasonably necessary expense or have attempted to fix a specific percentage as the maximum that the debtor may include in his or her budget.

EXAMPLE Brad files a chapter 7 bankruptcy petition. Brad’s plan states that he will use all available disposable income to pay his creditors during the three-year period following the approval of his plan. But the plan permits Brad to continue making contributions to his church, which in the past have averaged 10 percent of his income. Some creditors object to the plan and demand that the court reject it since Brad will be making contributions to his church rather than using these funds to pay off his lawful debts. The Religious Liberty and Charitable Donation Protection Act specifies that the court cannot reject Brad’s bankruptcy plan because of the charitable contributions, since the contributions are less than 15 percent of his gross annual income.

EXAMPLE Same facts as the previous example, except that Brad’s plan proposes to pay contributions to his church in the amount of 25 percent of his gross annual income. Brad would rather that his church receive all available income than his creditors. Several creditors object to this plan. The court probably will deny Brad’s request for bankruptcy protection since the substantial contributions proposed in his plan exceed 15 percent of his gross annual income and are not consistent with his prior practice of making charitable contributions.

EXAMPLE A young married couple had a premature baby, which resulted in substantial medical bills that were not fully covered by insurance. The couple filed for bankruptcy protection under chapter 13 of the bankruptcy law. Under chapter 13 (also known as a “wage earner’s plan”), the debtor continues to work and applies all disposable income to the payment of debts. The bankruptcy trustee objected to the couple’s plan on the ground that they were not applying all of their disposable income to their debts. In particular, the trustee noted that the couple planned to make monthly contributions of $234 to their church, which amounted to nearly 10 percent of their gross income. The couple conceded that tithing is not required as a condition of membership in their church but is “strongly recommended.”

A federal court noted that the bankruptcy law provides that a bankruptcy plan will not be approved unless the debtor’s projected disposable income to be received in the next three years will be applied to payments under the plan. However, it noted that the bankruptcy law defines disposable income to exclude charitable contributions to a qualified religious or charitable organization in an amount not to exceed 15 percent of a debtor’s income. Since the couple’s monthly tithe was less than 15 percent of their income, it did not meet the definition of disposable income, and their plan could not be rejected on account of these contributions. In re Cavanagh, 242 B.R. 707 (D. Mont. 2000).

EXAMPLE A couple with $100,000 of debt filed for bankruptcy, but their petition was opposed by a bankruptcy trustee on the ground that the plan allowed them to donate 10 percent of their income to their church. The trustee insisted that the proposed charitable contributions were not “reasonably necessary for the debtors’ maintenance and support” and therefore constituted disposable income that should be paid to their creditors. A federal bankruptcy court ruled that the plan could not be denied because of the debtors’ proposed contributions to their church. The court noted that the contributions the couple wanted to continue making to their church were less than 15 percent of their annual income, so their bankruptcy plan could not be rejected because of these contributions. This was so despite the size of their debt. However, the court agreed that the couple should be required to prove to the bankruptcy court that they were, in fact, making the contributions to their church. In re Kirschner, 259 B.R. 416 (M.D. Fla. 2001).

EXAMPLE A married couple with over $65,000 of consumer debts filed a chapter 7 bankruptcy petition, seeking to have their debts discharged. The plan called for all the couple’s income to be assigned to the court over and above specified living expenses, which included $615 in monthly contributions to their church. The court noted that bankruptcy plans can be rejected if they would promote a “substantial abuse” of bankruptcy law. The court concluded that allowing the couple to withhold $615 each month for payment to their church was abusive, and it would accept their bankruptcy plan only after reducing monthly charitable contributions to $400.

The court conceded that the law bars rejection of bankruptcy plans based on charitable contributions that do not exceed 15 percent of a debtor’s annual income (or a higher percentage if consistent with the debtor’s regular practice in making charitable contributions). While the couple’s proposed contributions were less then 15 percent of their income, the court noted that “this does not mean that the court must accept the amount of charitable contributions that a debtor lists where the evidence does not reflect that the debtor, in fact, has given or is giving the listed amount to charity.” The court noted that the couple had only contributed $450 per month to their church over the previous two years, so it reduced their proposed monthly contributions of $615 to $450 as a condition of accepting the plan. In re Hallstrom, 2002 WL 1784500 (M.D.N.C. 2003).

EXAMPLE A federal court ruled that tuition payments made to a church-operated school were not charitable contributions, and so a married couple’s bankruptcy plan could be rejected because of their insistence on continuing to make such payments.

A married couple (the debtors) filed for bankruptcy protection. They had net monthly income of $5,770, expenses of $4,194, and $1,576 in disposable income. The bankruptcy plan provided for 36 monthly payments of $1,576 (totaling $56,736), which would pay $123,714 of unsecured creditors 25 percent of their claims. The debtors were devout Catholics and asked the court to allow them to continue making monthly tuition payments of $750 to send their children to a parochial school. They pointed out that the tuition was less than 15 percent of their gross annual income and that the bankruptcy code permits debtors to make charitable contributions of up to 15 percent of their annual income. A federal bankruptcy court rejected the debtors’ argument that parochial school tuition payments should be allowed because they constituted a charitable contribution.

The court acknowledged that the bankruptcy code prohibits trustees from rejecting a bankruptcy plan based on charitable contributions (so long as the contributions do not exceed 15 percent of the debtor’s annual income), but it concluded that this provision did not apply to tuition payments even if motivated by religious beliefs:

Charitable or religious donations are just that, and in making such contributions the donor is not bargaining for a tangible quid pro quo, but is making a gift to support the religion of his/her choice. Here the debtors propose to purchase, under the guise of a so-called religious donation, a substantial asset—the private education of their children. Based upon the record and the applicable law, I conclude as a matter of law that parochial school tuition payments are not charitable donations within the meaning of the Act, and that the money proposed to be used by the debtors to make said payments is disposable income required to be distributed under the chapter 13 plan. In re Watson, 299 B.R. 56 (D.R.I. 2003).

The terms designated and restricted are often used interchangeably regarding contributions, but there are differences. A designated contribution is technically a restriction on the use of assets imposed internally, such as by the board of directors. These restrictions can be changed or eliminated by the board at any time. This text differentiates between designated and restricted contributions.

On the other hand, a restriction on net assets is imposed externally, most often by a donor. Neither the board nor the donor can change or eliminate such restrictions. Restricted contributions designate a purpose of the donor (not the church). A church is not obligated to accept such contributions, since it exercises no meaningful control over them, and since the church exercises no control over the contribution, it generally does not issue a contribution receipt to the donor. On the other hand, a donor can restrict a contribution to an existing program or purpose of the church and can claim a charitable contribution deduction for such a contribution since the church exercises control over it. Examples include a preapproved project (such as the church building fund) or a specific individual (such as a missionary, student, minister, or needy person). In this section, both kinds of contributions are addressed. More emphasis is given to contributions designating individuals since this is the type of restricted contribution that has caused the most confusion.

If a contribution designates an approved project or program of the church, the designation ordinarily will not affect the deductibility of the contribution. An example is a contribution designated for a church’s building fund.

IRS Letter Ruling 200530016 (2005) addressed charitable contributions that designate specific projects. A charity began construction of a cultural center and solicited contributions for this project. It asked the IRS for a ruling affirming that contributions toward the project would be deductible even if donors requested that their donations be applied to the project and the charity “provides no more than assurances to such donors that it will attempt in good faith to honor such preferences.”

The IRS provided an exhaustive analysis of the deductibility of restricted contributions and made the following helpful clarifications and observations:

The IRS concluded, based on this precedent, that charitable contributions to the charity would be deductible even if the donors requested that their donations be used to cover costs and expenses relating to the cultural center and the charity provided no more than assurances to such donors that it would attempt in good faith to honor such preferences.

EXAMPLE A church establishes a “new building fund.” Bob donates $500 to his church with the stipulation that the money be placed in this fund. This is a valid restricted charitable contribution and may be treated as such by the church treasurer.

EXAMPLE Barb would like to help her church’s music director buy a new home. She contributes $25,000 to her church with the stipulation that it be used “for a new home for our music director.” Neither the church board nor the congregation has ever agreed to assist the music director in obtaining a home. Barb’s gift is not a charitable contribution. As a result, the church treasurer should not accept it. Barb should be advised to make her gift directly to the music director. Of course, such a gift will not be tax-deductible by Barb. On the other hand, the music director may be able to treat it as a tax-free gift.

EXAMPLE A university owned several fraternity houses. The condition of the houses declined to such an extent that student safety was jeopardized. As a result, university officials launched a fund-raising drive to raise funds to renovate the houses. Donors were encouraged to contribute for the renovation of a specific fraternity house, and the university assured donors that it would “attempt” to honor their designations. However, the university made it clear to donors that it accepted their restricted gifts with the understanding that the designations would not restrict or limit the university’s full control over the contributions and that the university could use the restricted contributions for any purpose. The IRS cautioned that for a restricted gift to be a tax-deductible charitable contribution, it

must be in reality a gift to the college and not a gift to the fraternity by using the college as a conduit. The college must have the attributes of ownership in respect of the donated property, and its rights as an owner must not, as a condition of the gift, be limited by conditions or restrictions which in effect make a private group the beneficiary of the donated property. . . . ​[The] university will accept gifts designated for the benefit of a particular fraternity only with the understanding that such designation will not restrict or limit [the] university’s full ownership rights in either the donated property or property acquired by use of the donated property. Accordingly, we conclude that contributions made to [the] university for the purpose of reconstructing and remodeling fraternity housing will qualify for a charitable contribution deduction. Private Letter Ruling 9733015.

If a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s exempt purposes. To illustrate, contributions to a church or missions agency for the benefit of a particular missionary may be tax deductible if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that they are spent in furtherance of the church’s mission.

As noted above, a charitable contribution must be made to or for the use of a qualified organization. Contributions and gifts made directly to individuals are not deductible. However, contributions to individuals will, in some cases, be deductible on the ground that they were for the use of a qualified organization. Contributions to foreign missionaries under the control and supervision of a religious organization often are deductible on this basis. The contribution is not made to the organization, but it is made for the use of the organization. Similarly, contributions often are made payable to a church, but with a stipulation that the funds be distributed to a specified individual. Common examples include Christmas gifts to a minister, scholarship gifts to a church school, and contributions to a church benevolence fund. The deductibility of these restricted contributions, along with contributions made to foreign missionaries, is addressed below.

Of course, donors can designate the specific charitable activity to which they would like their contribution applied. For example, a donor can contribute $500 to a church and specify that the entire proceeds be applied to foreign missions or to a benevolence or scholarship fund. Designating a charitable activity, as opposed to an individual, generally presents no legal difficulties.

EXAMPLE A taxpayer made payments to a boys’ school on behalf of a ward of the Illinois Children’s Home and Aid Society. The court held that the payments were not contributions to or for the use of the charitable organization but were gifts for the benefit of a particular individual. S.E. Thomason v. Commissioner, 2 T.C. 441 (1943).

EXAMPLE An individual gave money to a university, requiring that it use the money to fund the research project of a particular professor. The university had no discretion over the use of the funds. The IRS ruled that the university was a “conduit” only and that the real donee was the professor. As a payment to an individual, the gift was not deductible. IRS Revenue Ruling 61-66 (1961).

In 2005, IRS Letter Ruling 200530016 addressed charitable contributions that designate specific projects and individuals. The IRS provided an exhaustive analysis of the deductibility of restricted contributions and made these clarifications and observations:

Contributions made directly to a missionary may be deductible if it can be established that the contribution was for the use of a charitable organization (i.e., a church or religious denomination exercises control or supervision over the missionary). In 1962 the IRS clarified the application of this principle in a ruling upholding a donor’s contribution to a church fund out of which missionaries, including his son, were compensated:

If contributions to the fund are earmarked by the donor for a particular individual, they are treated, in effect, as being gifts to the designated individual and are not deductible. However, a deduction will be allowable where it is established that a gift is intended by a donor for the use of the organization and not as a gift to an individual. The test in each case is whether the organization has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes. In the instant case, the son’s receipt of reimbursements from the fund is alone insufficient to require holding that this test is not met. Accordingly, unless the taxpayer’s contributions to the fund are distinctly marked by him so that they may be used only for his son or are received by the fund pursuant to a commitment or understanding that they will be so used, they may be deducted by the taxpayer in computing his taxable income. Revenue Ruling 62-113. [Emphasis added.]

This principle has been consistently applied by the courts in determining the deductibility of restricted contributions to charitable organizations. Consider the following examples.

Peace v. Commissioner, 43 T.C. 1 (1964)

The Tax Court ruled that checks payable to the Sudan Interior Mission were deductible by a donor despite the listing of four missionaries’ names on the lower left-hand corner of each check and a letter from the donor requesting that the checks be used for the missionaries. After analyzing all the facts, the court concluded that the donor knew and intended that his contributions would go into a common pool and be administered by the mission and distributed in accordance with stated policies regarding missionary support. As a result, the donor’s designation of four individual missionaries “was no more than a manifestation of [his] desire” to have his donations credited to the support allowance of those individuals. The mission maintained “exclusive control, under its own policy, of both the administration and distribution of the funds.” The IRS, in a private letter ruling summarized earlier in this section, explained this case as follows: “The court permitted a deduction for funds donated to a church mission society with the stipulation that specific amounts should go to each of four designated missionaries because an examination of the totality of the facts and evidence demonstrated that the contribution went into a common pool and the church retained control of the actual distribution of the funds.” IRS Letter Ruling 200530016 (2005).

Lesslie v. Commissioner, 36 T.C.M. 495 (1977)

A taxpayer who sent a bank check to a missionary serving in Brazil with the express instruction that the funds be used for Presbyterian mission work was allowed a deduction by the Tax Court. The court noted that while the check was payable directly to the missionary, it was not a gift to him personally, since it was given for the express purpose of Presbyterian mission work. In substance, the court concluded, the funds were contributed “to or for the use of the church in its mission work, with the missionary receiving the funds as its agent.”

Winn v. Commissioner, 595 F.2d 1060 (5^th Cir. 1979)

A federal appeals court upheld the deductibility of a contribution to a fund established by three Presbyterian churches for the support of a particular missionary, even though the contribution mentioned the missionary’s name, since the contribution was for the use of an exempt missions organization. The court noted that a church officer received donated funds and distributed them for the mission work the church intended. The IRS, in a private letter ruling summarized earlier in this section, explained this case as follows:

At issue was a contribution in response to an appeal by a church to assist a certain person in her church missionary work. Central to the court’s finding was that even though the contribution was made payable to a fund named for the individual, an officer of the church took the funds donated and dealt with them as the church wished. That is, possession of the contribution by a church official was held to be one of the elements establishing control by the church. The court concluded:

We also note that a donor can earmark a contribution given to a qualified organization for specific purposes without losing the right to claim a charitable deduction. Such a contribution still would be to or for the use of a charitable entity despite the fact that the donor controlled which of the qualified entity’s charitable purposes would receive the exclusive benefit of the gift. . . . ​Proof that the church sponsored the appeal for the express purposes of collecting funds for this part of its work, that an officer of that church took the funds donated and dealt with them as the church wished, and that the funds went to the support of the work the church intended is sufficient to establish that the funds were donated for the use of the church. IRS Letter Ruling 200530016 (2005).

Ratterman v. Commissioner, 11 T.C. 1140 (1948)

A contribution given to a Jesuit priest was held to be deductible on the theory that members of the Jesuit Order are under a vow of poverty obligating them to give to the Order all property received by them, and accordingly, a gift to a priest in reality is a gift to or for the use of the Order.

Davis v. United States, 495 U.S. 472 (1990)

To be deductible, a contribution must be made to or for the use of a qualified organization. In a 1990 ruling, the United States Supreme Court gave its most detailed interpretation of the requirement that a charitable contribution be to or for the use of a qualified charitable organization. Davis v. United States, 495 U.S. 472 (1990). The case involved the question of whether the parents of Mormon missionaries can deduct (as charitable contributions) payments they make directly to their sons for travel expenses incurred in performing missionary activities. The parents conceded that their payments were not made to a qualified charity, since the monies went directly to the sons and not to the Mormon Church. However, they insisted that their payments were for the use of the church since the church “had a reasonable ability to ensure that the contributions primarily served the organization’s charitable purposes.” They pointed to the church’s role in requesting the funds, setting the amount to be donated, and requiring weekly expense sheets from the missionaries.

On the other hand, the IRS interpreted “for the use of” much more narrowly, to mean “in trust for.” In other words, for a contribution to be “for the use of” a charity, it must be made to an individual or organization pursuant to a trust or similar legal arrangement for the benefit of the charity. Without such a legal and enforceable arrangement, a contribution to an individual cannot be considered for the use of the charity, since no legal means are in place to ensure that the contribution will be used for the exclusive benefit of the charity. An example of a donation for the use of a qualified charity would be a contribution to a trustee who is required, under the terms of a trust agreement, to spend the trust income solely for the benefit of specified charities. Such a contribution is not to a charitable organization, but it should be deductible if made to a trustee who is required to distribute the funds to qualified charities. Obviously, the parents’ transfer of funds to their sons’ personal checking accounts failed this definition.

The court conceded that the words “for the use of,” taken in isolation, could support the interpretation of either the parents or the IRS. However, it reviewed the events leading to the enactment of the phrase “for the use of” in 1921 and concluded that “it appears likely that in choosing the phrase ‘for the use of’ Congress was referring to donations made in trust or in a similar legal arrangement.” The court noted that the parents had presented no evidence supporting their claim that Congress intended the phrase “for the use of” to mean contributions directly to individual missionaries so long as the church “has a reasonable ability to supervise the use of the contributed funds.” The court further emphasized that the parents’ interpretation

would tend to undermine the purposes of [federal tax law] by allowing taxpayers to claim deductions for funds transferred to children or other relatives for their own personal use. Because a recipient of donated funds need not have any legal relationship with a [church], the [IRS] would face virtually insurmountable administrative difficulties in verifying that any particular expenditure benefited a [church]. Although there is no suggestion whatsoever in this case that the transferred funds were used for an improper purpose, it is clear that [the parents’] interpretation would create an opportunity for tax evasion that others might be eager to exploit.

The court concluded that the parents could not deduct the payments they made directly to their missionary sons because the payments were not made either to or for the use of a church or other qualified charity as required by federal law. The payments could not be considered for the use of a church, since the parents

took no steps normally associated with creating a trust or similar legal arrangement. Although the sons may have promised to use the money in accordance with Church guidelines, they did not have any legal obligation to do so; there is no evidence that the [church’s] guidelines have any legally binding effect. . . . ​We conclude that because the [parents] did not donate the funds in trust for the Church, or in a similarly enforceable legal arrangement for the benefit of the Church, the funds were not donated ‘for the use of’ the Church.

Following the Davis case, the Mormon church converted its missionary funding procedure into an Equalized Funding Program (EFP). The IRS maintains that contributions to the new program are now deductible as charitable contributions. The new program has been described by the IRS as follows:

Prior to selecting its missionaries, the organization determines the cost of operation of its missionary programs and the cost of maintaining its missionaries in different parts of the world. It then determines an average cost for all its missionaries. The funds collected go to a commingled general fund. The organization then distributes the funds to each mission where it is used as needed. By using this system, the parents and relatives will be donating more or less than the actual expenses of their son or daughter. They are donating to the missionary effort the average cost of supporting a missionary worldwide rather than the actual cost of supporting their child. The conduit or earmarking issue is thus effectively diluted. The parents, friends, and relatives are donating directly to the organization with the understanding that the organization will distribute funds as needed at the mission site. Also, missionaries, whose parents are unable or unwilling to provide support, will be supported.

The organization in the EFP will control the funds. The funds are donated to the organization and are contributed without condition, the organization is given the discretion to use those funds as needed in the various mission placements of the organization, no commitment or understanding exists that the payments will be spent for the benefit of a particular missionary, and it is clear that the donor’s intent is to benefit the organization rather than a particular missionary. 1996 EO CPE Text.

Contributions to churches or missions agencies that designate a particular missionary as the recipient of the contributed funds

Assume that a church member donates $500 to a denominational missions board and designates on the check (or with a cover letter) that it is for a designated missionary. Is this common practice affected by the Supreme Court’s decision in the Davis case (summarized above)? In many cases it will not be. In 1962 the IRS ruled that restricted contributions are tax-deductible (assuming that all of the other legal requirements applicable to charitable contributions are satisfied) so long as the church or missions board “has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes.”

In other words, if a donor contributes funds to a missions board, designating a particular missionary, the contribution will be deductible so long as the missions board retains full administrative and accounting control over the funds. What does this mean? Neither the IRS nor any federal court has addressed this issue directly. Presumably, this test could be satisfied if a missions agency adopts the following procedures:

Such procedures can be burdensome for a missions agency. This is the type of accounting and administrative control the Mormon Church was attempting to avoid in the Davis case (see above) by its practice of direct person-to-person donations. However, such procedures (or similar ones) will be essential to demonstrating that the agency maintains administrative and accounting control over contributions designating specific missionaries.

EXAMPLE A federal appeals court concluded: “Income received by the agent of a principal is deemed to be the income of the principal and not the income of the agent. It follows that income received by a member of a religious order as the agent of the order, promptly delivered to the order based on the agent’s vow of poverty, is deemed to be the income of the order and not of the agent.” Gunkle v. Commissioner, 2014 WL 2052751 (5th Cir. 2014).

EXAMPLE A married couple (the “taxpayers”) gave contributions of $6,000, $6,500, and $6,000 directly to three “missionaries” and claimed the total amount ($18,500) as a charitable contribution on their tax return. The three recipients were characterized as missionaries and evangelists for the taxpayers’ church. In 2005 the three missionaries worked to establish and develop new local churches. One developed a church in Flint, Michigan. Another developed a church in Raleigh, North Carolina. A third developed a church in South Africa.

The missionaries determined how best to use those funds toward the development of their respective churches. They used these funds to support the recruitment of new members, to purchase and provide religious education materials, and to provide for their basic financial support. Each of the missionaries provided reports to both his local church and the taxpayers. These reports detailed the use of the contributions for their missionary work.

The IRS denied a charitable contribution deduction for any of the donations the taxpayers made to the three missionaries, but the Tax Court ruled that they were entitled to deduct these donations. It began its opinion by restating two basic requirements for charitable contributions:

The court conceded that the churches in Michigan and North Carolina met the first requirement. However, the church in South Africa did not. Therefore, contributions made to or for the use of the local church in South Africa are not deductible.

Having determined that the local churches in Michigan and North Carolina were qualified charitable donees, the court addressed the second requirement—were the taxpayers’ donations given to the missionaries associated with these two churches made for the use of or to either of those qualified charitable donees? The court concluded that the taxpayers’ donations were not made for the use of the Michigan and North Carolina churches, noting that the United States Supreme Court has defined the phrase “for the use of” to mean that the contribution must be “held in a legally enforceable trust for the qualified organization or in a similar legal arrangement.” Davis v. United States, 495 U.S. 472, 485 (1990). Such legal arrangements “must provide the charitable donee a legally enforceable right against the recipient that ensures the donated funds are used on behalf of the donee.”

This requirement was not met in this case, since the taxpayers’ donations “were given directly to the two missionaries for the purpose of supporting the missionary and evangelical work performed at the local churches.” The taxpayers “made no effort to establish a legally enforceable trust, nor did they succeed in creating a similar legal arrangement.” The court rejected the taxpayers’ argument that their donations created contractual obligations on the part of the missionaries to use the funds as directed. The court noted that the taxpayers had failed to demonstrate that oral contracts between themselves and the two missionaries “could create a legally enforceable right in the local churches to secure access to the funds.” Therefore, their contributions were not given “for the use of” a qualified donee.

Although the contributions were not given for the use of a qualified charitable donee, the contributions could be deductible if the taxpayers gave the contributions “to” a qualified donee. The court noted that contributions to an organization “include contributions given to an agent of the organization.” It explained:

Agency is a fiduciary relationship that arises when an agent acts on behalf of and under the control of a principal. Additionally, both the principal and the agent must manifest consent to the relationship. The analysis of agency has two substantive components: (1) The relationship between the principal and the agent and (2) the interaction of the agent with third parties on the principal’s behalf.

First [the two missionaries] had appropriately established an agency relationship with their respective local churches in Flint, Michigan, and Raleigh, North Carolina. Religious doctrine forbids the local churches from accepting funds directly from nonmembers. Thus the local churches designated [the missionaries] as their agents to solicit, collect, and disburse funds on their behalf. Additionally, the local churches gave [them] authority to represent the local churches in interactions with the general public in order to facilitate recruitment of additional members. Through the granting of this authority the local churches manifested their assents to [the missionaries’] service as agents. Additionally, the local churches required [the missionaries] to provide regular financial reports to their respective local churches. To ensure [they] complied with the teaching of the [church] the elders of the local churches monitored the distributions of funds and [the missionaries’] interactions with the public. If at any time [they] acted contrary to the wishes of the local churches, the local churches held the authority to terminate the relationship and dismiss either of them as an agent. Therefore [the missionaries] established a proper agency relationship with their respective local churches.

Second [the missionaries] interacted with the taxpayers and other third parties on behalf of their local churches. They provided religious instruction to both members and nonmembers of the local churches. They used this instruction of nonmembers as an opportunity to recruit new members to the local churches. They also purchased radio and newspaper advertisements on behalf of their local churches. [They] solicited and received funds from nonmembers (including the taxpayers) for their local churches. They used these funds to purchase religious instructional materials and advertisements and to provide for their own modest living expenses. All of these interactions with third parties were performed under the authority of the agency relationship between the men and their local churches.

Because [the missionaries] were agents of their respective local churches (qualified donees) and the taxpayers’ contributions were given to them in this capacity, their contributions were given “to” a qualified donee within the requirements of [the tax code]. Therefore, they are entitled to deduct the [$12,500 given to these two missionaries]. Wilkes v. Commissioner, T.C. Summary Opinion 2010-53 (2010).

Contributions to a local church designating a particular missionary not associated with any missions board or agency

Are these contributions tax-deductible? According to the IRS’s 1962 ruling, such contributions are deductible only if the church “has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes.” This means that the local church must assume the role of a missions board and implement the kinds of procedures described above regarding each such missionary. This is a significant responsibility that many churches will not be willing to assume. The Supreme Court’s decision in the Davis case (summarized above) ensures that contributions to local churches for independent missionaries and short-term “lay missionaries” from one’s own church are not tax-deductible without such controls.

Hubert v. Commissioner, T.C. Memo.
1993-482 (1993)

The Tax Court ruled that contributions to a church were deductible even though they were designated for the support of two missionaries. A member attended an inner-city Baptist church for many years. Due to a lack of funds, the church asked the member to sponsor two missionaries from the church. The member did so for several years. One of the missionaries worked in Peru and was responsible for beginning 15 Baptist churches there. The other missionary worked in a variety of assignments overseas in missionary radio. The member was not related to either missionary or personally associated with them in any way other than the fact that he had taught one of them in his Sunday-school class many years before.

In 1982 the member executed a last will and testament that created two trusts funded with $100,000 each. The income of each trust was to be paid to two missions organizations for the missionary work of the two missionaries during their lives, including support during retirement. The member died in 1986, and his estate claimed a charitable contribution deduction for the two $100,000 trusts. The IRS denied a deduction, arguing that the member intended to benefit the missionaries personally and that the missions organizations lacked full control over the use of the funds. The IRS relied in part on the Supreme Court’s decision in the Davis case (the Mormon missionary case discussed above) denying a charitable contribution deduction to Mormon parents for contributions made directly to their missionary sons.

The Tax Court ruled that the estate could claim a charitable contribution deduction for the money placed in the two trusts even though the church member specified that the trusts were for the benefit of the two missionaries. The court noted that a charitable contribution, to be deductible, must be to or for the use of a charity. A contribution is for the use of a charity if it is transferred to a legally enforceable trust for the charity:

Under [the Supreme Court’s decision in the Mormon missionary case] the test is not whether the charitable organization has full control of the funds, but rather is whether the charitable organization has a legally enforceable right to the funds. In [the Mormon missionary case] the charitable organization [did not] actually receive the funds, either directly or in trust. In the case before us, the income and later the principal are held in a legally enforceable trust for [the two missions] organizations which have control over the funds.

The court rejected the IRS argument that the charitable purpose failed because the intent and the actual effect of the gifts was to benefit the two missionaries rather than the church. The court acknowledged that the trusts focused on two specific missionaries. However, it concluded that “we are satisfied, on the facts before us, that decedent intended the bequests to be used to implement the missionary work of the [missions organizations] through the named missionaries, as well as through the building of foreign mission field medical clinics.” The court explained:

The charities have complete discretion to use the funds in any manner which fits the stated purpose, including choosing the amounts of the funds to be used and the methods of using those funds. . . . ​On these facts, we conclude that decedent intended to benefit the general public, not the two named missionaries. Moreover, we find that the charitable organizations have substantial control over the use of the funds and were not meant to be mere conduits to funnel money to the missionaries. The fact that decedent directed the [missions organizations] to use the funds for specific purposes does not defeat the charitable nature of the bequests. Under general trust principles, the [missions organizations] have a fiduciary duty to use the funds as directed; however, they have complete discretion to determine the most appropriate ways to implement the directed purposes. We conclude that the charitable organizations had sufficient control and enforceable rights over the bequests to ensure that the funds were used for charitable purposes, as is required by [law]. The charitable nature of the bequests is further protected by the Attorneys General of Georgia and the State or States in which the charitable organizations are located. The Attorneys General are charged with ensuring that the charitable purposes of the trust are carried out.

The fact that the trusts were to continue distributing funds to the two missionaries following their retirements did not matter to the court. It observed:

The retirement provisions further decedent’s charitable purpose by ensuring that the missionaries will be able to continue their work without concern for what will happen to them when the time comes to retire. During the retirement period, the [missions organizations] will continue to control the funds and may provide for the retirement of the missionaries as they see fit. Under the provisions of the will, upon retirement of the missionaries, the income and principal of the trusts are to be given to the charities “to provide for” the retirement of the missionaries and their wives.

The court did caution that “on different facts we might conclude that the charitable organization was a mere conduit to funnel money to an individual and, therefore, lacked sufficient control over the funds. In such a circumstance, because the bequest was intended to benefit one individual rather than the general public, the bequest would not qualify for a charitable deduction.”

Conclusions

The Hubert case, along with the other precedent summarized above, suggest that contributions to a church or missions organization may be tax-deductible even though they designate a specific missionary in either of two situations:

Situation 1

In 1962 the IRS ruled that contributions to a church or missions organization are tax-deductible even though they designate a particular missionary, so long as the church or missions organization “has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes.” Revenue Ruling 62-113. In other words, if a donor contributes funds to a church missions board and designates a particular missionary, the contribution will be deductible so long as the church or missions board retains full administrative and accounting control over the funds.

Situation 2

Contributions for the use of a church or missions organization are tax-deductible even though they designate a particular missionary. The phrase for the use of means that a contribution is given to a trustee pursuant to a trust or similar legal arrangement for the benefit of a charitable organization. If this test is met, it does not matter that the trustee is directed to distribute funds to a church or missions organization for a specified individual. A contribution is deductible under these circumstances because the trustee has a legal duty to ensure that trust funds are used by the named beneficiary for religious or charitable purposes. This conclusion is reinforced by two additional considerations:

First, churches and missions organizations have a fiduciary duty to distribute funds only for religious or charitable purposes. As a result, if a trust distributes funds to a church or missions organization for the missionary work of a specified individual, the church or missions organization has a fiduciary duty to ensure that trust distributions are used by the missionary for such purposes. As a result, such contributions are for the use of the church or missions organization even though they designate a specific recipient.

Second, state attorneys general are empowered to ensure that the charitable purposes of charitable trusts are carried out.

Many churches have established benevolence funds to assist needy persons. Typical beneficiaries of such funds include the unemployed, persons with a catastrophic illness, accident victims, and the aged. There is no question that churches may establish benevolence funds. This is both a religious and a charitable function. Undesignated contributions to a church benevolence fund are deductible by the donor if he or she itemizes deductions on Schedule A (Form 1040).

Problems arise when a donor makes a contribution to a church benevolence fund and designates the intended recipient of the contribution. For example, assume that John is a member of a church, that his church has a benevolence fund, that Joan (another church member) is suffering from a catastrophic illness for which she has inadequate medical insurance, and that John contributes $1,000 to the church benevolence fund with the instruction that his contribution be applied to Joan’s medical bills. Is John’s contribution deductible? The answer to this question depends upon the following two considerations:

Let’s apply these rules to some specific situations.

Contributions made directly to individuals

Obviously, contributions made directly to individuals are not deductible, no matter how needy the recipient may be. For example, the courts have repeatedly denied deductions for contributions made directly to relatives, ministers, students, military personnel, and needy persons.

EXAMPLE A church invited members to submit requests for financial assistance. Church leaders (elders) reviewed the requests and selected persons to assist consistent with the church’s teachings. A married couple made direct contributions totaling $3,500 to various persons identified by the elders. Recipients used the donations to cover living expenses. The Tax Court, in denying any charitable contribution deduction for these donations, observed:

[The taxpayers’] contributions to [the needy church members] are not charitable contributions. . . . ​[The tax code] allows taxpayers to deduct “a contribution or gift to or for the use of . . . ​a corporation, trust, or community chest, fund, or foundation . . . ​created or organized in the United States . . . ​organized and operated exclusively for religious [or] charitable purposes . . . ​no part of the net earnings of which inures to the benefit of any private individual.” Moneys given directly to individuals for their personal benefit are deemed private gifts and are not deductible charitable contributions because they are not given to or for the use of a charitable organization. The taxpayers’ contributions were given directly to the needy individuals for their personal use. Although the recipients were morally obligated to use the funds in accordance with religious teachings, no organization or entity besides the individuals was the beneficiary of the gift. Therefore, the taxpayers are not entitled to a $3,500 charitable contribution deduction for contributions given to the needy individuals. Wilkes v. Commissioner, T.C. Summary Opinion 2010-53 (2010).

Unrestricted contributions made directly to a tax-exempt charitable organization

Contributions made directly to a tax-exempt charitable organization ordinarily are deductible by donors who are able to itemize deductions on Schedule A. As a result, contributions to a church benevolence fund are deductible by donors (who itemize deductions on Schedule A) who do not stipulate that their contribution be given to a designated individual. To illustrate, assume that a church establishes a benevolence fund and that a church member contributes $250 to the fund but makes no reference (either orally or in writing) regarding a desired recipient of the contribution. Such a contribution ordinarily will be deductible by the donor (assuming he or she is able to itemize deductions on Schedule A) since it is clear that the contribution was made to or for the use of the church.

Anonymous recommendations

Some churches have established a benevolence fund and allow only unrestricted contributions to the fund. However, church members are free to make anonymous recommendations (in writing) to the church board regarding desired recipients. Similarly, several churches have appointed a benevolence committee to receive written or oral recommendations from the congregation regarding candidates for benevolence fund distributions and to make recommendations to the church board.

In either case, if the identity of donors to the benevolence fund is undisclosed, and if all church members are free to make recommendations regarding recipients of the fund, then donor contributions may be deductible. However, these procedures will not support the deductibility of contributions if the identity of benevolence fund donors is obvious to the board, and the board distributes such donations consistent with the expressed desires of the donors.

Contributions designating a specific beneficiary

The most difficult kind of benevolence fund contribution to evaluate (but by far the most common) is a contribution that designates a specific recipient. The designation may be written on the face of the check, on an envelope accompanying the contribution, or in a letter; or it may be oral.

To illustrate, a member contributes a check in the amount of $500 to a church’s benevolence fund and inserts a note requesting that a designated individual receive the funds. Is such a contribution deductible? Ordinarily such restricted contributions to a benevolence fund are not deductible, since the intent of the donor is to make a transfer of funds directly to a particular individual rather than to a charitable organization. This does not make them illegal—it simply makes them nondeductible by the donor. On the other hand, the recipient may not have to report the transfer as taxable income if it qualifies as a nontaxable gift (see “Gifts and Inheritances” on page ).

The IRS has stated:

If contributions to the fund are earmarked by the donor for a particular individual, they are treated, in effect, as being gifts to the designated individual and are not deductible. However, a deduction will be allowable where it is established that a gift is intended by a donor for the use of the organization and not as a gift to an individual. The test in each case is whether the organization has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes. Revenue Ruling 62-113.

This test suggests that in some cases it may be possible for a donor to deduct a restricted contribution to a church benevolence fund if the circumstances clearly demonstrate that the designation was a mere suggestion or recommendation and that the donor intended the donation to be to or for the use of the church and subject to its control rather than to the control of the designated individual.

The IRS has reached such a conclusion in three rulings:

Although the term “contribution” is not defined either in the Internal Revenue Code or in the income tax regulations, it is well-established that to be deductible under section 170 of the tax code, a contribution must qualify as a gift in the common sense of being a voluntary transfer of property without consideration.

Revenue Ruling 62-113 [quoted above] holds that contributions to a [tax-exempt] organization that are not earmarked by the donor for a particular individual, will be deductible if it is established that a gift is intended by the donor for the use of the organization and not as a gift to an individual. The test is whether the organization has full control of the donated funds and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes.

From the information submitted and representations made, [the charity] is to have complete legal and equitable control over the funds contributed by [the donor]. [The donor’s] right to suggest distributees will be advisory in nature and will not be binding on [the charity]. Moreover, the fund will be used in the furtherance of [the charity’s] stated purposes. IRS Letter Ruling 8752031.

While private letter rulings apply only to the parties covered by the ruling and may not be used as precedent in support of a particular position, they reflect the thinking of the IRS on a particular issue and, as a result, can be of considerable relevance. The private letter ruling discussed above suggests that contributions to a church benevolence fund can be deductible, even if the donor mentions a beneficiary, if the facts demonstrate that

How can these facts be established? One possible way would be for a church to adopt a “benevolence fund policy,” making all distributions from a benevolence fund subject to the unrestricted control and discretion of the church board, and to communicate such a policy to all prospective donors. It can be argued that donors willing to make a restricted contribution to a church benevolence fund under these conditions are manifesting an intent to make a contribution to the church rather than to the designated individual. A sample policy is printed in Illustration 8-1.

Churches adopting such a policy should make copies available to any person wanting to make a restricted contribution to the church benevolence fund. Such a policy does not guarantee that a restricted contribution will be rendered deductible. Churches wishing to assure donors that their contributions to church benevolence funds will be deductible should use one of the more certain methods discussed above (e.g., unrestricted contributions or unrestricted contributions and anonymous designations to the board or benevolence committee).

A church can administer a program in such a way as to jeopardize the deductibility of contributions. For example, a church can adopt the benevolence fund policy reproduced in Illustration 8-1, yet honor every recommendation made by donors. Clearly, no contribution would be deductible under such an arrangement, since the church’s alleged control over the donated funds would be illusory. Similarly, if a church receives only a few contributions to its benevolence fund each year and, at the time of each contribution, receives a single anonymous recommendation regarding a recipient, it is reasonably clear that the contributions are associated with the recommendations, and the church’s control over the funds will be compromised to the extent that it routinely honors such recommendations.

Special appeals

Many churches have made special appeals to raise funds for a particular benevolence need. For example, an offering is collected to assist a family with a child who has incurred substantial, uninsured medical expenses. Are contributions made to such an offering tax-deductible? Unfortunately, neither the IRS nor any federal court has addressed this issue directly. However, it is possible that such contributions would be tax-deductible if the following conditions are met: 

This interpretation of the law is aggressive and should not be adopted without the advice of a competent tax professional.

In 1956 the IRS issued a ruling acknowledging that charities can distribute funds for benevolent purposes so long as certain conditions are satisfied:

Organizations privately established and funded as charitable foundations which are organized and actively operated to carry on one or more of the purposes specified in section 501(c)(3) of the Internal Revenue Code of 1954, and which otherwise meet the requirements for exemption from federal income tax are not precluded from making distributions of their funds to individuals, provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized. However, organizations of this character which make such distributions should maintain adequate records and case histories to show the name and address of each recipient of aid; the amount distributed to each; the purpose for which the aid was given; the manner in which the recipient was selected and the relationship, if any, between the recipient and (1) members, officers, or trustees of the organization, (2) a grantor or substantial contributor to the organization or a member of the family of either, and (3) a corporation controlled by a grantor or substantial contributor, in order that any or all distributions made to individuals can be substantiated upon request by the Internal Revenue Service. Revenue Ruling 56-304. [Emphasis added.]

Handling excess contributions

How should the balance of a fund created to assist a cancer victim be distributed in the event of her death? That was the issue faced by a New Jersey appeals court. A woman was diagnosed as suffering from acute leukemia. After chemotherapy proved unsuccessful in treating the disease, her physicians recommended a bone marrow transplant. The woman’s health insurance company refused to pay for the transplant on the ground that it was an experimental procedure. The woman’s family launched a fund-raising campaign in their community, seeking private donations to defray the anticipated costs of the transplant. Their efforts included newspaper advertisements urging readers to mail contributions to a fund established in the woman’s name at a local bank. Nearly $21,000 was raised through these efforts. Unfortunately, the woman died before the transplant could be performed. The fund had a balance of nearly $8,000 at the time of the woman’s death.

A dispute arose as to the proper distribution of this fund balance. Family members insisted that the fund balance should be distributed to them, and they based their position on affidavits signed by several donors to the fund stating that had they known the leukemia victim would die before the bone marrow transplant, they would have wanted the fund balance distributed to the woman’s family. A court refused to distribute the balance to the family. Rather, it ordered the bank (in which the contributed funds were deposited) to distribute the remaining funds on a pro rata basis among the donors. This ruling will be relevant to any church that has created a fund for the benefit of a specified individual or family (ordinarily for benevolent or charitable purposes). The important point is this: when the purpose of the fund no longer exists, any fund balance should not necessarily be distributed to family members. Matter of Gonzalez, 621 A.2d 94 (N.J. Super. 1992).

Employer-provided relief to employees

Can a church make benevolence distributions to employees or to family members of employees? Are such distributions consistent with a church’s exempt purposes? Note the following five points:

First, section 102(c) of the tax code specifies that the exclusion of gifts from income taxation does not apply to “any amount transferred by or for an employer to, or for the benefit of, an employee.” This is a broad prohibition that would appear to preclude employers, under any circumstances, from making nontaxable benevolence distributions to employees.

Second, IRS Publication 3833 (discussed below) contains the following guidance:

Frequently, employers fund relief programs through charitable organizations aimed at helping their employees cope with the consequences of a disaster or personal hardship. . . . ​An employer can establish an employer-sponsored public charity to provide assistance programs to respond to any type of disaster or employee emergency hardship situations, as long as the related employer does not exercise excessive control over the organization. Generally, employees contribute to the public charity and rank and file employees constitute a significant portion of the board of directors. To ensure the program is not impermissibly serving the related employer, the following requirements must be met:

If these requirements are met, the public charity’s payments to the employer-sponsor’s employees and their family members in response to a disaster or emergency hardship are presumed: (1) to be made for charitable purposes and (2) not to result in taxable compensation to the employees.

Third, note that this excerpt from Publication 3833 does not treat all natural disaster or emergency hardship distributions to employees as nontaxable benevolence gifts. Rather, this result is possible only if the three conditions mentioned in the excerpt are satisfied. The first condition is that the class of beneficiaries is large and indefinite (a “charitable class”). This means that Publication 3833 is not addressing church benevolence distributions to one or two employees who are facing an emergency hardship. One or two employees do not constitute a large and indefinite charitable class, so such distributions would be fully taxable. An example of employer distributions to employees that would be nontaxable would be a disaster fund established by a large charitable employer to all employees adversely affected by a natural disaster. However, the same result would not apply to churches with only a small number of employees, since the requirement of a charitable class would not be met.

Fourth, the above-quoted excerpt from Publication 3833 demonstrates that the IRS did not consider section 102(c) of the tax code (which bars employers from making nontaxable gifts to employees) to be a bar to the nontaxability of disaster and emergency hardship distributions by employers to their employees. However, as noted above, some important conditions must be met.

Fifth, note that Publication 3833 is addressing disaster relief and “emergency hardship” situations. Its preamble states that it “is for people interested in using a charitable organization to provide help to victims of disasters or other emergency hardship situations. These disasters may be caused by floods, fires, riots, storms, or similar large-scale events. Emergency hardship may be caused by illness, death, accident, violent crime, or other personal events.” This language is broad enough to encompass many kinds of emergency hardships beyond those directly caused by a natural disaster.

Disaster relief

IRS Publication 3833 (Disaster Relief) provides charities with helpful information on how to handle contributions from individuals who designate a specific benevolence recipient in the context of natural disasters. Here is the key excerpt: “Individuals can also help victims of disaster or hardship by making gifts directly to victims. This type of assistance does not qualify as a tax-deductible contribution since a qualified charitable organization is not the recipient. However, individual recipients of gifts are generally not subject to federal income tax on the value of the gift.”

The publication then provides the following example, which will be useful to many church treasurers in evaluating the tax-deductibility of contributions to the church that designate a particular needy person.

Jim, a college student and a counselor at a summer camp, accidentally rolls his old truck into a lake. The other counselors collect several hundred dollars and give the monies directly to Jim to help with the down payment for another truck. Since the counselors are making gifts to a particular individual, the use of a qualified charitable organization would not be appropriate. The counselors cannot claim tax deductions for their gifts to Jim. However, Jim is not subject to federal income tax on the gift amount. [Emphasis added.]

IRS Publication 3833 contains information concerning the distribution of funds by a “disaster relief or emergency hardship organization.” The same principles would apply to churches and other religious organizations. Here are the key excerpts directly relevant to many kinds of benevolence gifts made to churches:

Organizations may provide assistance in the form of funds, services, or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including repairs), transportation, and medical assistance (including psychological counseling). The type of aid that is appropriate depends on the individual’s needs and resources. Disaster relief organizations are generally in the best position to determine the type of assistance that is appropriate.

For example, immediately following a devastating flood, a family may be in need of food, clothing, and shelter, regardless of their financial resources. However, they may not require long-term assistance if they have adequate financial resources. Individuals who are financially needy or otherwise distressed are appropriate recipients of charity. Financial need and/or distress may arise through a variety of circumstances. Examples include individuals who are:

The group of individuals that may properly receive assistance from a tax-exempt charitable organization is called a “charitable class.” A charitable class must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all the individuals in a city, county or state. This charitable class is large enough that the potential beneficiaries cannot be individually identified and providing benefits to this group would benefit the entire community.

If the group of eligible beneficiaries is limited to a smaller group, such as the employees of a particular employer, the group of persons eligible for assistance must be indefinite. To be considered to benefit an indefinite class, the proposed relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster. Accordingly, if a charity follows a policy of assisting employees who are victims of all disasters, present or future, it would be providing assistance to an indefinite charitable class. If the facts and circumstances indicate that a newly established disaster relief program is intended to benefit only victims of a current disaster without any intention to provide for victims of future disasters, the organization would not be considered to be benefiting a charitable class.

Because of the requirement that exempt organizations must serve a charitable class, a tax-exempt disaster relief or emergency hardship organization cannot target and limit its assistance to specific individuals, such as a few persons injured in a particular fire. Similarly, donors cannot earmark contributions to a charitable organization for a particular individual or family.

The publication provides the following example:

Linda’s baby, Todd, suffers a severe burn from a fire requiring costly treatment that Linda cannot afford. Linda’s friends and co-workers form the Todd Foundation to raise funds from fellow workers, family members, and the general public to meet Todd’s expenses. Since the organization is formed to assist a particular individual, it would not qualify as a charitable organization.

Consider this alternative case: Linda’s friends and co-workers form an organization to raise funds to meet the expenses of an open-ended group consisting of all children in the community injured by disasters where financial help is needed. Neither Linda nor members of Linda’s family control the charitable organization. The organization controls the selection of aid recipients and determines whether any assistance for Todd is appropriate. Potential donors are advised that, while funds may be used to assist Todd, their contributions might well be used for other children who have similar needs. The organization does not accept contributions specifically earmarked for Todd or any other individual. The organization, formed and operated to assist an indefinite number of persons, qualifies as a charitable organization.

The publication cautions charities that “an organization must maintain adequate records that demonstrate the victims’ needs for the assistance provided. These records must also show that the organization’s payments further charitable purposes.” It clarifies that documentation should include the following:

However, the publication concedes that

a charitable organization that is distributing short-term emergency assistance would only be expected to maintain records showing the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted (individual names and addresses are not required), charitable purpose intended to be accomplished, and the cost of the aid. Examples of such short-term emergency aid would include the distribution of blankets, hot meals, electric fans, or coats, hats, and gloves. An organization that is distributing longer-term aid should keep the more-detailed type of records described above.

EXAMPLE Amy is a young mother who recently was diagnosed with a rare kidney disease that will require expensive and continuing treatment in excess of her insurance coverage. Her father hands the treasurer of Amy’s church a check in the amount of $10,000, payable to the church, with the stipulation that it be used for Amy’s medical expenses. According to IRS Publication 3833, this check should not be accepted by the church, since it is not a tax-deductible contribution.

EXAMPLE The Smith family loses its home in a fire. The home was not insured adequately for this loss. The family’s church has a benevolence fund, and several members make contributions to this fund assuming that their contributions will be distributed to the Smith family. Members’ contributions may be tax-deductible if they are advised that while their contributions may be used to assist the Smith family, their contributions might be used for other individuals or families who are in need. Contributions earmarked for the Smith family should not be accepted by the church.

IRS Publication 3833 contains the following additional information concerning distributions of aid by charitable organizations for the “needy and distressed.”

Needy and distressed test

A charity should have in place a “needy or distressed test,” that is, a set of criteria by which it can objectively make distributions to individuals who are financially or otherwise distressed. Adequate records are required to support the basis upon which assistance is provided.

Definition of needy

Persons “do not have to be totally destitute to be needy.” Rather, “merely lacking the resources to meet basic necessities” qualifies. On the other hand, “charitable funds cannot be distributed to persons merely because they are victims of a disaster. Therefore, an organization’s decision about how its funds will be distributed must be based on an objective evaluation of the victim’s needs at the time of the grant.”

Documentation required

A charity that is distributing short-term emergency assistance may require less documentation in the way of victims establishing that they need relief assistance than an organization that is distributing longer-term aid. For example, IRS Publication 3833 states:

A charitable organization that is distributing short-term emergency assistance would only be expected to maintain records showing the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted (individual names and addresses are not required), charitable purpose intended to be accomplished, and the cost of the aid. Examples of such short-term emergency aid would include the distribution of blankets, hot meals, electric fans, or coats, hats, and gloves. An organization that is distributing longer-term aid should keep the more detailed type of records described above.

Amount of assistance needed

An individual who is eligible for assistance because the individual is a victim of a disaster or emergency hardship has no automatic right to a charity’s funds. For example, a charitable organization that provides disaster or emergency hardship relief does not have to make an individual whole, such as by rebuilding the individual’s uninsured home destroyed by a flood or replacing an individual’s income after the person becomes unemployed as the result of a civil disturbance.

Excess contributions

A person who is eligible for assistance because he or she is a victim of a disaster or emergency hardship has no automatic right to a charity’s funds. This issue “is especially relevant when the volume of contributions received in response to appeals exceeds the immediate needs. 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.”

To illustrate, a tornado destroys several homes in a small town. Local churches collect unrestricted offerings for disaster relief. The churches receive more donations than are necessary to cover short-term and long-term needs of the victims. Any excess donations should be returned to the donors if possible. If this is not possible, the churches could retain the excess donations for use in future emergencies. In some cases a court may be willing to remove any restriction on the use of excess donations.

IRS Private Letter Ruling 200250029

The IRS issued a ruling in a case involving the deductibility of a restricted contribution made to a charity that was organized to promote music. The charity accomplished its charitable purpose by hosting composer events, placing composers in residencies with professional arts institutions, funding recordings of new American music, and entering agreements with professional arts institutions to commission works.

A married couple (the donors) informed the charity of their desire to support the work of a particular composer, and a few months later they donated a substantial amount to the charity. At the time of the contribution, the charity did not make any commitment to use the funds to commission the work of the composer, and there was no representation that the funds would be used for that purpose. The charity informed the donors that the funds would be used at its discretion in furtherance of its charitable purpose, and the donors understood this. In a letter to the donors, the charity thanked them for the contribution. The letter stated that there “can be no assurance that the funds contributed will be used to support the work of the composer” and that the funds would be used by the charity “in carrying out its charitable purpose and will not be returned to the donors.”

A short time later the charity paid the composer a commissioning fee to compose a new musical work, and it also agreed to reimburse the expenses incurred by the composer in appearing at the premier of his work. The composer agreed to complete a musical work of specified type and duration in a timely manner.

The charity asked the IRS to issue a ruling that the donors’ contribution to the charity was tax-deductible and was not affected by the donors’ earmarking of their contribution for the support of the composer. The IRS began its ruling by noting that the tax code allows a tax deduction for charitable contributions and that a charitable contribution “is a contribution or gift to or for the use of an organization operated exclusively for charitable purposes” (emphasis added). The IRS concluded that the donors’ contribution to the charity was tax-deductible, despite their expressed interest in benefiting a specific composer (and the charity’s use of the donated funds for that same composer). The IRS observed:

A charitable contribution deduction is not allowed if a charity is used as a conduit, and a payment to a qualifying charity is “earmarked” or designated for the benefit of a particular individual, even if the individual is a member of the class the charity is intended to benefit. The organization must have control and discretion over the contribution, unfettered by a commitment or understanding that the contribution would benefit a designated individual. The donor’s intent must be to benefit the organization and not the individual recipient.

In this case donors made a payment to a recognized charity, and expressed an interest in supporting the work of a particular composer. This expression of interest raises the issue of whether the contribution was impermissibly earmarked for this composer. No commitment or understanding existed between the donors and charity that the contribution would benefit the composer. The donors understood that any funds contributed to the charity would be distributed according to the discretion of the charity, and that the charity’s officers select the composers. We believe that the instant case is similar to Revenue Ruling 62-113 and Peace [addressed above]. Although the donors expressed an interest in the selection of a particular individual to compose a work for the charity, the common understanding was that the contribution would become part of the general funds of the charity, and would be distributed in the manner chosen by the charity’s officers. Therefore, the contribution by the donors to the charity was not impermissibly earmarked for the composer, and therefore is a charitable contribution. [Emphases added.]

The ruling provides useful information on the correct handling of contributions that suggest or recommend a particular recipient. This issue frequently arises in churches when members want to donate funds for a particular needy person or family or for a student or missionary. In the past the IRS has been adamant that such contributions do not qualify as charitable contributions. This ruling suggests that the IRS may be taking a more flexible approach in such cases if the following conditions exist: (1) The church has control and discretion over the contribution, “unfettered by a commitment or understanding that the contribution would benefit a designated individual.” (2) No commitment or understanding exists between a donor and the church that a contribution will benefit a person or persons specified by the donor. (3) The donor understands that any funds contributed to the church would be distributed according to its discretion.

Note that a “commitment or understanding” is not the same as a mere expression of interest in a particular individual. A commitment or understanding connotes some compulsion on the part of the church to distribute donated funds to a person designated by the donor and, in that sense, removes any control by the church over the funds. As a result, such a donation is not to or for the use of the church. On the other hand, mere expressions of interest by the donor do not bind a church to distribute donated funds to the person designated by the donor. Instead, the church is left with the discretion to determine how the donated funds are spent and may completely disregard the donor’s expression of interest in a specified individual.

The IRS ruling was a private letter ruling. As such, it cannot be used as precedent in other cases. However, such rulings are commonly viewed by tax attorneys as indications of the thinking of the IRS on specific issues, and in this sense they are relevant.

Conclusions

Consider these few final remarks regarding benevolence funds.

Form 1099-NEC

Does the church need to give the recipient of the benevolence distributions a Form 1099-NEC (if the distributions are $600 or more in any one year)? Ordinarily the answer would be no, since the Form 1099-NEC is issued only to nonemployees who receive compensation of $600 or more from the church during the year. IRS Letter Rulings 9314014, 200113031. To the extent that benevolence distributions to a particular individual represent a legitimate charitable distribution by the church (consistent with its exempt purposes), no Form 1099-NEC would be required. It would be unrealistic to characterize such distributions as compensation for services rendered when the individual performed no services whatever for the church.

How church treasurers should respond

What should church treasurers do when a member attempts to contribute a check for a specified benevolence recipient and it is clear (on the basis of the above information) that the contribution is not tax-deductible? The best option would be to refuse to accept the check. This is the conclusion reached by the IRS in Publication 3833, which states that “contributors may not earmark funds for the benefit of a particular individual or family.” Church treasurers should keep this example in mind when church members want to make contributions to the church for the benefit of a specific needy person or family. Since such contributions are not tax-deductible by the donor, the church should not receive them.

Honoring every donor recommendation

If a church routinely honors every “recommendation” made by donors regarding the individual recipient of their contributions, this strongly suggests that the church does not exercise sufficient control over those contributions for them to be treated as charitable contributions. The IRS Exempt Organizations Continuing Professional Education Technical Instruction Program for 1996 contains the following statement: “In circumstances where the organization is directing all, or close to all, donor contributions to the use of individuals specifically preferred by those donors, a review of the facts should . . . ​determine whether the organization is in control of the funds. If control is not in the hands of the organization, it may be appropriate to refer the [matter to the IRS national office].”

Reviewing the church charter

If your church has established a benevolence fund, you may wish to review your corporate charter or other organizational documents to be sure that your statement of purposes includes “charitable” as well as “religious” purposes. Some legal precedent suggests that benevolence activities are more properly characterized, for tax purposes, as charity rather than religion.

No impact on nonitemizers

With the significant increase in the standard deduction in recent years, it is estimated that as few as 10 percent of all taxpayers are able to claim itemized deductions (including charitable contributions). As a result, as many as 90 percent of all donors receive no tax benefit from a charitable contribution. These individuals are able to designate contributions (or make direct gifts to needy individuals) without concern for the rules summarized in this section.

Definition of charity

Benevolence funds typically are established to assist persons in need. The income tax regulations define charitable to include “relief of the poor and distressed or of the underprivileged.” The regulations define needy as

being a person who lacks the necessities of life, involving physical, mental, or emotional well-being, as a result of poverty or temporary distress. Examples of needy persons include a person who is financially impoverished as a result of low income and lack of financial resources, a person who temporarily lacks food or shelter (and the means to provide for it), a person who is the victim of a natural disaster (such as fire or flood), a person who is the victim of a civil disaster (such as civil disturbance), a person who is temporarily not self-sufficient as a result of a sudden and severe personal or family crisis (such as a person who is the victim of a crime of violence or who has been physically abused). Treas. Reg. 1.170A-4A(b)(2)(ii)(D).

The church board should carefully scrutinize every distribution to ensure that the recipient meets this test.

EXAMPLE The IRS ruled that employee contributions to a nonprofit hospital’s benevolence fund were tax-deductible. The IRS noted that the fund was established to assist financially needy persons who suffer economic hardship due to accident, loss, or disaster. Persons eligible for assistance include current employees of the hospital, retirees, former employees, volunteers, and the spouses and children of such persons. It emphasized that employee contributions did not earmark specific recipients. Rather, all distributions from the fund were made by a committee consisting of employees of the hospital. The committee reviews a potential beneficiary’s application to determine the need for emergency financial assistance and the availability of resources in the fund to meet that need.

The IRS concluded that employee contributions to the fund were tax-deductible since the purpose of the fund was consistent with the hospital’s charitable purposes and the class of potential beneficiaries was sufficiently large:

All awards of the fund are payable only after a determination of need in the discretion of the committee. Contributions may not be earmarked and there is no guarantee that funds will even be available for past contributors should they have a need arise and apply to the fund for assistance. Thus, contributions cannot be made to the fund with an expectation of procuring a financial benefit. The fund derives its income from voluntary contributions and no part of its income inures to the benefit of any individual. The class of potential beneficiaries consists of several thousand employees. . . . ​Such a class of beneficiaries is not so limited in size that the donee organization is considered to benefit specified individuals. Accordingly, we rule that contributions to the fund are deductible as charitable contributions.

The IRS cautioned that the hospital needed to comply with various recordkeeping requirements: “Adequate records and case histories should be maintained to show the name and address of each recipient, the amount distributed to each, the purpose for which the aid was given, the manner in which the recipient was selected and the relationship, if any, between the recipient and members, officers, or trustees of the organization, in order that any or all distributions made to individuals can be substantiated upon request by the IRS.” Revenue Ruling 56-304; see also IRS Letter Ruling 9741047.

EXAMPLE The IRS ruled that a donor can deduct contributions to a charitable organization on behalf of needy persons in a foreign country. The organization obtained a list of 5,000 needy families in the foreign country from a social welfare agency in that country. From this list 25 families were randomly selected who were given $50 per month in support payments.

The IRS stated the general rule that “contributions by an individual to a charitable organization that are for the benefit of a designated individual are not deductible under [federal tax law] even though the designated individual may be an appropriate beneficiary for a charitable organization. A gift for the benefit of a specific individual is a private gift, not a charitable gift.”

However, the IRS concluded that individual donors could deduct their contributions to the relief fund since the organization’s “selection of beneficiaries is done in a way to assure objectivity and to preclude any influence by individual donors in the selection. Therefore, [the charity] is not acting as a conduit for private gifts from its contributors to other individuals. Accordingly, contributions to [the charity] for the relief of needy families in a foreign country will be deductible by donors under the provisions of section 170 of the tax code.” IRS Letter Ruling 8916041.

Many taxpayers have attempted to claim charitable contribution deductions for payments made to a church-operated private school (or to the church that operates the school) in which the taxpayer’s child is enrolled. The IRS has emphasized that a charitable contribution is “a voluntary transfer of money or property that is made with no expectation of procuring a financial benefit commensurate with the amount of the transfer.” Revenue Ruling 83-104. Therefore, payments made by a taxpayer on behalf of a child attending a church-operated school are not deductible as contributions either to the school or to the church if the payments are earmarked in any way for the child.

The fact that payments are not earmarked for a particular child does not necessarily mean they are deductible. The IRS has held that the deductibility of undesignated payments by a taxpayer to a private school in which his child is enrolled depends upon

whether a reasonable person, taking all the facts and circumstances of the case in due account, would conclude that enrollment in the school was in no manner contingent upon making the payment, that the payment was not made pursuant to a plan (whether express or implied) to convert nondeductible tuition into charitable contributions, and that receipt of the benefit was not otherwise dependent upon the making of the payment. Revenue Ruling 83-104.

In resolving this question, the IRS has stated that the presence of one or more of the following four factors creates a presumption that the payment is not a charitable contribution:

The IRS has observed that if none of these factors is determinative, a combination of several additional factors may indicate that a payment is not a charitable contribution. Such additional factors include but are not limited to the following: (1) the absence of a significant tuition charge, (2) substantial or unusual pressure to contribute applied to parents of children attending a school, (3) contribution appeals made as part of the admissions or enrollment process, (4) the absence of significant potential sources of revenue for operating the school other than contributions by parents of children attending the school, and (5) other factors suggesting that a contribution policy has been created as a means of avoiding the characterization of payments as tuition. If a combination of such factors is not present, payments by a parent will normally constitute deductible contributions, even if the actual cost of educating the child exceeds the amount of any tuition charged for the child’s education.

An income tax regulation further specifies that the term scholarship does not include “any amount provided by an individual to aid a relative, friend, or other individual in pursuing his studies where the grantor is motivated by family or philanthropic considerations.” Treas. Reg. 1.117-(3)(a).

Examples from IRS Ruling 83–104

The IRS has illustrated the application of these principles in the following examples (set forth in Revenue Ruling 83-104):

Situation 1

A school requests parents to contribute a designated amount (e.g., $400) for each child enrolled in the school. Parents who do not make the $400 contribution are required to pay tuition of $400 for each child. Parents who neither make the contribution nor pay the tuition cannot enroll their children in the school. A parent who pays $400 to the school is not entitled to a charitable contribution deduction because the parent must either make the contribution or pay the tuition in order for his child to attend the school. Therefore, admission to the school is contingent upon making a payment of $400. Such a payment is not voluntary.

Situation 2

A school solicits contributions from parents of applicants for admission during the school’s solicitation for enrollment of students or while applications are pending. The solicitation materials are part of the application materials or are presented in a form indicating that parents of applicants have been singled out as a class for solicitation. Most parents who are financially able make a contribution or pledge to the school. No tuition is charged. The school suggests that parents make a payment of $400. A parent making a payment of $400 to the school is not entitled to a charitable contribution deduction. Because of the time and manner of the solicitation of contributions by the school, and the fact that no tuition is charged, it is not reasonable to expect that a parent can obtain the admission of his child to the school without making the suggested payments. Such payments are in the nature of tuition, not voluntary contributions.

Situation 3

A school admits a significantly larger percentage of applicants whose parents have made contributions to the school than applicants whose parents have not made contributions. Parents who make payments to the school are not entitled to a charitable contribution deduction. The IRS ordinarily will conclude that the parents of applicants are aware of the preference given to applicants whose parents have made contributions. The IRS therefore ordinarily will conclude that a parent could not reasonably expect to obtain the admission of his child to the school without making the payment.

Situation 4

A society for religious instruction has as its sole function the operation of a private school providing secular and religious education to the children of its members. No tuition is charged. The school is funded through the society’s general account. Contributions to the account are solicited from all society members, as well as from local churches and nonmembers. Persons other than parents of children attending the school do not contribute a significant portion of the school’s support. Funds normally come to the school from parents on a regular, established schedule. At times, parents are solicited by the school to contribute funds. No student is refused admittance because of the failure of his or her parents to contribute to the school. Under these circumstances, the IRS generally will conclude that payments to the society are nondeductible. Unless contributions from sources other than parents are of such magnitude that the school is not economically dependent upon parents’ contributions, parents would ordinarily not be certain that the school could provide educational benefits without their payments. This conclusion is further evidenced by the fact that parents contribute on a regular, established schedule.

Situation 5

A private school charges a tuition of $300 per student. In addition, it solicits contributions from parents of students during periods other than the period of the school’s solicitation for student enrollments. Solicitation materials indicate that parents of students have been singled out as a class for solicitation and the solicitation materials include a report of the school’s cost per student. Suggested amounts of contributions based on an individual’s ability to pay are provided. No unusual pressure to contribute is placed upon individuals who have children in the school, and many parents do not contribute. In addition, the school receives contributions from many former students, parents of former students, and other individuals. A parent pays $100 to the school in addition to the $300 tuition payment. Under these circumstances, the IRS generally will conclude that the parent is entitled to claim a charitable contribution deduction of $100. Because a charitable organization normally solicits contributions from those known to have the greatest interest in the organization, the fact that parents are singled out for a solicitation will not in itself create an inference that future admissions or any other benefits depend upon a contribution from the parent.

Situation 6

A church operates a school providing secular and religious education that is attended both by children of parents who are members of the church and by children of nonmembers. The church receives contributions from all of its members. These contributions are placed in the church’s general operating fund and are expended when needed to support church activities. A substantial portion of the other activities is unrelated to the school. Most church members do not have children in the school, and a major portion of the church’s expenses are attributable to its nonschool functions. The methods of soliciting contributions from church members with children in the school are the same as the methods of soliciting contributions from members without children in the school. The church has full control over the use of the contributions that it receives. Members who have children enrolled in the school are not required to pay tuition for their children, but tuition is charged for the children of nonmembers. A church member whose child attends the school contributes $200 to the church for its general purposes. The IRS ordinarily will conclude that the parent is allowed a charitable contribution deduction of $200 to the church. Because the facts indicate that the church school is supported by the church, that most contributors to the church are not parents of children enrolled in the school, and that contributions from parent members are solicited in the same manner as contributions from other members, a parent’s contributions will be considered charitable contributions, and not payments of tuition, unless there is a showing that the contributions by members with children in the school are significantly larger than those of other members. The absence of a tuition charge is not determinative in view of these facts.

Effect of a recommendation

Can donors recommend or suggest that their contributions be distributed by the church to a named individual? Possibly. The question in each case is whether the church has “full control of the donated funds, and discretion as to their use, so as to ensure that they will be used to carry out its functions and purposes.” Revenue Ruling 62-113. A number of courts and IRS rulings suggest that this test is compatible with mere recommendations or expressions of interest that accompany donors’ contributions. To illustrate, the IRS has ruled that the church must have “control and discretion over the contribution, unfettered by a commitment or understanding that the contribution benefit a designated individual” (emphasis added). IRS Letter Ruling 200250029 (summarized above). Of course, if every recommendation made by donors is honored by the church, this will call into question the reality of the church’s control over the restricted contributions. The following cases illustrate that not all contributions accompanied by recommendations will be charitable contributions.

The Scientology case

In a 1989 ruling the Supreme Court affirmed that tuition payments made to a church or school are not tax-deductible as charitable contributions. The court rejected the Church of Scientology’s claim that all contributions for which the donor receives religious benefits and services are automatically deductible. Hernandez v. Commissioner, 109 S. Ct. 2136 (1989). It noted that if the church’s claim were accepted, the effect would be to

expand the charitable contribution deduction far beyond what Congress has provided. Numerous forms of payments to eligible donees plausibly could be categorized as providing a religious benefit or as securing access to a religious service. For example, some taxpayers might regard their tuition payments to parochial schools as generating a religious benefit or as securing access to a religious service; such payments, however, have long been held not to be charitable contributions under [federal law]. Taxpayers might make similar claims about payments for church-sponsored counseling sessions or for medical care at church-affiliated hospitals that otherwise might not be deductible.

IRS Letter Ruling 9405003

A religious organization solicits contributions from family members and other interested persons to apply toward the tuition expenses of seminary students. Interested parents and family members send in contributions to the organization on behalf of a designated seminary student, and the organization transfers the funds to the student for his or her seminary expenses (less a nominal administrative fee). Most donors give a certain amount every month for the support of a particular student. Literature published by the organization states:

As with all Christian corporations for which donations qualify for tax-exempt status with the Internal Revenue Service, contributions must be directed to [the organization]. A check should not contain the name of the [student] for whose ministry it is given; instead the student’s name should be designated on the envelope or a separate paper. Although the disposition of all contributions rests with the board of directors, [the organization] honors the donor’s designation whenever possible. If it is not possible, [the organization] notifies the donor about the situation.

The organization’s policy manual states that “because of the nonprofit status of [the organization] the distribution of all contributions rests with the board of directors. However, [the organization] takes donors’ designations into account as a matter of accountability and integrity.” [Emphases added.]

The organization claimed that donors’ contributions for specified students were fully deductible since the organizations’ board of directors reserved final authority to distribute all contributed funds. The IRS disagreed, noting that “an individual taxpayer is entitled to a deduction for charitable contributions or gifts to or for the use of qualified charitable organizations, payment of which is made during the taxable year.” It added, “[A] gift is not considered a contribution ‘to’ a charity if the facts show that the charity is merely a conduit to a particular person.” The IRS then quoted from Revenue Ruling 62-113 (quoted above) in which it observed:

If contributions to the fund are earmarked by the donor for a particular individual, they are treated, in effect, as being gifts to the designated individual and are not deductible. However, a deduction will be allowable where it is established that a gift is intended by a donor for the use of the organization and not as a gift to an individual. The test in each case is whether the organization has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes. In the instant case, the son’s receipt of reimbursements from the fund is alone insufficient to require holding that this test is not met. Accordingly, unless the taxpayer’s contributions to the fund are distinctly marked by him so that they may be used only for his son or are received by the fund pursuant to a commitment or understanding that they will be so used, they may be deducted by the taxpayer in computing his taxable income.

The IRS concluded that contributions designating seminary students did not satisfy this test:

In the present case, the taxpayers’ contributions to [the organization] were earmarked for the student not only through the use of account numbers which link donors to seminarians, but also by indicating the student’s name on the contribution envelopes. Further, the organization’s literature indicates that it will make every effort to use the contributions as the donor requests “as a matter of accountability and integrity.” These facts indicate that the program is set up so that donors would expect that their contributions will go to the designated seminarian. Thus, the donor reasonably intends to benefit the individual recipient. In addition, taxpayers in this case have stated that they would not have made donations to this particular organization if their son had not been associated with it. Taxpayers intended their donations to support their son and expected that their son would receive the contributions they made to the organization. It follows from these facts that the organization does not have full control of the donated funds. Thus, under the standard enunciated by Revenue Ruling 62-113 . . . ​the contributions made by taxpayers to the organization are not deductible . . . ​because they not only are earmarked but also are received subject to an understanding that the organization will use the funds as the donors designate and because the taxpayers intended to benefit the designated individual rather than the organization.

The IRS rejected the organization’s claim that the parents’ donations were deductible because the organization exercised control over their distribution. The IRS observed: “[T]he organization’s statement in their literature that the disposition of all contributions rests with the board of directors is not sufficient to demonstrate control. In fact, the organization in this case refutes its own statement of control by going on to say that it considers designations by donors as a matter of accountability.”

In conclusion, contributions by parents and others that designate a particular student are not deductible, even if the school (or other organization) purports to retain full control over the distribution of those contributions. A mere statement that the school exercises control is not enough.

EXAMPLE A church operates a school and charges annual tuition of $5,000. A parent contributes $5,000 to the school’s scholarship fund and specifies that the contribution be used for his child’s tuition (who attends the school). This “contribution” is not deductible. The church or school should so inform the parent at the time of the contribution and should decline the check.

EXAMPLE Same facts as the previous example, except that the donor is a neighbor rather than the student’s parent. The result is the same.

EXAMPLE A church establishes a scholarship fund to assist members who are attending seminary. A parent of a seminary student contributes $10,000 to the fund with the stipulation that the contribution be applied toward her son’s seminary tuition. Based on IRS Letter Ruling 9405003, this contribution would not be deductible if the parent understood that her contribution would benefit her son and the parent intended to benefit her son rather than the school. (This can be established by asking the donor whether she would have contributed to the scholarship fund if her son were not a seminary student.)

EXAMPLE A member contributes $2,000 to a school’s scholarship fund. The donor does not designate any student but leaves the distribution of her contribution to the discretion of the school’s scholarship committee. This contribution is tax-deductible.

EXAMPLE A member contributes $1,000 to a church building fund. This contribution is tax-deductible since it is to a church rather than to a specific individual.

EXAMPLE A donor disbursed funds to various college scholarship funds to pay tuition and related educational expenses of certain individual students selected by the colleges. The IRS contended that the payments were, in effect, gifts to individual students rather than deductible charitable contributions. A federal appeals court disagreed and held: “Although [the government] contends that the scholarship awards by [the donor] were, in effect, mere gifts to individual students, the record clearly shows that the payments were made to the state teachers colleges themselves and that [the donor] had no part in the selection of any individual recipient of a scholarship.” Sico Foundation v. United States, 295 F.2d 924 (Ct. Cl. 1961).

EXAMPLE A donor made contributions to a college scholarship fund. The first contribution was accompanied by a letter stating, in part:

I am interested in the work that your college is doing and I am enclosing my check for [a stated amount], which as I understand it, represents tuition for one term, plus book requirements. Of late, I have been interested in the career of Mr. Robert Roble, who is a very promising young man in my opinion, and whose family lives close to my summer home. I believe he deserves all the help he can get toward his education. I am aware that a donation to a scholarship fund is only deductible if it is unspecified; however, if in your opinion and that of the authorities, it could be applied to the advantage of Mr. Robert Roble, I think it would be constructive.” 

Subsequent contributions from the donor were marked “scholarship grants for Robert Roble.” A federal appeals court concluded:

It is clear from the record that the [donor] intended to aid Roble in securing an education and that the payments to the college were earmarked for that purpose. . . . ​If a scholarship was involved, it was one the [donor], not the college, awarded Roble. . . . ​[The donor’s payments] were for the sole benefit of one specified person, Robert Roble, rather than gifts to the college for the benefit of an indefinite number of persons. . . . ​The payments made were not to a general scholarship fund to be used as the college saw fit, but were to be applied to the educational expenses of Roble. . . . ​A contribution to an individual, no matter how worthy, does not qualify as a charitable deduction. Tripp v. Commissioner, 337 F.2d 432 (7th Cir. 1964).

EXAMPLE In 1968 the IRS approved a charitable contribution deduction for a corporation under the following facts:

The corporation is a large employer that obtains its trained employees principally from graduates of accredited colleges and other educational institutions. To assure an adequate supply of trained young people who may seek employment with the corporation and to respond in a charitable manner to the financial needs of such educational institutions, the corporation established a program for the advancement of higher education.

Under the program, amounts were made available to private and public educational institutions for their use in providing individuals with scholarships. The selection of these institutions was made on the following basis: (1) at least one scholarship was made available to each private institution that currently had 20 or more graduates employed by the corporation, and (2) further scholarships were made available to those public institutions from which the corporation drew a substantial number of graduates.

No one institution was awarded more than five scholarships. Each educational institution involved selected the recipients of the scholarships. Upon a determination of the amount of each scholarship, based on the need of the recipient, payment was made to the educational institution, which in turn made disbursements therefrom to or for the account of each student.

Also, under this program, the corporation made grants-in-aid to private institutions in the form of unrestricted funds, the amounts of which were equivalent to the regular tuition charges made by the institutions for students. The recipients of the scholarships were not connected with the corporation in any manner, and the educational benefits they derived from the corporation’s expenditures could be utilized by them as they chose, free of any present or future obligations to the corporation. And, in turn, the corporation was free of any responsibility to offer employment to the students who derived these benefits. Revenue Ruling 68-484.

EXAMPLE A donor contributed funds to the college scholarship funds at the colleges in which his son and daughter-in-law were enrolled. The contributions designated the donor’s son and daughter-in-law as the intended recipients. The Tax Court, in denying the deductibility of these payments, observed: “The amounts paid to [the two colleges] were distributed by these institutions as scholarships to individuals specifically designated by [the donor] including [his] son and daughter-in-law. The payments were, in effect, tuition payments for specifically designated beneficiaries, and as such are nondeductible personal expenses.” Lloyd v. Commissioner, T.C. Memo. 1970-95.

EXAMPLE A prominent donor (who served in the state legislature) established a scholarship fund for the benefit of students in his district. Each year one senior student from each high school was selected by the high-school principal on the basis of need and scholastic merit to receive proceeds from the scholarship fund. The donor did not participate in the selection of students to receive scholarships. Each check drawn on the scholarship fund was signed by the donor and made payable to a student and a college or university as joint payees. The donor claimed these payments as a deduction for charitable contributions.

The IRS denied a charitable contribution deduction for these payments. It claimed that deductions should be disallowed because the identity of the recipient of the scholarship was made known to the donor prior to the time the funds were disbursed.

A federal district court rejected the IRS position and ruled that the donor was entitled to claim a charitable contribution deduction for his payments. The court observed:

I am unwilling to place the ultra-technical interpretation on Section 170 of the Internal Revenue Code which is urged upon us by the Government. Under the facts presented here, the [donor] had no voice in the selection of the individuals who would benefit from the scholarship donations; [the donor] instructed the principals of the various high schools to select a student based upon need and merit. Any contributions which flow into a scholarship program result in benefit to both the educational institution and the individual recipients of those scholarships. No reason or authority is presented which would lead me to the conclusion that benefit by an individual scholarship recipient should defeat the deductibility of the gift; notwithstanding benefit by the individual student, the gift is nevertheless ‘for the use of’ an exempt entity. . . . ​The fact that the checks were made to the joint order of the student and the college or university is not inconsistent with plaintiffs’ intention to further the educational purposes of the high schools and colleges in question. Bauer v. United States, 449 F. Supp. 755 (W.D. La. 1978).

EXAMPLE Students at a religious educational institution had their tuition paid by sponsors. In many cases the sponsor was the student’s parent. Each sponsor signed a commitment form that set the contribution amount and payment schedule and indicated the names of the sponsor and the student. Space was also provided on the payment envelopes for the student’s name. The commitment form specified that contributions were nonrefundable and that the use of money was “solely at the discretion” of the organization. The IRS denied a charitable contribution deduction because deductibility requires both full control by the organization and the intent by the donor to benefit the charity itself and not a particular recipient. The commitment form and the envelopes indicated that the payments were designated for the benefit of particular students. IRS Revenue Ruling 79-81 (1979).

EXAMPLE A donor established a scholarship fund with a large gift from his estate with the stipulation that scholarships would be distributed to persons who bore the donor’s family name and attended either of two specified colleges that bore the donor’s family name. The IRS concluded that the scholarship gift was not tax-deductible as a charitable contribution, since it did not benefit a large and indefinite class (as is required of a charitable distribution). Rather, “the class of beneficiaries . . . ​is necessarily limited to a private class of persons.” This ruling will be relevant to those churches that have created scholarship funds for restricted students (such as church members attending seminary). The smaller the pool of eligible recipients, the more likely that any contributions to the scholarship fund will be deemed nondeductible by the IRS since they will be seen as benefiting a private class of persons rather than serving a public and charitable purpose by designating a large and indefinite class of potential recipients. IRS Letter Ruling 9631004.

EXAMPLE In 1999 the IRS released an internal memorandum (a “field service advisory”) addressing the question of whether parents can claim a charitable contribution deduction for tuition payments they make for their children who attend an Orthodox Jewish school. The parents cited the following facts in supporting their claim that tuition payments they made on behalf of their children were deductible as charitable contributions:

The IRS rejected all the parents’ arguments and concluded that the tuition payments were not deductible as charitable contributions. It observed that the parents in this case “are required to make specific payments in return for which they receive a benefit—religious and secular education for their children. Under the rationale postulated in Hernandez [discussed above], the parents are not entitled to a charitable contribution deduction for tuition payments made to Jewish religious schools.” FSA 9999-9999-201.

EXAMPLE A federal appeals court rejected a married couple’s claim that they could deduct 55 percent of the cost of their son’s tuition at a religious school because religious instruction comprised 55 percent of the curriculum and constituted an “intangible religious benefit” that did not reduce the value of their charitable contribution.

The court concluded, “Not only has the Supreme Court held that, generally, a payment for which one receives consideration does not constitute a contribution or gift . . . ​but it has explicitly rejected the contention . . . ​that there is an exception for payments for which one receives only religious benefits in return.”

The parents also argued that they could claim a charitable contribution deduction for the amount by which their tuition payments exceeded the market value of their son’s education. They claimed that the value of the education their son received was zero since the cost of an education at a public school was “free,” and therefore they could fully deduct the cost of their son’s tuition since the entire amount exceeded the “value” of the education received.

The court disagreed, noting that the value of their son’s education was the cost of a comparable secular education offered by private schools. Further, the court noted that the parents presented no evidence of the tuition that private schools charge for a comparable secular education, so there was no evidence showing that they made an excess payment that might qualify for a tax deduction. Sklar v. Commissioner, 2002-1 USTC 50,210 (9th Cir. 2002). See also Sklar v. Commissioner, 2008 WL 5192051 (9th Cir. 2008).

EXAMPLE Church members made contributions to their church as part of a scheme to deduct tuition payments made to private schools their children were attending. Members contributed to the church an amount equal to or exceeding the amount of their child’s tuition at a private school unrelated to the church. The school billed the church for the tuition, and the church paid it. At the end of the year, the church provided a receipt to the members, reflecting their total contributions for the year without any reduction for tuition the church paid. The receipt also stated that the member had received nothing in exchange for the contributions except intangible religious benefits.

The IRS classified this arrangement as a “disguised tuition payment program” that triggered tax penalties for aiding and abetting the understatement of tax ($1,000 for each person receiving a contribution statement per year) and an additional penalty of $10 for each quid pro quo contribution for which the church failed to provide a written receipt complying with the quid pro quo substantiation requirements (addressed under “Substantiation of Charitable Contributions” on page ). IRS Private Letter Ruling 200623063.

EXAMPLE A married couple paid for their son’s tuition at a church-affiliated university and claimed the full amount as a charitable contribution deduction on their tax return. The IRS denied the deduction, and the couple appealed to the United States Tax Court. The court agreed with the IRS that the couple could not deduct the tuition payments as a charitable contribution. It concluded:

In order for petitioners to be entitled to a charitable contribution deduction . . . ​for the payment made to the university, they must show the extent to which the tuition payment exceeds the market value of their son’s education and that the excess payment was made with the intention of making a gift. They have failed to establish that the amount paid to the university exceeded the market value of the education received by their son so as to take on the dual character of both a tuition payment and a charitable contribution. . . . ​Therefore, petitioners are not entitled to a charitable contribution deduction for their son’s tuition. Reece v. Commissioner, T.C. Summary Opinion 2009-59.

Tax benefits for parents with children in college

Congress has enacted several tax benefits to assist individuals and families with the cost of higher education. See “Education credits” on page .

Church-established scholarship funds

Many churches have established scholarship funds to provide financial assistance to members or their children who are attending college or seminary. Can parents deduct contributions they make to these funds if their child is a potential beneficiary? To illustrate, assume that a church establishes a scholarship fund to provide scholarships to church members who are attending seminary. In 2025 only one member is attending a seminary, and his parents contribute $10,000 to the scholarship fund. While their contribution is unrestricted, their son will be the sole beneficiary of their contribution, so it is not tax-deductible. Would it make a difference if 10 members were attending the seminary?

To be tax-deductible as a charitable contribution, a gift to a church or charity must benefit an indefinite class of beneficiaries. Whether unrestricted gifts to a scholarship fund are deductible will depend on the number of potential beneficiaries. The more the better since you must prove that the class of potential beneficiaries is indefinite. Frankly, this test is not met when only a few potential candidates exist. The problem is that parents of these students, in effect, get to deduct a substantial portion of their contributions to the fund. At some point, however, the number of potential beneficiaries is sufficiently large to allow a deduction.

Church leaders should consider this test in evaluating the deductibility of unrestricted contributions by parents to a church-established scholarship fund: the probability of the deductibility of such a gift equals the number of potential recipients. So, if a church adopts a scholarship fund to benefit seminary students and it has 2 students attending seminary, the probability of an unrestricted gift to the scholarship fund being tax-deductible would be 2 percent. If 15 students are potential recipients, the probability rises to 15 percent. This test has never been endorsed by the IRS or a court, but it does illustrate an important point: churches should not treat contributions to scholarship funds as tax-deductible unless a significant number of potential recipients exists that comprise a charitable class.

Conclusions

Be sure to review the conclusions at the end of the subsection “Benevolence funds” (see “Conclusions” on page ).

Restricted gifts to ministers can occur in various ways. For example, churches often collect an offering to honor a minister on a birthday or anniversary, at Christmas, or on another special occasion. Sometimes members make gifts directly to a minister on such occasions. The deductibility of such contributions is discussed under “Christmas and other special-occasion gifts” on page , “Retirement gifts” on page , and “Retirement Distributions Not Pursuant to a Formal Plan” on page .

It is also fairly common for individuals to attempt to supplement a minister’s compensation by making contributions to a church that are designated for the benefit of a particular minister. To illustrate, assume that Pastor R is a church’s youth pastor, that his annual compensation from the church is $20,000, and that his parents (who live in another state) want to supplement his income. As a result, they send $5,000 to the church earmarked for their son, which is paid by the church to Pastor R in addition to his stated salary of $20,000. This contribution is not tax-deductible by the parents, since it clearly was their intent to benefit their son. The church acted simply as an intermediary through which the gift was funneled (in many cases, in an attempt to obtain a charitable contribution deduction).

But what if the church informed the parents that their $5,000 gift would be applied to reducing the church’s obligation to pay a $20,000 salary? In other words, if the parents understand that their $5,000 gift will be applied toward the church’s commitment to pay a $20,000 salary (leaving the church with an obligation of $15,000), does this make a difference? Does relieving the church of $5,000 of its $20,000 obligation warrant a charitable contribution deduction?

This question was addressed directly by the Tax Court in a 1975 decision. Davenport v. Commissioner, 34 T.C.M. 1585 (1975). A couple paid $100 per month toward the housing expenses of their minister son and claimed a charitable contribution deduction for all of their payments. They argued that their payments were tax-deductible since they were relieving the church of an obligation to provide housing (or a housing allowance) for their son. In denying any charitable contribution deduction to the parents for their monthly payments, the court observed: “The cases are clear that the criteria for determining whether an amount is a charitable contribution is not whether the payment which is not made directly to the charity might incidentally relieve the charity of some cost but rather whether the payment is such that the contribution is ‘for the use of’ the charity in a meaning similar to ‘in trust for.’”

The court referred to an earlier decision in which it denied a charitable contribution deduction for a payment made by a taxpayer directly to an educational institution for the education and maintenance of a child who was a ward of the Illinois Children’s Home. Thomason v. Commissioner, 2 T.C. 441 (1943). In the prior case, the taxpayer had contended that since the Illinois Children’s Home would have had to pay for the education and maintenance of this boy had he not done so, his payments were “for the use of” that charity and should be tax-deductible. In holding that the amount paid by the taxpayer in the Thomason case to the educational institution was not a charitable contribution, the court observed that these payments were earmarked “from the beginning not for a group or class of individuals, not to be used in any manner seen fit by the home, but for the use of a single individual” in whom the taxpayer “felt a keen fatherly and personal interest.” The court further observed that “charity begins where certainty in beneficiaries ends,” quoting from a Supreme Court case which held that the uncertainty of the objects of the donation is an essential element of charity. After reviewing this precedent, the court concluded:

Here, whether the [church] would have chosen to maintain a house . . . ​for the use of [the taxpayer’s] son and his family as living quarters . . . ​is not shown by this record. It may have been that had the taxpayer paid the [$100 per month] directly to the church, that organization would have chosen to use the funds otherwise. . . . ​However, even were there something in this record to indicate that the church would have rented a house for the use of the taxpayer’s son . . . ​it would not follow that the deduction would be allowable since by making the payments directly to the landlord the taxpayer took away the option of the church with respect to its use of the funds. As we have pointed out in several cases, the charity must have full control of the funds donated in order for a taxpayer to be entitled to a charitable deduction, and such is not the situation where the funds are restricted by the donor for the use of a particular individual. In the instant case, in our view the evidence as a whole shows that it was the taxpayer’s intent to benefit his son by insuring that his son had a place to live with his family. . . . ​Under these circumstances the payments were for the use or benefit of a particular individual, the taxpayer’s son, and therefore are not charitable deductible contributions even though incidentally the payments . . . ​may have relieved the church of the necessity of paying for a place for the taxpayer’s son to live.

Be sure to review the conclusions at the end of the subsection “Benevolence funds” (see “Conclusions” on page ).

Should churches ever return a contribution to a donor? This is a question that nearly every church leader faces eventually. Such requests can arise in a variety of ways. Consider the following:

EXAMPLE A church member donates $2,500 to his church during the first six months of 2025. In July 2025, due to a financial crisis, he asks for a refund of his contributions.

EXAMPLE A church member donates $2,000 to her church during the first six months of 2025. In July 2025 she becomes upset with the pastor and begins attending another church. She later asks the treasurer of her former church for a refund of her contributions.

EXAMPLE A church member donates $1,000 to the church building fund in 2019. In 2025 the church abandons its plans to construct a new building. The member asks the church treasurer to return her $1,000 contribution.

Unfortunately, the IRS and the courts have provided little guidance on this question, and what little guidance that exists is conflicting and ambiguous. This section will summarize the leading precedent.

Most charitable contributions are unrestricted, meaning that the donor does not specify how the contribution is to be spent. An example would be a church member’s weekly contributions to a church’s general fund.

Unrestricted contributions are unconditional gifts. A church has no legal obligation to return unrestricted contributions to a donor under any circumstances. In fact, a number of problems are associated with the return of unrestricted contributions to donors. These are explored below.

Inconsistency

A return of a donor’s contributions would be completely inconsistent with the church’s previous characterization of the transactions as charitable contributions. As already noted, a charitable contribution is tax-deductible because it is an irrevocable gift to a charity. If a church complies with enough donors’ requests to refund their contributions, this raises a serious question as to the deductibility of any contribution made to the church. Contributions under these circumstances might be viewed as no-interest “demand loans”—that is, temporary transfers of funds that are recallable by donors at will. As such, they would not be tax-deductible as charitable contributions.

Amended tax returns

Donors who receive a “refund” of their contributions would need to be advised to file amended federal tax returns if they claimed a charitable contribution deduction for their “contributions” for any of the previous three tax years. This would mean that donors would have to file a Form 1040-X with the IRS. In many states, donors also would have to file amended state income tax returns.

Church liability

A church that returns a charitable contribution to a donor who does not file an amended tax return to remove a prior charitable contribution deduction faces potential liability for “aiding and abetting” in the substantial understatement of tax. IRC 6701(b).

Inurement

One of the conditions for tax-exempt status under section 501(c)(3) of the tax code is that none of a church’s assets inures to the benefit of a private individual. Since unrestricted contributions are church assets, a church that voluntarily returns such contributions to donors is distributing its resources to private individuals. It is possible that the return of such contributions would amount to prohibited inurement, thereby jeopardizing the church’s tax-exempt status. Inurement is discussed more fully under “General Considerations” on page .

Refunds

Compliance with a donor’s demand for the return of a contribution would morally compel a church to honor the demands of anyone wanting a return of a contribution. This would establish an undesirable precedent.

First Amendment issues

A few courts have concluded that the First Amendment’s guarantees of the nonestablishment and free exercise of religion bar the civil courts from refunding charitable contributions to donors if doing so would implicate religious doctrine. This issue is addressed below.

IRS response to a question submitted by a member of Congress

In 2010 the IRS responded to questions submitted by Congresswoman Kay Granger on behalf of one of her constituents regarding the tax consequences associated with a charity’s return of a charitable contribution. The IRS observed:

We are pleased to provide you with the following general information about the federal income consequences to a donor who receives a repayment of a charitable gift plus interest on the repayment. . . .

If a taxpayer receives the full tax benefit of a charitable contribution deduction when making a contribution to a qualified charity, and the charity repays the contribution to the taxpayer in a subsequent year, the “tax benefit rule” requires the taxpayer to include in gross income in that subsequent year the amount of the previously deducted contribution.

A taxpayer who receives interest on a repaid contribution must also include that amount in income. An individual taxpayer generally includes interest in income when it is available to the taxpayer free of substantial limitations and restrictions. . . .

If the taxpayer uses a repaid contribution to make a new charitable contribution to a different charitable organization, he or she may claim a charitable contribution deduction for the new contribution, subject to the usual restrictions and limitations on charitable contribution deductions.

The tax benefit rule referenced in the above-quoted IRS response is codified in section 111 of the tax code, which states: “Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.”

In several cases, the IRS and the courts have ruled that section 111 requires donors who have received a refund of a charitable contribution made in a prior year to report the refund as taxable income in the year of the refund rather than file an amended return for the year of the contribution deleting that contribution. See, e.g., Revenue Ruling 75-150.

EXAMPLE A California court ruled that a church is not obligated to return unrestricted contributions to donors absent fraud or mistake. A church member (the “plaintiff”) sued his church, seeking a refund of a contribution he had made to the church on the ground that his contributions were “converted” from legitimate church use to inappropriate and unauthorized expenses, including the purchase of a home, furnishings, landscaping, cars, clothes, a swimming pool, a Jacuzzi, and other items. The trial court disagreed, and the member appealed.

A state appeals court noted that the elements of conversion are as follows: “the plaintiff owns or has a right to possession of personal property; defendant disposed of the personal property in a manner that is inconsistent with the plaintiff’s rights; and damages.” However, “where plaintiff neither has title to the property alleged to have been converted, nor possession thereof, he cannot maintain an action for conversion.” The question is whether the plaintiff “had title to or possession of the money, or whether he relinquished both title and possession by making valid gifts. If he made valid gifts, then the trial court did not commit error because he could not establish the requisite title to or possession of the money. If he did not make valid gifts, then the trial court’s ruling is not supported by its logic.”

The court noted that there are three requirements for a valid gift: “There must be an intent on the part of the donor to make an unconditional gift; there must be an actual or symbolical delivery that relinquishes all control; and the donee must signify acceptance.”

The court concluded that the plaintiff

failed to establish that any of the necessary elements of a gift are missing. He suggests he did not intend to make unconditional gifts of money because he was deceived. But he misses the point. Even if he was deceived, he was induced into making unconditional gifts. He indicates in his brief that he gave the money for “specific non-profit needs within the church,” and his “giving was akin to a conditional gift, with the specific intent that he was not giving up ownership of his monies as if he was tossing those funds in the trash.” Thus, he suggests that the money was converted because it was not used as he intended. . . . ​To dispel the plaintiff’s notion he has a conversion claim, we highlight that his gifts were unconditional because they were present transfers. He may have wished his money to be used in a specific way, but he relinquished all control. To the degree he communicated his wishes, the church may have had a moral obligation to honor those wishes, but it did not have a legal obligation.

The court added that the plaintiff “cannot be heard to complain that he was left with no remedy if he was, in fact, deceived by [the church].” It pointed out that “if a donor’s intent is induced by mistake or fraud, the gift may be rescinded or set aside in an action in equity. Consequently, the plaintiff could have sued to rescind or set aside his gifts,” but “a conversion claim was not a viable substitute.”

Most churches have been confronted with a donor asking for a return of his or her contributions. Such requests usually are generated by a decision to change churches or by a financial emergency. For whatever reason, such requests can be perplexing. Church leaders often do not know how to respond. This case reflects the conclusion that most courts have reached when considering the legal basis of donors’ requests for a return of some or all of their unrestricted contributions. As this court noted, there generally is no legal basis for honoring such requests, since charitable contributions constitute “gifts,” and gifts represent an irrevocable transfer of all a donor’s right, title, and interest in donated funds or property. Therefore, there is no legal justification for donors to reclaim donations they previously made for which they have no more legal interest to support a request or demand for a refund. However, this court mentioned two possible exceptions to this general rule. First, donors who make a restricted contribution for a stated purpose (e.g., a building fund) may have a legal right to enforce their designation. Second, the court suggested that donors may be able to reclaim a contribution based on fraud or mistake. Hawkins v. Baptist Church, 2017 WL 1007812, (Cal. App. 2018).

It is common for church members to make “restricted” charitable contributions to their church specifying that their contributions be used for a specified purpose. What happens if a church board applies such contributions to some other purpose? Are there legal consequences for either the church or the church board? The courts have reached different conclusions, as noted in this section.

Donors can enforce their designations or compel a return of their contributions

Many courts have concluded that donors who make restricted contributions to a charity can enforce their contributions or compel a return of their contributions if the charity uses the restricted funds for other purposes. These cases usually are based on

The leading cases are summarized below.

Breach of implied trust

Some courts have concluded that a donor’s restricted contribution creates an implied trust requiring the charity to use the contribution for the restricted purpose.

EXAMPLE A woman executed a will in which she left a portion of her estate “to the Chattowah Open Land Trust, Inc., for qualified conservation purposes.” The Georgia Supreme Court ruled that this language created a charitable trust that was legally enforceable:

This devise of property reflects all of the composite elements of an express trust: (1) an intention by a [donor] to create a trust; (2) a trust property; (3) a beneficiary; (4) a trustee; and (5) active duties imposed upon a trustee. Decedent devised her property to Chattowah to use for conservation purposes for the benefit of the public. Decedent placed active duties on the trustee to maintain the property in perpetuity. . . . ​Therefore, the probate court did not err in its finding that decedent’s will unambiguously created a charitable trust. Chattowah’s argument that the will failed to use the terms ‘trust’ and ‘trustee’ does not alter this outcome, as the strict use of these terms is not required to establish a trust. Chattowah Open Land Trust, Inc. v. Jones, 636 S.E.2d 523 Ga. 2006).

EXAMPLE A gift to the Bible Institute Colportage Association of Chicago “to be used in the publication and dissemination of evangelical Christian literature in harmony with its Articles of Incorporation” created a charitable trust that was for the benefit of those who might receive the literature and was binding on the Association’s successor as trustee of the bequeathed assets. One of the court’s judges filed a concurring opinion in which he noted that the court’s decision seemed to conflict with the established rule that a mere statement in a will of an intended purpose for a gift to charity does not convert the gift into a charitable trust. Bible Institute Colportage Association v. St. Joseph Bank & Trust Co., 75 N.E.2d 666 (Ind. App. 1947).

EXAMPLE A church member’s will left the balance of his estate as follows: “I give to my executor, Oren D. Becker, the remainder and residue of my estate to hold in trust, to be invested by him and used to perpetuate my name and interest in Hawes Methodist Episcopal Church and to assist needy and worthy causes and persons as he understands my wishes and practice to be when living, and at his death if there be still a residue or remainder of my estate, it shall go to the Elizabeth Gamble Deaconess Home Association.” The Ohio Supreme Court ruled that the will created a valid charitable trust that was legally enforceable. The court concluded:

To my mind there was first created by this will a valid charitable trust for the benefit of the Hawes Methodist Episcopal Church, and this direct bequest to the Hawes Methodist Episcopal Church was clear, unambiguous, and enforceable in a court of equity. This state is committed to the universal doctrine that charitable trusts should be liberally construed to carry out the intentions of the testator in the creation and execution of a charitable trust, and that where there is no uncertainty in trustee, beneficiary or object, or manner of execution, a court of equity will not permit the same to fail. Becker v. Fisher, 147 N.E. 744 (Ohio 1925).

EXAMPLE The Mississippi Supreme Court has ruled:

Rather, each cause of action asserted against a religious organization claiming First Amendment protection, must be evaluated according to its particular facts. For instance, with respect to a claim of breach of fiduciary duty, a religious organization might enjoy First Amendment protection from claims of failure to provide a certain quantity or quality of religious instruction in exchange for tithes and offerings, but might not enjoy such protection from claims that it solicited and accepted funds to be held in trust for a specific, stated purpose, but spent the funds for an unauthorized purpose. Roman Catholic Diocese v. Morrison, 905 So.2d 1213 (Miss. 2005).

However, as noted in the next section of this chapter, other courts have concluded that restricted gifts to charity do not create a charitable trust.

The general law of contributions

Some courts have concluded that charities that use restricted contributions for different purposes violate the “general law of contributions.” The leading case is First Church of Christ Scientist v. Schreck, 127 N.Y.S. 174 (1911), in which a New York court explained the rule as follows: “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the fund to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.”

This principle has been applied by several courts. The leading cases are summarized below.

EXAMPLE On August 29, 2005, Hurricane Katrina ravaged the Mississippi Gulf Coast. The storm caused extensive damage to the property of St. Paul Catholic Church. On November 27, 2005, the diocesan bishop issued a decree merging St. Paul Church with Our Lady of Lourdes Church to form a new parish called the Holy Family Parish. The decree stated that the Holy Family Parish would maintain two church edifices, St. Paul Church and Our Lady of Lourdes Church. Pursuant to this decree, plans were initiated to rebuild St. Paul Church, and donations were solicited and given for that purpose. More than one year later, on March 13, 2007, the bishop issued a second decree announcing that Our Lady of Lourdes would be the only church in the Holy Family Parish. This decision effectively closed the doors of St. Paul Church. This decision was made because Our Lady of Lourdes Church, unlike St. Paul Church, is located in a non-flood-zone area.

Several of St. Paul Church’s former parishioners filed suit against the Catholic Diocese of Biloxi, the pastor of St. Paul Church, and the bishop (the “church defendants”), asserting that any financial contributions made for the specific purpose of rebuilding St. Paul Church were held in trust and must be used exclusively for rebuilding efforts, and the church defendants violated said trust. A trial court dismissed the lawsuit on the ground that any resolution of the controversy by a civil court would violate the First Amendment guaranty of religious freedom.

On appeal, the Mississippi Supreme Court ruled that the trial court erred in dismissing the plaintiffs’ claim that the church defendants had improperly diverted restricted funds:

Plaintiffs submit that church defendants hold any donations made for the purpose of rebuilding the St. Paul church in trust. They argue that these funds were given based on church defendants’ promise to rebuild the church, and that the funds may not be used for any other purpose. They assert that church defendants breached their fiduciary duties by merely contacting donors for permission to use the donors’ contributions toward a different purpose. Plaintiffs thus seek to enjoin the diversion of the funds, and request an adjudication of whether church defendants’ decisions have been fiscally irresponsible, and whether those funds must be used in a manner mutually agreeable to them or in their best interest.

The Mississippi Supreme Court then explained the general law of contributions as follows, quoting the Schreck case (see above): “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the funds to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.” Schmidt v. Catholic Diocese, 18 So.3d 814 (Miss. 2009).

EXAMPLE The Mississippi Supreme Court remanded the case in the previous example back to the trial court for further consideration. This case was eventually appealed back to the state supreme court. The court concluded, “We hold that . . . ​plaintiffs who donated have a legally enforceable right to the return of their donations once the church announced it was not going to rebuild St. Paul’s.” It again quoted the general law of contributions as explained by the New York court in the Schreck case (see above): “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the fund to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.”

EXAMPLE An Arizona church planned on constructing a much-needed building facility for Sunday-school purposes. A building committee was appointed to consider a building site and financing for the planned building. A married couple (the “donors”) informed the building committee that they would “start the ball rolling” by a contribution of stock worth $10,000 to be applied to the construction of the Sunday-school building and a plaque honoring the church’s long-term pastor. The donors proceeded to donate the stock to the church. A year later, the pastor retired, and the church board wrote to the donors and asked for permission to use $8,000 of the stock to purchase lots across the street from the church. The donors refused to grant such permission and requested the return of the stock. This request was refused.

The donors sued the church to recover the stock on the theory that the stock was specifically limited to the building of an addition to the Sunday-school building of the church and as a memorial for the pastor, and for no other purpose. The trial court granted the church’s motion to dismiss the lawsuit for failure to state a cognizable claim.

A state appeals court noted that the donors’ offer to “start the ball rolling” by giving $10,000 worth of stock to the church “was a charitable subscription.” As to charitable subscriptions, “the law in this country is neither uniform nor well settled. Some courts have failed to find any consideration in a promise to make a gift. But where the gift has passed into the hands of the donee, there is an implied promise agreeing to the purposes for which it is offered from the acceptance of the donation and there arises a bilateral contract supported by a valuable consideration.” The court concluded:

After the donors sent the stock to the church’s treasurer, the church exercised dominion over it. . . . ​The communication received by the donors which requested permission to use $8,000 of the gift for land and the refusal to return the stock is further evidence of the exercise of dominion over the stock. . . . ​We hold that on the present state of the record the church, by exercising dominion over the stock, assented to the conditions of the donation and is bound both in law and in good conscience to perform the conditions or to return the stock.

That the stock and dividends must be returned if the Church fails to perform the purposes of the gift has been decided in parallel circumstances We think the rule stated in First Church of Christ Scientist v. Schreck, 127 N.Y.S. 174 (1911) (see above) is the correct one applicable to the case before us: “Where a religious society raises a fund by subscription for a particular purpose, it cannot divert the fund to another purpose, and, if it abandons such purpose, the donors may reclaim their contributions.” Dunaway v. First Presbyterian Church, 442 P.2d 93 (Ariz. 1968).

EXAMPLE The Nebraska Supreme Court concluded:

Where a church edifice has been erected by voluntary contributions and upon the promise and agreement that the building is to be used for certain specified purposes, the contributors to the fund have a right to insist that the property be used for the purposes named, and may enjoin a sale of the building where no adequate cause is shown and the effect would be to divert the funds from the use intended and apply them elsewhere. . . . ​A church organization, like any other, must act in good faith with those contributing to the erection of an edifice for its use. A church edifice is the result, ordinarily, of many voluntary subscriptions. It would be the property of those who contributed to its erection, but for the fact that it was made as a donation to a particular society. The donation, however, is for a particular purpose—the erection of a church edifice. The money so contributed cannot be diverted and applied to another use without the donors’ consent as the erection of a building for a college, however much the latter might be needed. If good faith requires the application of the money to the uses for which it was designed, the same rule would seem to apply after the building was erected. Avery v. Baker, 43 N.W. 174 (Nebr. 1889).

Fraud

Example A federal district court in Arkansas allowed a group of 185,000 donors to bring a class action lawsuit for fraud against a missions agency for allegedly violating the assurance it repeatedly gave donors that their designated contributions would be spent “100 percent” for the designated purpose. This case demonstrates a possible vulnerability of churches that divert designated funds to an undesignated purpose—a class action lawsuit by donors seeking a return of their contributions. There were 185,000 donors whose common interests were being advanced by the class action described in this case. Some $375 million in donations was at issue. These numbers were inflated because a national ministry was involved, but the same principle can apply to church members seeking redress for a church’s violation of donors’ designations. 2018 U.S. Dist. LEXIS 155586; 2018 WL 4323938.

Wrongful diversion of restricted funds

A few courts have compelled charities to refund restricted contributions to donors when they used the funds for other purposes. In a leading case, a woman, Elizabeth Barker, died in 1953. Her will named her son as executor of her estate and distributed her assets equally to her son and three daughters. The estate was closed in 1955, following payment of debts and distribution of assets. In 1958 the son informed a local court that there were assets belonging to the estate that were recently discovered, necessitating the reopening of the estate. The court reopened the estate, and the son identified the additional asset as a $1,000 charitable contribution his mother had made to her church for the construction of a new church building. Since the church had abandoned the construction project, the estate was entitled to a return of the contribution.

The church acknowledged that it initiated a building fund drive in the years 1950 and 1951 for the purpose of acquiring another site and erecting a new church building and that substantial contributions were received, including $1,000 from the executor’s mother. With part of the funds so raised, a site was purchased.

The parties agreed that a pledge card used in the campaign was signed by the deceased and that she had pledged $1,000 for the building fund. In the years 1956 and 1957, the church board decided not to build the new church. At an annual parish meeting in January 1957, it was resolved that the new site should be sold and that on request, the contributors would be reimbursed for their contributions, and the remaining funds would be spent (1) for necessary repairs and improvements of the present church building and (2) for establishing and maintaining a parochial mission of St. Barnabas Church. The sale was made at a profit of $24,000.

Some contributors requested a return of their contributions pursuant to the resolution, and all such contributions were returned. The funds raised in the drive and the profits from the sale of the lot, less only the funds returned to contributors on request, were used to rehabilitate the existing church.

The executor of Elizabeth Barker’s estate requested the return of the $1,000 contribution made by the deceased to the building fund, but the request was refused by the church, and no refund was made to the decedent’s estate or to the executor. The executor sued the church, demanding that it disgorge itself of the $1,000 contribution.

A trial court dismissed the executor’s claims, but this ruling was reversed on appeal by the Nebraska Supreme Court. The court concluded that the church had to refund the $1,000 contribution to the estate. The court listed the following four factors that establish a “diversion of designated funds” claim:

Barker v. Wardens and Vestrymen of St. Barnabas Church, 126 N.W.2d 170 (Nebr. 1964).

Breach of fiduciary duty

A few courts have compelled charities to refund restricted contributions to donors on the basis of a breach of their fiduciary duties when they used the funds for different purposes.

EXAMPLE A New Jersey court concluded that a married couple who donated $50,000 to an animal shelter for construction of a new and large facility containing separate rooms for larger dogs and older cats was entitled to a refund of their contribution after the shelter announced that it was not able to honor the donors’ conditions. The court noted that “by opting to disregard the donors’ conditions, the shelter breached its fiduciary duty. Under these circumstances, requiring it to return the gift appears not only eminently suitable, but a mild sanction.” The court concluded that “under the facts presented here, it would be a perversion of equitable principles to permit a charity to aggressively solicit funds from a donor, accept the donor’s unequivocally expressed conditional gift, and thereafter disregard those conditions and rededicate the gift to a purpose materially unrelated to donor’s original purpose.”

The court “categorically rejected” the shelter’s argument that a ruling in favor of the donors in this case would cause all charities in the state to risk losing contributions committed to them “merely because they take longer than anticipated to raise funds needed to build a new facility or start a new initiative.” This “parade of horribles” argument “is based on mere speculation and is not rooted to the salient facts of this case.” Adler v. Save, 74 A.3d 41 (N.J. Super. A.D. 2013).

Donors cannot enforce their designations or compel a return of their contributions

In several cases, the courts have refused to allow donors to enforce their designations or receive a refund of their restricted contributions. This result usually is based on one of the following grounds:

Definition of gift

A gift is a transfer of the donor’s entire interest in the donated property. As one court explained, “A gift is a voluntary, gratuitous transfer of property by one to another where the donor manifests an intent to make such a gift and absolutely and irrevocably delivers the property to the donee. Moreover to prove a gift it must be shown that the donor has relinquished all present and future dominion and power over the subject matter of the gift.” In re Marriage of Simmons, 409 N.E.2d 321 (Ill. App. 1980).

According to this definition, a donor whose restricted contribution to a church constitutes a gift lacks the legal authority to enforce it, since he or she has “relinquished all present and future dominion and power” over the contribution.

On the other hand, a contribution that is made in trust to a church or charity for a specified purpose is a charitable trust. The church or charity holds the contribution as a trustee and must ensure that the donor’s specified purpose is honored. The church or charity has no authority to apply the contributed funds or property for a purpose other than what was specified by the donor in creating the trust. One court explained the distinction between gifts and charitable trusts as follows: “We note the difference between an absolute devise or gift and one in trust to a charitable institution. In the former, the property becomes an asset of the corporation to be used in such manner as the corporation deemed best, while in the latter, the property is held by the corporation, not as its own, but in the capacity as a trustee, or as an instrumentality of the [donor] in carrying out the directions.”

Are restricted contributions to churches gifts that the donors no longer can enforce, or are they charitable trusts that are enforceable? A leading authority on trust law answered this question as follows: “The court will examine carefully all the clauses of the instrument and the situation of the parties in order to decide whether the phrases used were intended to be binding upon the donee and to make him trustee for charity, or whether he was to be an absolute owner with only moral obligations by reason of the suggestions or requests from the donor as to the use of the property given.” Bogert, The Law of Trusts and Trustees § 324.

One court has noted that “the mere statement in a will of the purpose for which the property is to be used does not create a trust.” On the other hand, “as a general proposition charitable trusts are favored by the law.” St. Mary’s Medical Center v. McCarthy, 829 N.E.2d 1068 (Ind. App. 2005).

To summarize, if a restricted contribution to a church is a gift, then the church is free to use the contributed funds or property in any manner it chooses, and neither the donor nor anyone else has the legal authority to enforce the original designation. On the other hand, if a restricted contribution is deemed to be a charitable trust, then the designation is enforceable. Clearly, this distinction is critical when addressing the enforceability of a restricted contribution. Unfortunately, in many cases it is not an easy task to decide whether a contribution is a gift or a charitable trust. Some of the leading cases to address this distinction are summarized below.

EXAMPLE A donor’s will bequeathed assets to the Methodist Church “to the Northwestern Branch of the Women’s Foreign Missionary Society to be used for China, India and Africa.” A court concluded that this was “a gift absolute without restrictions as to use” and did not create a charitable trust. Stockton v. Northwestern Branch of Women’s Foreign Missionary Society of the Methodist Episcopal Church, 133 N.E.2d 877 (Ind. App. 1956).

EXAMPLE An Indiana court addressed the question of whether a restricted gift to charity is legally enforceable, and under the facts presented concluded that a restricted gift was not enforceable by an heir of the original donor. In 1950 a woman executed a last will and testament that bequeathed $250,000 to a hospital for the construction of a chapel. Following the donor’s death, a chapel was constructed. It contained a plaque noting that it was a memorial to the donor. In 2003 the hospital decided that it would be necessary to expand its facilities and that such expansion would require demolition of the chapel. In 2004 the hospital took steps to dismantle the chapel, including removing the stained-glass windows. A descendant of the donor asked a court to block the demolition of the chapel. A trial court issued an order permanently enjoining the hospital from destroying the chapel and ordering it to restore the chapel to its original condition. The hospital appealed.

The appeals court began its opinion by making a distinction between “an absolute gift and one in trust to a charitable institution. In the former, the property becomes an asset of the corporation to be used in such manner as the corporation deemed best, while in the latter, the property is held by the corporation, not as its own, but in the capacity as a trustee.” The court noted that the question of whether the language of a will or other document “was intended to create a charitable trust, binding on the recipient, has been litigated in a number of cases.” In answering this question, a court must “examine carefully all the clauses of the instrument and the situation of the parties in order to decide whether the phrases used were intended to be binding upon the charity . . . ​or whether it was to be an absolute owner with only moral obligations by reason of the suggestions or requests from the donor as to the use of the property given.”

The court stressed that “the mere statement in a will of the purpose for which the property is to be used does not create a trust.” On the other hand, “as a general proposition charitable trusts are favored by the law.”

Did the donor in this case intend to make an outright gift to the hospital, subject to its full discretion and control? Or did she intend to create a perpetual charitable trust that was beyond the power of the hospital to change? The court concluded that there was no question that the donor intended to make a charitable gift of some kind to the hospital. The donor’s purpose (funding a chapel) “was met when the chapel was constructed and a plaque memorializing the donor was placed there.” Further, “the general rule is that the mere statement of the purpose for a charitable gift does not transform it into a charitable trust.” Beyond that, the donor’s will “says nothing as to how long the memorial had to exist in order for it to be valid, or what would happen should [the hospital] no longer want the chapel before the end of its useful life.” In further support of its conclusion that the donor had not created a perpetual charitable trust, the court noted that the donor’s will had been drafted by an experienced attorney who knew how to create a perpetual trust if this had been the donor’s desire.

The donor’s heir claimed that whenever a restricted gift is made to a charity, the charity holds the property subject to a “condition subsequent,” meaning that the gift is revoked if the charity uses the property for some other purpose. Once again, the court disagreed: “Although no definite or particular form of expression is absolutely essential to the creation of a condition subsequent, it must be manifest from the terms of the will that the gift was made on condition and the absence of the words usually used for such purpose is significant. Conditions subsequent are not favored in law and always receive a strict construction. A condition subsequent will not be implied from a mere declaration in the deed that the gift is made for a special purpose.” The court quoted from a leading treatise on the law of trusts: “The clear majority rule is that nothing short of express provisions for forfeiture and either a reverter, a gift over or a right to retake the property in the donor or his heirs would enable a donor to effectively impose a condition subsequent.” The court noted that the donor’s will in this case

contained nothing to indicate the required duration of the [chapel]. . . . ​The will also contains no reverter language to indicate what should happen to the chapel, or the funds used to build it, if the hospital no longer wanted the chapel on its premises. . . . ​When the language of an instrument does not clearly indicate the grantor’s intention that the property is to revert to him in the event it is diverted from the declared use, the instrument does not operate as a restraint upon alienation of the property, but merely expresses the grantor’s confidence that the grantee will use the property so far as may be reasonable and practicable to effect the purpose of the grant.

The court concluded by noting that the donor’s gift in fact had been used to construct a chapel that had been used continuously for nearly 50 years and that “although charitable gifts should be encouraged so far as possible, charities themselves should not be bound to one particular use of bequeathed property for multiple generations unless they are on clear notice that such is a requirement of the bequest.” St. Mary’s Medical Center v. McCarthy, 829 N.E.2d 1068 (Ind. App. 2005).

EXAMPLE A woman executed a will that left most of her estate to “be held in trust by the Board of Managers of the Foreign Missionary Society of the Methodist Episcopal Church of the United States of America for the following purposes: After all my debts, bequests, and provision for my burial, etc., be paid, that sufficient funds be used to educate as Bible readers in India six girls . . . ​the money remaining after that set aside for the education of the aforesaid Bible readers to be applied to the purchase of a building to be used for the education of girls in India.” A Maryland court concluded:

We say that this will creates no trust, because none was intended to be created; and the evidence that none was intended to be created is furnished by the fact that the gift, whatever the language used in making it, was to a corporation capable of taking [donations] for its purposes, some of which purposes are precisely those indicated in the will as the ones to which the funds were to be devoted. The gift is, therefore, not to the society in trust, but to it for its legitimate corporate uses, and is free from restrictions other than the conditions that have been indicated. Women’s Foreign Missionary Society of the Methodist Episcopal Church v. Mitchell, 44 A. 737 (Md. 1901).

EXAMPLE A donor’s will bequeathed his house to his church “to be used as a parsonage.” An Ohio court concluded that this language did not transfer the home in trust to the church for charitable purposes, and the church received unrestricted title to the property and could sell it rather than using it as a parsonage. First Presbyterian Church v. Tarr, 26 N.E.2d 597 (Ohio 1939).

Standing

A fundamental requirement in any lawsuit is that the plaintiff have “standing.” Standing means that the plaintiff has suffered an injury to a legally protected interest that can be redressed by a civil court. Since no gift occurs unless a donor absolutely and irrevocably transfers title, dominion, and control over the gift to the donee, it follows that donors have no legal interest to protect when their restricted gifts to charity are not honored. To illustrate, in a frequently cited case, the Supreme Court of Connecticut observed: “At common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust unless he or she had expressly reserved the right to do so.” Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997).

How can a donor who has made a restricted contribution to a church sue to enforce the designation when a charitable contribution, by definition, is a transfer of all of the donor’s interest in the donated funds or property to the church? Standing poses a significant legal barrier to any donor who is considering litigation as a means of enforcing the terms of a restricted gift.

One judge aptly observed: “In considering the subject of standing, I begin with the observation that, when a charitable gift is made, without any provision for a reversion of the gift to the donor or his heirs, the interest of the donor and his heirs is permanently excluded.” Smithers v. St. Luke’s-Roosevelt Hospital Center, 723 N.Y.S.2d 426 (2001) (Judge Friedman, dissenting). This judge quoted from a leading treatise on trust law:

There is no property interest left in the [donor] or his heirs, devises, next of kin, or legatees. The donor or his successors may have a sentimental interest in seeing that his wishes are respected, but no financial [interest] which the law recognizes . . . ​and hence neither he nor they are as a general rule permitted to sue the trustees to compel them to carry out the trust. . . . ​The better reasoned cases refuse to permit the donor during his lifetime, or his successors after his death, to sue merely as donor or successors to compel the execution of the charitable trust. Bogert, Trusts and Trustees, § 415.

Section 391 of the Restatement (Second) of Trusts, a respected legal treatise that has been adopted in many states, specifies that donors or their heirs may not enforce the terms of a charitable gift: “A suit can be maintained for the enforcement of a charitable trust by the attorney general or other public officer, or by a co-trustee, or by a person who has a special interest in the enforcement of the charitable trust, but not by persons who have no special interest or by the [donor] or his heirs, personal representatives or next of kin” [emphasis added].

Several courts have concluded that donors lack the legal authority to enforce a restricted gift to charity, usually on the basis of one or both of the two principles described above (the definition of gift, or a lack of standing).

While a donor may not have standing to enforce a restricted gift to a church, this does not mean the church can ignore it. Most states have enacted laws empowering the attorney general to enforce the terms of such gifts. An official comment to section 348 of the Restatement (Second) of Trusts, a respected legal treatise that has been adopted in many states, specifies:

Where property is given to a charitable corporation, particularly where restrictions are imposed by the donor, it is sometimes said by the courts that a charitable trust is created and that the corporation is a trustee. It is sometimes said, however, that a charitable trust is not created. This is a mere matter of terminology. The important question is whether and to what extent the principles and rules applicable to charitable trusts are applicable to charitable corporations. Ordinarily the principles and rules applicable to charitable trusts are applicable to charitable corporations. Where property is given to a charitable corporation without restrictions as to the disposition of the property, the corporation is under a duty, enforceable at the suit of the attorney general, not to divert the property to other purposes but to apply it to one or more of the charitable purposes for which it is organized. Where property is given to a charitable corporation and it is directed by the terms of the gift to devote the property to a particular one of its purposes, it is under a duty, enforceable at the suit of the [state] attorney general, to devote the property to that purpose [emphasis added]. Section 348, comment f.

Another leading legal treatise states: “The public benefits arising from the charitable trust justify the selection of some public official for its enforcement. Since the attorney general is the governmental officer whose duties include the protection of the rights of the people of the state in general, it is natural that he has been chosen as the prosecutor, supervisor, and enforcer of charitable trusts, both in England and in the several states.” Bogert, Trusts and Trustees § 411. Several courts have recognized the exclusive authority of the state attorney general to enforce the terms of completed gifts.

EXAMPLE The Connecticut Supreme Court, after ruling that donors have no legal right to enforce their gifts to charity, concluded that the attorney general could do so:

The general rule is that charitable trusts or gifts to charitable corporations for stated purposes are [enforceable] at the instance of the attorney general. . . . ​Although gifts to a charitable organization do not create a trust in the technical sense, where a purpose is stated a trust will be implied, and the disposition enforced by the attorney general, pursuant to his duty to effectuate the donor’s wishes. . . . ​Connecticut is among the majority of jurisdictions which have . . . ​entrusted the attorney general with the responsibility and duty to represent the public interest in the protection of any gifts, legacies or devises intended for public or charitable purposes. . . . ​The theory underlying the power of the attorney general to enforce gifts for a stated purpose is that a donor who attaches conditions to his gift has a right to have his intention enforced. The donor’s right, however, is enforceable only at the instance of the attorney general. Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997). Accord Maria J. Derblom v. Archdiocese, 2019 Conn. Super. LEXIS 1029.

EXAMPLE A New York court observed: “The general rule is that gifts to charitable corporations for stated purposes are [enforceable] at the instance of the attorney general. . . . ​It matters not whether the gift is absolute or in trust or whether a technical condition is attached to the gift.” Lefkowitz v. Lebensfeld, 417 N.Y.S.2d 715 (1979).

EXAMPLE An Ohio court concluded:

One of the recognized powers held by the attorney general at common law was to inquire into any abuses of charitable donations. Clearly, the attorney general’s traditional power to protect public donations to charity goes beyond the mere enforcement of express trusts where the formal elements of such a trust manifestation of intent to create a trust, the existence of trust property, and a fiduciary relationship are essential to its creation. The attorney general, in seeking to protect the public interest, may also bring suit to impose a constructive trust on funds collected for charitable purposes but subsequently diverted to other purposes. A constructive trust, although not a formal trust at all, serves as a means to prevent the unjust enrichment of those who would abuse their voluntary roles as public solicitors for charity. For this court to hold that the attorney general can only enforce express charitable trusts would greatly hamper his ability to carry out his statutory and common law duties. Brown v. Concerned Citizens for Sickle Cell, 382 N.E.2d 1155 (Ohio. App. 1978).

Several other courts have concluded that the attorney general alone may enforce restricted gifts to charity. See, e.g., Denver Foundation v. Wells Fargo Bank, 163 P.3d 1116 (Cal. App. 2007); American Center for Education, Inc. v. Cavnar, 145 Cal. Rptr. 736 (Cal. App. 1978); Greenway v. Irvine’s Trustee, 131 S.W.2d 705 (Ky. 1930); Weaver v. Wood, 680 N.E.2d 918 (Mass. 1997); In re James’ Estate, 123 N.Y.S.2d 520 (N.Y. Sur. 1953).

The authority of a state attorney general to enforce donors’ designated gifts to charity is largely meaningless since state attorneys general rarely exercise this power. When they do, it is in cases involving large gifts to prominent charities. Attorneys general rarely, if ever, have enforced restricted gifts to a church. Attorney General v. First United Baptist Church, 601 A.2d 96 (Maine 1992).

Section 391 of the Restatement (Second) of Trusts specifies that others, in addition to the attorney general, may enforce the terms of a charitable trust: “A suit can be maintained for the enforcement of a charitable trust by the attorney general or other public officer, or by a co-trustee, or by a person who has a special interest in the enforcement of the charitable trust, but not by persons who have no special interest or by the [donor] or his heirs, personal representatives or next of kin” [emphasis added].

One court concluded that “fiduciaries, such as trustees, have historically been deemed to have a special interest so as to possess standing.” Hartford v. Larrabee Fund Association, 288 A.2d 71 (1971). However, the court cautioned that the attorney general must be joined as a party to protect the public interest.

Those with no special interest have no standing to bring an action to enforce the conditions of a gift. These include beneficiaries of the charitable gift. Steeneck v. University of Bridgeport, 668 A.2d 688 (Conn. 1995).

The California Supreme Court ruled that “the prevailing view of other jurisdictions is that the attorney general does not have exclusive power to enforce a charitable trust and that a trustee or other person having a sufficient special interest may also bring an action for this purpose. This position is adopted by [section 391 of] the Restatement (Second) of Trusts and is supported by many legal scholars.” Holt v. College of Osteopathic Physicians and Surgeons, 40 Cal. Rptr. 244 (1964).

EXAMPLE The United States Supreme Court has observed:

A defining characteristic of a trust arrangement is that the beneficiary has the legal power to enforce the trustee’s duty to comply with the terms of the trust. A qualified beneficiary of a bona fide trust for charitable purposes would have both the incentive and legal authority to ensure that donated funds are properly used. If the trust contributes funds to a range of charitable organizations so that no single beneficiary could enforce its terms, the trustee’s duty can be enforced by the Attorney General under the laws of most states. Davis v. United States, 495 U.S. 472 (1990).

EXAMPLE The Alabama Supreme Court ruled that a church lacked standing to enforce a charitable trust that was created to distribute income to religious and charitable institutions. The court noted that “the prevailing view of other jurisdictions is that the attorney general does not have exclusive power to enforce a charitable trust and that a . . . ​person having a sufficient special interest may also bring an action for this purpose. Beneficiaries of a charitable trust have a right to maintain a suit to enforce the trust or prevent diversion of the funds.” The court ruled, however, that not all beneficiaries have a legal right to enforce the terms of a charitable trust. It drew a distinction between “a person or entity that has a vested or fixed right to receive a benefit from a charitable trust and a person or entity that might merely potentially receive a benefit in the discretion of the trustees” and concluded that only beneficiaries with a vested or fixed right to receive distributions from a charitable trust have standing to enforce it. The church and school in this case were mere “potential beneficiaries” who would benefit from the trust only if the trustee selected them out of the large class of religious and charitable institutions, and such an interest was not sufficient to confer standing. Rhone v. Adams, 2007 WL 2966822 (Ala. 2007).

By expressly reserving a property interest, such as a right of reverter in a gift instrument, donors may bring themselves and their heirs within the special-interest exception to the general rule that donors and beneficiaries of a charitable trust may not bring an action to enforce the trust but rather are represented exclusively by the attorney general. A right of reverter is created when a property owner transfers title to another with the express stipulation that title will revert to the prior owner upon the occurrence of a specified condition.

To illustrate, a landowner could convey a home or other property to a church “so long as the property is used for church purposes.” If the property ceases to be used for church purposes, then the title reverts to the former owner by operation of law. Such deeds vest only a “determinable” or “conditional” title in the church since the title will immediately revert to the previous owner (or such person’s heirs or successors) by operation of law upon a violation of the condition.

Reversionary clauses represent one way for donors to ensure that they will be able to enforce a donation of land or a building to a church for specified purposes. However, note that if a reversionary clause is inserted in a deed as part of a donation of property to a church, the donor may be denied a charitable contribution deduction unless the IRS determines that the possibility of a reversion of title from the church back to the former owner is so remote as to be negligible. As the drafters of UMIFA stated:

Pursuant to section 170 of the [federal tax code] an income tax deduction for a charitable contribution is disallowed unless the taxpayer has permanently surrendered dominion and control over the property or funds in question. Where there is a possibility not so remote as to be negligible that the charitable gift subject to a condition might fail, the tax deduction is disallowed. The drafters of UMIFA worked closely with an impressive group of professionals, including tax advisers, who were concerned with the federal tax implications of the proposed Act. The drafters’ principal concern in this regard was that the matter of donor restrictions not affect the donor’s charitable contribution deduction for the purposes of federal income taxation. In other words, the concern was that the donor not be so tethered to the charitable gift through the control of restrictions in the gift that the donor would not be entitled to claim a federal charitable contribution exemption for the gift. IRC § 170(a), Treas. Reg. § 1.170A-1 (c).

The income tax regulations specify that a charitable contribution deduction “shall not be disallowed . . . ​merely because the interest which passes to, or is vested in, the charity may be defeated by the performance of some act or the happening of some event, if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.”

The language “so remote as to be negligible” has been defined as “a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction. It is likewise a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.”

The IRS applies the following factors in deciding if a charitable contribution deduction should be allowed or denied: (1) whether the donor and donee intend at the time of the donation to cause the event’s occurrence; (2) the incidence of the event’s occurring in the past; (3) the extent to which the occurrence of the event would defeat the donation; and (4) whether the taxpayer has control over the event’s occurrence. IRS Letter Ruling 200610017 (2005).

In recent years a few courts have rejected the traditional rule that donors cannot enforce their completed gifts and have allowed donors (or their heirs) to sue a charity to enforce the terms of a completed gift.

EXAMPLE A church launched a capital fund-raising campaign. A retiree in her eighties (Eileen) contributed $35,000 to the campaign. She later testified, “If I had known that the archdiocese . . . ​was giving any consideration to closing the church, I would not have made the gift of $35,000.” A few years later, the archbishop ordered the closure of the church as part of a reorganization. During one of the last worship services before the church closed, Eileen asked the pastor, “Why didn’t you tell us the church was closing?” He replied, “I didn’t know.” Eileen sued the archbishop, claiming negligent misrepresentation and breach of a fiduciary duty.

The Massachusetts Supreme Judicial Court ruled that Eileen had standing to pursue her claim: “It is clear that Eileen has alleged an individual stake in this dispute that makes her, and not the state attorney general, the party to bring suit . . . ​. A gift to a church generally creates a public charity. It is the exclusive function of the attorney general to correct abuses in the administration of a public charity by the institution of proper proceedings. It is his duty to see that the public interests are protected . . . ​or to decline so to proceed as those interests may require. However, a plaintiff who asserts an individual interest in the charitable organization distinct from that of the general public has standing to pursue her individual claims. In this case, Eileen’s claims are readily distinguishable from those of the general class of parishioner beneficiaries. . . . ​She claims that she lost substantial personal funds as the result of the archbishop’s negligent misrepresentation to her. This claim is personal, specific, and exists apart from any broader community interest in keeping the church open. She has alleged a personal right that would, in the ordinary course, entitle her to standing. Maffei v. Roman Catholic Archbishop, 867 N.E.2d 300 (Mass. 2007).

Churches that solicit funds for designated projects face difficult choices when they abandon the project and are left with the task of disposing of funds donated for that project. These problems can be avoided if the church simply includes a statement similar to the following when soliciting funds for a specific project:

“By contributing to this project, donors acknowledge that the church has full authority to apply contributions designated for this project to other purposes in the event the project is canceled or oversubscribed.”

Such a statement should be printed on special offering envelopes used for the project, or on any other materials so long as they provide adequate notice to donors of the policy andreflect donors’ consent to it.

Example Several donors to a religious ministry sued the ministry for fraud and other grounds because the ministry used some of the donated funds for unrelated purposes. The ministry argued that the plaintiffs lacked “standing” to sue in federal court. Article III of the Constitution limits the jurisdiction of federal courts to “cases” and “controversies,” which is interpreted to mean that the plaintiff bringing a lawsuit in federal court must have suffered some form of tangible injury to be redressed. The ministry pointed to several cases in support of the principle that “donating money to a charitable fund does not confer standing to challenge the administration of that fund . . . ​and that the Plaintiffs’ unrestricted charitable gifts to [the ministry] cannot constitute an injury for purposes of Article III standing.” The court agreed that “at common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust unless he or she had expressly reserved the right to do so.” The court concluded:

The Plaintiffs asserted that they “sustained monetary and economic injuries” arising out of their donations to [the ministry]. The Plaintiffs donated several thousand dollars. . . . ​Before making donations to [the ministry] the Plaintiffs allege that they listened to radio programs, podcasts, and CDs featuring [the ministry’s founder]; watched videos published by [the ministry]; and read books by [the founder]. The Plaintiffs recall hearing messages [that] solicited financial contributions to advance that work. The Plaintiffs also allege that they reasonably relied on . . . ​[the ministry’s] uniform messaging . . . ​that contributions made by people like the [Plaintiffs] would be used to financially support that mission.” The Court concludes that these allegations “satisfy Article III standing’s requirements.” Carrier v. Ravi Zacharias International Ministries, 2022 WL 1540206 (N.D. Ga, 2022).

Example A Michigan court ruled that a Catholic archdiocese could be sued for fraud for soliciting donations from members for the religious ministry of the archdiocese that in fact were spent for the defense and settlement of a sex abuse claim. The court concluded that 

contrary to defendants’ arguments, resolution of . . . ​plaintiffs’ fraud claim would not impermissibly permit the trial court to second guess how the Archdiocese spends its money. In order to adjudicate plaintiffs’ claim that the CSA donations were not and would not be used to settle claims against the Archdiocese, the trial court would only be required to decide whether the Archdiocese’s statement was true or false when made. Such an inquiry by the trial court would not involve delving into internal church policies or otherwise substituting its opinion in lieu of that of the authorized tribunals of the church in ecclesiastical matters. The inquiry would not relate to the propriety of how the donations were spent, but rather whether the Archdiocese lied about their purpose when it solicited them. This does not cross the line imposed by the First Amendment. Dux v. Bugarin, 2021 WL 6064359 (Mich. App. 2021).

Constitutional issues

A few courts have concluded that the First Amendment guaranties of nonestablishment and free exercise of religion bar the civil courts from resolving donors’ disputes with churches regarding the handling of restricted contributions if doing so would implicate religious doctrine. The leading cases are summarized below.

Hawthorne v. Couch, 911 So.2d 907 (La. App. 2005)

A church member (the “donor”) sued a church, seeking repayment of tithes he paid the church and also damages and attorney fees. The lawsuit alleged that the pastor of the church obtained the donor’s tithes by exerting a “powerful influence over members of his church, demanding total submission to his authority, and gaining complete control of the members’ minds and money.” The lawsuit further alleged that the pastor involved himself in the day-to-day business of a company the donor owned; ordered the donor to pay tithes on the gross income from the business and to increase the tithes paid by the business; and threatened him with “judgment and hell” if he did not pay up. The lawsuit claimed that the pastor knew his teaching was not biblical but that he was “overwhelmed with greed and power” and at some point had the idea that he would take over the donor’s business. The donor claimed that his efforts to comply with the pastor’s false teaching was bankrupting the company and that the pastor offered to purchase the business for a nominal sum.

The donor insisted that he always intended to tithe on his personal income, as opposed to the gross receipts from his business, and that he donated money to the church under duress. He claimed that the pastor’s “misrepresentation of the Bible” constituted fraud, that the pastor knew his teaching was false, and that he knew the donor was relying on that teaching in making excessive contributions to the church’s enrichment.

A trial court dismissed the donor’s lawsuit, and the case was appealed. A Louisiana state appellate court began its opinion by noting that the First Amendment guaranty of religious freedom forbids the civil courts from interfering in the ecclesiastical matters of religious organizations and that this prohibition “extends to matters of religious discipline, faith, and custom.” The court acknowledged that “not all church disputes necessarily involve purely ecclesiastical matters,” but it concluded that where a “dispute is rooted in an ecclesial tenet of a church, the court will not have jurisdiction of the matter.”

The court noted that the donor’s claims “focused almost exclusively on the pastor’s teachings regarding tithing. Without question, any legal analysis that would require a court to analyze and pass judgment upon such teachings would violate the [First Amendment]. The issue of tithing is at its core a purely ecclesiastical matter. . . . ​Accordingly, the trial court correctly concluded that it lacked jurisdiction.”

The donor insisted that no religious doctrine had to be considered in the revocation of his donations to the church, and so his claims could be considered. He relied on the general rule that a donation “shall be declared null upon proof that it is the product of influence by the donee or another person that so impaired the volition of the donor as to substitute the volition of the donee or other person for the volition of the donor.” However, the court pointed out that the donor’s allegations regarding the validity of his consent “are rooted in the religious teachings or beliefs of the pastor and the church”:

He alleged that the pastor threatened him with judgment and hell if he failed to make proper tithes. Although he claimed not to have free will and his gifts were made under duress due to the fraud allegedly perpetrated by the pastor, he further characterized the pastor’s position as false teaching based on his misinterpretation of the Bible. . . . ​Whereas the donor masks his claims with legal terms such as consent, fraud, and duress, this controversy is indeed purely religious. Any consideration of his claims would require a court to examine the interpretation of the Bible on the subject of tithing which was applied by the pastor and then make a determination of whether that interpretation was or was not fraudulent. A civil court is in no position to make a judicial determination of what is and what is not a correct biblical interpretation. Furthermore, to consider whether the pastor was attempting to substitute his volition for the donor’s would likewise require a court to consider the biblical basis of the pastor’s threats aimed at the donor. A court would have to consider the pastor’s intent in directing such statements at the donor, which again would require an interpretation of the basis for the comments, i.e., the Bible. For instance, in considering the allegation that the donor was threatened with judgment and hell for failing to give sufficiently, a court would need to delve into the issue of whether such statement was an actual threat to coerce the donor to donate money or rather a literal interpretation of the Bible as believed by the pastor. Clearly, as discussed herein, such an analysis is outside the jurisdiction of a civil trial court.

Moreover, at all times herein, the donor possessed the free will to simply walk away from this controversy by disassociating himself from the pastor and church. That would have ended the controversy concerning the amount of tithe he did or did not give to the church, and all parties would then have been free to live by any biblical interpretation they chose concerning this subject. By even requesting this or any other civil court to issue a ruling on such a clearly ecclesiastical matter runs the honored issue of separation of church and state to the very edge of the fabric. The Founders showed incredible foresight in setting up our system of government where the lines should never cross on such issues, and the courts should and do maintain a neutral posture.

McDonald v. Macedonia Missionary Baptist Church, 2003 WL 1689618 (Mich. App. 2003)

A married couple donated $4,000 to their church’s “new building fund.” The congregation planned to construct a new church the following year, but these plans were put on hold when the church received an unused school building. The couple sued their church, seeking a return of their building fund donation on the basis of the church’s “breach of contract.” Church leaders noted that the church had $500,000 in its new building fund and insisted that it still planned to build a new sanctuary as soon as the fund grew to $6 million. A trial court agreed with the couple and ordered the church to refund their contributions. The church appealed.

A Michigan appeals court reversed the trial court’s ruling and dismissed the case. It concluded that the civil courts are barred by the First Amendment guaranty of religious freedom from intervening in such internal church disputes:

It is well settled that courts, both federal and state, are severely circumscribed by the First Amendment [and the Michigan constitution] in resolution of disputes between a church and its members. Jurisdiction is limited to property rights which can be resolved by application of civil law. Whenever the trial court must stray into questions of ecclesiastical polity or religious doctrine the court loses jurisdiction. . . . ​We hold that this dispute involves a policy of the church for which our civil courts should not interfere. Because the decision of when and where to build a new church building is exclusively within the province of the church members and its officials, the trial court erred in not dismissing the couple’s lawsuit.

Maffei v. Roman Catholic Archbishop, 867 N.E.2d 300 (Mass. 2007)

An Italian immigrant (James) established a successful gravel business and owned several tracts of land. Upon the death of James and his wife, most of their property passed to their six children. The pastor of a Catholic church was interested in acquiring an eight-acre tract from the family as the site of a new sanctuary. Two of the siblings agreed to donate their interest in the land to the church, but the other four siblings were reluctant to transfer their interests until the pastor assured them that the new church would be named “St. James,” in honor of their father, and that the church would remain a tribute to James “forever.” During the negotiations for the property, the pastor did not inform any members of the family that canon law permitted the closure of the church in the future.

A church was constructed on the land in 1958. By the 1990s, however, question arose concerning the continuing viability of the church. A local newspaper story listed the church among those the archdiocese planned to close. The current pastor of the church assured the congregation that the story was false. The church launched a capital fund-raising campaign. A retiree in her eighties (Eileen) contributed $35,000 to the campaign. She later testified, “If I had known that the archdiocese . . . ​was giving any consideration to closing St. James, I would not have made the gift of $35,000.” In 2004 the archdiocese ordered the closure of St. James. During one of the last worship services before the church closed, Eileen asked the pastor, “Why didn’t you tell us the church was closing?” He replied, “I didn’t know it.”

Eileen, as well as the sole surviving sibling to have transferred the land to the church, sued the archbishop. The lawsuit claimed that the oral assurance by church officials that the church would be named “St. James” forever was a binding and enforceable commitment that was breached by the church’s closure. The lawsuit also alleged negligent misrepresentation and breach of a fiduciary duty and asked the court to order a reversion of the property to the surviving sibling.

The Supreme Judicial Court noted that the First Amendment guaranty of religious freedom “places beyond our jurisdiction disputes involving church doctrine, canon law, polity, discipline, and ministerial relationships” and that “among the religious controversies off limits to our courts are promises by members of the clergy to keep a church open.” The court concluded that it had jurisdiction over church property disputes “if and to the extent, and only to the extent, that they are capable of resolution under neutral principles of law” involving no inquiry into church doctrine or polity.

The court concluded that the sole surviving sibling who conveyed property to the church had standing since she gave up her rights in the property in reliance on the pastor’s assurance that the property would always be used as a church in memory of James. In other words, her rights were different from members of the congregation generally. Similarly, the court concluded that Eileen had standing to sue:

It is clear that Eileen has alleged an individual stake in this dispute that makes her, and not the state attorney general, the party to bring suit . . . . ​A gift to a church generally creates a public charity. It is the exclusive function of the attorney general to correct abuses in the administration of a public charity by the institution of proper proceedings. It is his duty to see that the public interests are protected . . . ​or to decline so to proceed as those interests may require. However, a plaintiff who asserts an individual interest in the charitable organization distinct from that of the general public has standing to pursue her individual claims. In this case, Eileen’s claims are readily distinguishable from those of the general class of parishioner-beneficiaries. . . . ​She claims that she lost substantial personal funds as the result of the archbishop’s negligent misrepresentation to her. This claim is personal, specific, and exists apart from any broader community interest in keeping the church open. She has alleged a personal right that would, in the ordinary course, entitle her to standing.

However, the court ruled that the First Amendment prevented it from resolving the sibling’s claims. For example, the sibling claimed that the pastor breached a fiduciary duty to her by not informing her at the time she conveyed her interests in the property to the archbishop that the church could be closed according to canon law. In rejecting this argument, the court observed:

A ruling that a Roman Catholic priest, or a member of the clergy of any (or indeed every) religion, owes a fiduciary-confidential relationship to a parishioner that inheres in their shared faith and nothing more is impossible as a matter of law. Such a conclusion would require a civil court to affirm questions of purely spiritual and doctrinal obligation. The ecclesiastical authority of the archbishop and [the pastor] over the parishioners, the ecclesiastical authority of the archbishop over the pastor, the state of canon law at the date of the property transfer . . . ​the canonical obligation of the pastor, if any, to inform parishioners of canonical law—all of these inquiries bearing on resolution of the fiduciary claims would take us far afield of neutral principles of law. We decline to hold that, as a matter of civil law, the relationship of a member of the clergy to his or her congregants, without more, creates a fiduciary or confidential relationship grounded in their shared religious affiliation for which redress is available in our courts.

The court also rejected Eileen’s claim that the archbishop acted negligently in failing to inform the local pastor of the plans to close the church when he knew he would be soliciting funds to sustain the church “now and for the future.” The court noted that Eileen’s gift was made in 2002, nearly two years before the archbishop decided to close the church. As a result, the pastor’s efforts to raise funds for the maintenance of the church, both now and in the future, was not negligent or a misrepresentation.

The Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA)

The Uniform Prudent Management of Institutional Funds Act (UPMIFA) has been adopted, with minor variations, in 49 states (all but Pennsylvania) and the District of Columbia. It replaces the Uniform Management of Institutional Funds Act (UMIFA), which was adopted by most states following its inception in 1972.

An introductory note to UPMIFA states that one of the reasons for the revision of UMIFA was an update to the provisions “governing the release and modification of restrictions on charitable funds to permit more efficient management of these funds.” In this regard, Section 6 of UPMIFA states:

(a) If the donor consents in a record, an institution may release or modify, in whole or in part, a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund. A release or modification may not allow a fund to be used for a purpose other than a charitable purpose of the institution.

(b) The court, upon application of an institution, may modify a restriction contained in a gift instrument regarding the management or investment of an institutional fund if the restriction has become impracticable or wasteful, if it impairs the management or investment of the fund, or if, because of circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund. The institution shall notify the [Attorney General] of the application, and the [Attorney General] must be given an opportunity to be heard. To the extent practicable, any modification must be made in accordance with the donor’s probable intention.

(c) If a particular charitable purpose or a restriction contained in a gift instrument on the use of an institutional fund becomes unlawful, impracticable, impossible to achieve, or wasteful, the court, upon application of an institution, may modify the purpose of the fund or the restriction on the use of the fund in a manner consistent with the charitable purposes expressed in the gift instrument. The institution shall notify the [Attorney General] of the application, and the [Attorney General] must be given an opportunity to be heard.

(d) If an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, [60 days] after notification to the [Attorney General], may release or modify the restriction, in whole or part, if:

(1) the institutional fund subject to the restriction has a total value of less than [$25,000];

(2) more than [20] years have elapsed since the fund was established; and

(3) the institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument.

UPMIFA defines an institutional fund as “a fund held by an institution exclusively for charitable purposes. The term does not include: (A) program-related assets; (B) a fund held for an institution by a trustee that is not an institution; or (C) a fund in which a beneficiary that is not an institution has an interest, other than an interest that could arise upon violation or failure of the purposes of the fund.” Charitable purposes are defined as “the relief of poverty, the advancement of education or religion, the promotion of health, the promotion of a governmental purpose, or any other purpose the achievement of which is beneficial to the community.” The Act defines a program-related asset as “an asset held by an institution primarily to accomplish a charitable purpose of the institution and not primarily for investment.” An institution is defined as any entity “organized and operated exclusively for charitable purposes.” This would include a church.

An official comment to section 6 (quoted above) states:

Subsection (a) permits the release of a restriction if the donor consents. A release with donor consent cannot change the charitable beneficiary of the fund. Although the donor has the power to consent to a release of a restriction, this section does not create a power in the donor that will cause a federal tax problem for the donor. The gift to the institution is a completed gift for tax purposes, the property cannot be diverted from the charitable beneficiary, and the donor cannot redirect the property to another use by the charity. The donor has no retained interest in the fund.

Subsection (b) applies the rule of equitable deviation. . . . ​Under the deviation doctrine, a court may modify restrictions on the way an institution manages or administers a fund in a manner that furthers the purposes of the fund. Deviation implements the donor’s intent. A donor commonly has a predominating purpose for a gift and, secondarily, an intent that the purpose be carried out in a particular manner. Deviation does not alter the purpose but rather modifies the means in order to carry out the purpose.

Sometimes deviation is needed on account of circumstances unanticipated when the donor created the restriction. In other situations the restriction may impair the management or investment of the fund. Modification of the restriction may permit the institution to carry out the donor’s purposes in a more effective manner. A court applying deviation should attempt to follow the donor’s probable intention in deciding how to modify the restriction. Consistent with the doctrine of equitable deviation in trust law, subsection (b) does not require an institution to notify donors of the proposed modification. Good practice dictates notifying any donors who are alive and can be located with a reasonable expenditure of time and money. Consistent with the doctrine of deviation under trust law, the institution must notify the attorney general who may choose to participate in the court proceeding. The attorney general protects donor intent as well as the public’s interest in charitable assets. Attorney general is in brackets in the Act because in some states another official enforces the law of charities.

The cy pres rule

The cy pres doctrine (which has been adopted in most states) specifies that if property is given in trust to be applied to a particular charitable purpose and it becomes impossible or impracticable to carry out that purpose, and if the donor manifested a more general intention to devote the property to charitable purposes, the trust will not fail, but the court will direct the application of the property to some charitable purpose that falls within the general charitable intention of the donor.

TIP: To help clarify the true intention of the donor of a designated contribution (at the time of the contribution), the IRS has suggested that the following language be used in a receipt for the contribution: “This contribution is made with the understanding that the donee organization has complete control and administration over the use of the donated funds.” IRS Exempt Organizations Continuing Professional Education Technical Instruction Program for 1999.

An official comment to section 8 of UPMIFA confirms that

subsection (c) applies the rule of cy pres from trust law, authorizing the court to modify the purpose of an institutional fund. The term modify encompasses the release of a restriction as well as an alteration of a restriction and also permits a court to order that the fund be paid to another institution. A court can apply the doctrine of cy pres only if the restriction in question has become unlawful, impracticable, impossible to achieve, or wasteful. . . . ​Any change must be made in a manner consistent with the charitable purposes expressed in the gift instrument. Consistent with the doctrine of cy pres, subsection (c) does not require an institution seeking cy pres to notify donors. Good practice will be to notify donors whenever possible. As with deviation, the institution must notify the attorney general who must have the opportunity to be heard in the proceeding.

EXAMPLE An elderly man drafted a will in 1971 that left most of his estate in trust to his sisters, and upon the death of the surviving sister to a local Congregational church with the stipulation that the funds be used “solely for the building of a new church.” The man died in 1981, and his surviving sister died in 1988. Since the Congregational church had no plans to build a new sanctuary, it asked a local court to interpret the will to permit the church to use the trust fund not only for construction of a new facility but also “for the remodeling, improvement, or expansion of the existing church facilities” and for the purchase of real estate that may be needed for future church construction. The church also asked the court for permission to use income from the trust fund for any purposes that the church board wanted. The state attorney general, pursuant to state law, reviewed the church’s petition and asked the court to grant the church’s requests.

However, several heirs opposed the church’s position, insisting that the decedent’s will was clear and that the church was attempting to use the trust funds “for purposes other than building a new church.” They asked the court to distribute the trust fund to the decedent’s lawful heirs. The local court agreed with the church on the ground that “gifts to charitable uses and purposes are highly favored in law and will be most liberally construed to make effectual the intended purpose of the donor.” The trial court’s ruling was appealed by the heirs, and the state supreme court agreed with the trial court and ruled in favor of the church. The supreme court began its opinion by observing that “it is contrary to the public policy of this state to indulge in strained construction of the provisions of a will in order to seek out and discover a basis for avoiding the primary purpose of the [decedent] to bestow a charitable trust.”

The court emphasized that the cy pres doctrine clearly required it to rule in favor of the church. Applying the cy pres rule, the court concluded: “The will gave the property in trust for a particular charitable purpose, the building of a new church. The evidence clearly indicated that it was impractical to carry out this particular purpose. Furthermore, the [decedent] did not provide that the trust should terminate if the purpose failed. A trust is not forfeited when it becomes impossible to carry out its specific purpose, and there is no forfeiture or reversion clause.” The court concluded that the trial court’s decision to permit the church to use the trust fund for the remodeling, improvement, or expansion of the existing church facilities “falls within the [decedent’s] general charitable intention.” Accordingly, the trial court’s decision represented a proper application of the cy pres rule. Matter of Trust of Rothrock, 452 N.W.2d 403 (Iowa 1990).

Practical considerations

While in some cases donors may not have the legal right to enforce a restricted gift, this does not mean that church leaders should ignore requests by donors to honor their designations. After all, both practical and ethical considerations should be taken into account.

The Connecticut Supreme Court has ruled that donors have no legal right to enforce their gifts to charity. The dissenting justices to this opinion observed: “This decision is simply an approval of a [charity] double crossing the donor and doing it with impunity unless an elected attorney general does something about it.” Carl J. Herzog Foundation, Inc. v. University of Bridgeport, 699 A.2d 995 (Conn. 1997). Do church leaders want to be perceived as “double-crossing” members who make restricted gifts? Further, the same dissenting opinion noted that the court’s decision “will not encourage donations to [charities].” What did the dissenting justices mean? Simply this: Many donors are prompted to make a charitable contribution because of a desire to further a specific purpose or project. If donors realize that they have no legal right to enforce a restricted gift, many of them may decide not to give.

The fact is that most donors who make restricted gifts to their church do so assuming that the church is ethically, if not legally, bound to honor their designations. Church leaders who violate this perception will be viewed by many donors as guilty of unethical conduct that may lead to internal dissension. Church leaders should consider these potential consequences before making a decision to ignore a donor’s designation, and they should consult with legal counsel before doing so to determine whether the designation is legally enforceable under state law, and if so, by whom.

Conclusions

In deciding whether to disregard donors’ designations, church leaders should consider several factors, including the following:

Many churches send teams on short-term mission trips both inside and outside of the United States. In some cases the participants on such trips are adults, while in others most of the participants are minors. The travel expenses incurred by participants may be paid in whole or in part by the church or by the participants (or in the case of minors, their parents) either directly or through contributions to the church.

Under what circumstances are participants, or nonparticipants who donate funds to defray the travel expenses of one or more participants, entitled to a charitable contribution deduction? Before addressing this question, three important principles must be addressed.

Principle 1: charitable travel expenses

Travel expenses incurred during a short-term mission trip which may qualify as a charitable contribution include air, rail, and bus transportation; out-of-pocket car expenses; taxi fares or other costs of transportation between the airport or station and your hotel; lodging costs; and the cost of meals. Since these expenses are not business related, they are not subject to the limits that apply to the deductibility of business expenses.

Principle 2: substantiation

If a participant in a short-term mission trip is entitled to a charitable contribution deduction for unreimbursed travel expenses of $250 or more, the church must issue an “abbreviated written acknowledgment” in order for the participant to substantiate a deduction. The requirements for such an acknowledgment are set forth under “Rule 2—individual cash contributions of $250 or more” on page .

Principle 3: no significant element of personal pleasure

Section 170(j) of the tax code states that no charitable contribution deduction is allowed “for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel.” The key phrase is “no significant element of personal pleasure, recreation, or vacation in such travel.” Unfortunately, neither the tax code nor regulations define a “significant element of personal pleasure, recreation, or vacation.” A conference committee report on section 170(j) provides the following clarification:

The disallowance rule applies whether the travel expenses are paid directly by the taxpayer, or indirectly through reimbursement by the charitable organization. For this purpose, any arrangement whereby a taxpayer makes a payment to a charitable organization and the organization pays for his or her travel expenses is treated as a reimbursement.

In determining whether travel away from home involves a significant element of personal pleasure, recreation, or vacation, the fact that a taxpayer enjoys providing services to the charitable organization will not lead to denial of the deduction. For example, a troop leader for a tax-exempt youth group who takes children belonging to the group on a camping trip may qualify for a charitable deduction with respect to his or her own travel expenses if he or she is on duty in a genuine and substantial sense throughout the trip, even if he or she enjoys the trip or enjoys supervising children. By contrast, a taxpayer who only has nominal duties relating to the performance of services for the charity, or who for significant portions of the trip is not required to render services, is not allowed any charitable deduction for travel costs.

The IRS has provided the following additional clarification in Notice 87-23:

[Section 170(j)] provides that no deduction is allowed for transportation and other travel expenses relating to the performance of services away from home for a charitable organization unless there is no significant element of personal pleasure, recreation, or vacation in the travel. For example, a taxpayer who sails from one Caribbean Island to another and spends eight hours a day counting whales and other forms of marine life as part of a project sponsored by a charitable organization generally will not be permitted a charitable deduction. By way of further example, a taxpayer who works on an archaeological excavation sponsored by a charitable organization for several hours each morning, with the rest of the day free for recreation and sightseeing, will not be allowed a deduction even if the taxpayer works very hard during those few hours. In contrast, a member of a local chapter of a charitable organization who travels to New York City and spends an entire day attending the organization’s regional meeting will not be subject to this provision even if he or she attends the theatre in the evening. This provision applies whether the travel expenses are paid directly by the taxpayer or by some indirect means such as by contribution to the charitable organization that pays for the taxpayer’s travel expenses.

The current edition of IRS Publication 526 (Charitable Contributions) addresses this issue:

Generally, you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. This applies whether you pay the expenses directly or indirectly. You are paying the expenses indirectly if you make a payment to the charitable organization and the organization pays for your travel expenses.

The deduction for travel expenses will not be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you do not have any duties, you cannot deduct your travel expenses.

Publication 526 further states: “If a qualified organization selects you to attend a convention as its representative, you can deduct your unreimbursed expenses for travel, including reasonable amounts for meals and lodging, while away from home overnight for the convention. You cannot deduct personal expenses for sightseeing, fishing parties, theater tickets, or nightclubs. You also cannot deduct travel, meals and lodging, and other expenses for your spouse or children. You cannot deduct your travel expenses in attending a church convention if you go only as a member of your church rather than as a chosen representative. You can, however, deduct unreimbursed expenses that are directly connected with giving services for your church during the convention.”

EXAMPLE Pastor J goes on a short-term mission to Europe. He is in Europe for 10 days and conducts one-hour worship services on two of those days. Pastor J will not be able to claim a charitable contribution deduction for the travel expenses he incurs in making this trip. The same rule would apply to the travel expenses of his wife and children if they accompany him on the trip.

EXAMPLE Unreimbursed expenses of a delegate to a church conference qualify as deductible charitable contributions. Revenue Ruling 58-240.

EXAMPLE K is a music director at her church. She attends a church convention as a visitor (not as a delegate). After arriving at the location of the meeting, K visits a religious music publisher to consider music for the church. Her unreimbursed expenses in making this side trip can be claimed as a charitable contribution. However, this does not convert her expenses incurred in traveling to the meeting site to a deductible business expense. This conclusion is supported by the following language in IRS Publication 526: “You can deduct unreimbursed expenses that are directly connected with giving services for your church during the convention.”

EXAMPLE Persons attending church conventions, assemblies, or other meetings in accordance with their rights, privileges, or obligations as members of the church (as opposed to attending such meetings as the duly chosen representative of a congregation or other official church body) are not, by their attendance, rendering gratuitous services to their church. Expenses incurred in attending such meetings do not constitute charitable contributions. Such expenses constitute nondeductible personal expenses under section 262 of the tax code, even if attendance is required or expected of the persons by the tenets of their religious group. However, this does not preclude the deduction as charitable contributions of unreimbursed expenditures directly connected with and solely attributable to the rendition of gratuitous services performed for the church during the meeting. Revenue Ruling 61-46.

EXAMPLE A Presbyterian church planned a trip to the Holy Land for 27 of its high-school students to “visit the places where Jesus lived and walked; visit and know young people of other backgrounds, cultures and religions; and share in an experience of Christian group living, understanding and friendship through work, travel, and worship.” For various reasons the destination was changed to Italy, Greece, and Turkey. While in Greece the students assisted in a “farm school” that taught local farmers more advanced techniques. Their primary responsibility involved the construction of a new chicken coop for the school’s chickens. The cost of the trip was $1,400 per student, and this cost was paid by several of the parents for their respective children. One of the parents claimed this payment as a charitable contribution, and this position was rejected by the IRS in an audit. The Tax Court agreed with the IRS. It observed:

We think it apparent that a deduction for expenses incident to the performance of services for the school is not allowable as a charitable contribution to [the church]. Although the church had a history of assisting the school, these are two distinctly separate organizations, and the services were not performed for the benefit of the church. That the trip increased the teenagers’ interest in the church program, developed their leadership capabilities, and increased their religious understanding does not aid [the parent’s] cause. If the trip, indeed, produced these results, the true beneficiaries were the teenagers themselves. . . . ​The evidence shows plainly that the 46 day expedition to Europe was primarily a vacation, sightseeing, and cultural trip for the teenagers. . . . ​Instead of the expenditures in question being incident to the rendition of services, we think the visit to the school and the work which was performed were only incidental to, or part of, a vacation trip. There is nothing to suggest that the expenses would have been less if the group had spent the entire trip solely for sightseeing. . . . ​While efforts to assist the teenagers in developing deeper religious involvement and concern for the needs of others are laudable, the tax laws do not permit parents to deduct sums which they expend for such purposes specifically on behalf of their own children. Tate v. Commissioner, 59 T.C. 543 (1973).

Consider another example. Assume that a layperson goes on a one-week mission trip to Germany and, on the way home, stops off in London for a two-week vacation. If he had only gone to Germany, his travel expenses would have been $2,000. But with the addition of the vacation, his unreimbursed expenses are $3,000. How much can he deduct as a charitable contribution: $3,000, $2,000, or $0? The best answer is $0. This conclusion is based on the text of section 170(j), which states that “no deduction shall be allowed under this section for traveling expenses (including amounts expended for meals and lodging) while away from home, whether paid directly or by reimbursement, unless there is no significant element of personal pleasure, recreation, or vacation in such travel.” Can it be said that there is “no significant element of personal pleasure, recreation, or vacation” when a layperson spends two weeks in London on vacation following a one-week mission trip to Germany? Probably not.

In summary, it is unlikely that a short-term missionary who spends two weeks in London (on vacation) following a one-week mission trip to Germany could claim a charitable contribution deduction for any of his or her travel expenses. With two out of three weeks being devoted to vacation, it is difficult to conclude that there was “no significant element of personal pleasure, recreation, or vacation in such travel.” While existing precedent does not clarify the meaning of a “significant element,” it almost certainly would include two-thirds of the total trip time.

The seven most common forms of funding of short-term mission trips, and the tax consequences of each, are summarized below.

Scenario 1: adult participants; church pays none of participants’ travel expenses

Adult participants on a short-term mission trip can claim their unreimbursed travel expenses as a charitable contribution. The income tax regulations specify:

Unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution. For example, the cost of a uniform without general utility which is required to be worn in performing donated services is deductible. Similarly, out of pocket transportation expenses necessarily incurred in performing donated services are deductible. Reasonable expenditures for meals and lodging necessarily incurred while away from home in the course of performing donated services are also deductible. Treas. Reg. 1.170A 1(g).

Scenario 2: adult participants; church pays all travel expenses from the general fund or a missions fund, with no contributions from participants (or nonparticipants) to cover travel expenses

Such an arrangement has no tax consequences. The church’s payment of the participants’ travel expenses is a legitimate expenditure of church funds in furtherance of the church’s religious purposes. No questions are raised concerning the deductibility of charitable contributions.

Scenario 3: adult participants; church pays all travel expenses; participants make contributions to the church in the amount of their travel expenses

Are payments made by the participants themselves to their church to cover the cost of their travel expenses deductible as charitable contributions? Yes, according to IRS Publication 526 (Charitable Contributions), so long as no significant element of personal pleasure is involved in the trip:

You can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in such travel. This applies whether you pay the expenses directly or indirectly. You are paying the expenses indirectly if you make a payment to the charitable organization and the organization pays for your travel expenses. The deduction will not be denied simply because you enjoy providing services to the charitable organization.

The term no significant element of personal pleasure is defined above.

Scenario 4: adult participants; church pays all travel expenses; nonparticipants make contributions to the church to cover the travel expenses of participants who cannot afford to pay all of their own expenses

The question raised by this scenario is whether payments made by donors are deductible as charitable contributions. If donors are contributing to a fund that will defray the travel expenses of unnamed participants who cannot afford to pay all of their own travel expenses, their contributions would be tax-deductible. The same would be true for donations specifying that they be applied to the travel expenses of a named participant. See “Missionaries” on page . In both cases it is assumed that the church has preauthorized the mission trip, that the trip will further the exempt purposes of the church, and that the church exercises sufficient control over the funds to ensure that they are used to carry out its purposes.

Scenario 5: minor participants; church pays all travel expenses from the general fund or a mission fund, with no contributions from participants (or nonparticipants) to cover travel expenses

Such an arrangement has no tax consequences. The church’s payment of the minor participants’ travel expenses is a legitimate expenditure of church funds in furtherance of the church’s religious purposes. No questions are raised concerning the deductibility of charitable contributions.

Scenario 6: minor participants; church pays all travel expenses; parents make contributions to the church in the amount of their children’s travel expenses

It is common for minors to go on church-sponsored short-term mission trips. If parents pay for their child’s travel expenses, can they claim a charitable contribution deduction? In a 1990 ruling, the United States Supreme Court addressed a related question. Davis v. United States, 110 S. Ct. 2014 (1990). The Court reached two conclusions:

First, the transfer of funds by parents to their children who were serving as missionaries with the Church of Jesus Christ of Latter-Day Saints were not for the use of the church and therefore were not tax-deductible as charitable contributions by the parents in the absence of evidence that funds were transferred in trust for the church. The Court concluded that a contribution to a church for a child’s missionary expenses may be for the use of the church only if the funds are donated “in trust for the church, or in a similarly enforceable legal arrangement for the benefit of the church.” The Court concluded:

We discern no evidence that petitioners transferred funds to their sons “in trust for” the Church. It is undisputed that petitioners transferred the money to their sons’ personal bank accounts on which the sons were the sole authorized signatories. Nothing in the record indicates that petitioners took any steps normally associated with creating a trust or similar legal arrangement. Although the sons may have promised to use the money “in accordance with Church guidelines,” they did not have any legal obligation to do so; there is no evidence that the guidelines have any legally binding effect. Nor does the record support the assertion that the Church might have a legal entitlement to the money or a civil cause of action against missionaries who used their parents’ money for purposes not approved by the Church.

Second, payments made by a parent directly to a missionary child are not tax-deductible, since they are not made to a charitable organization exercising administrative control over the payments. The Supreme Court observed in the Davis case that

the plain language [of the income tax regulation] indicates that taxpayers may claim deductions only for expenditures made in connection with their own contributions of service to charities . . . ​[A] taxpayer ordinarily reports his own income and takes his own expenses. . . . ​It would strain the language of the regulation to read it, as [the parents] suggest, as allowing a deduction for expenses made incident to a third party’s rendition of services rather than to the taxpayer’s own contribution of services.

In conclusion, it is doubtful that parents can claim a charitable contribution deduction for contributions they make to a church with the stipulation that they be used for a child’s expenses incurred while participating on a short-term mission trip. The only exception, as noted by the Supreme Court in the Davis case, would be donations by parents “in trust for the church, or in a similarly enforceable legal arrangement for the benefit of the church.”

Scenario 7: minor participants; church pays none of the minor participants’ travel expenses

If the minors pay their own expenses through their own fund-raising efforts, there usually will not be a tax question, since the minors will not be filing a tax return and do not need a charitable contribution deduction. On the other hand, if a minor’s parents (or other adult nonparticipants) pay for a child’s travel expenses, the analysis in the previous sections would apply.

Charitable contributions to churches and other tax-exempt organizations are deductible only if they satisfy certain conditions. One important condition is that the donor must be able to substantiate the contribution. The substantiation requirements vary depending on the kind of contribution. They are summarized below.

The many substantiation requirements are presented in this section in the form of 10 rules. Simply find the rules that apply to a particular contribution and follow the substantiation requirements. The rules apply to the contribution categories listed in Table 8-3.

Rule 1—requirements for all cash contributions

Donors cannot deduct a cash contribution to a church or charity, regardless of the amount, unless they keep one of the following:

The substantiation requirements may not be satisfied by maintaining other reliable written records. In the past donors could substantiate cash contributions of less than $250 with “other reliable written records showing the name of the donee, the date of the contribution, and the amount of the contribution” if no canceled check or receipt was available. This is no longer allowed.

EXAMPLE A church member makes cash contributions to his church of between $20 and $50 each week. He uses offering envelopes provided by the church, but the church provides no other receipt or statement substantiating the contributions. The member will not be able to claim a charitable contribution deduction for any of these payments. All cash contributions, regardless of amount, must be substantiated by either a bank record (such as a canceled check) or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. The recordkeeping requirements cannot be satisfied by other written records, including offering envelopes.

EXAMPLE The IRS audits a taxpayer’s 2024 federal income tax return and questions an alleged contribution of $100 to a church that was made on February 1, 2024, and for which the taxpayer has no canceled check or church receipt. The taxpayer does maintain a daily diary. A diary entry on the alleged date of the contribution shows that a contribution of $100 was made to the church. This is inadequate substantiation. Cash contributions can only be substantiated with bank records (including canceled checks) or a written communication from the donee charity showing the name of the donee, the date of the contribution, and the amount of the contribution. They cannot be substantiated with other written records, including diary entries.

Many churches use offering envelopes. They have a number of advantages, including the following:

If your church uses offering envelopes, how long should you keep them? One option is to issue donors a periodic (e.g., quarterly, semiannual, or annual) summary of contributions and include in this summary a statement similar to the following: “Any documentation, including offering envelopes, that the church relied upon in preparing this summary will be disposed of within six months. Therefore, please review this summary carefully and inform the church treasurer of any apparent discrepancies within six months of the date of this summary.”

Such a statement provides the church with a reasonable basis for destroying envelopes and other written records after the specified period of time. The burden is on members to promptly call attention to discrepancies. Of course, you can change the six-month period to any other length of time you desire. This statement will relieve the church of the responsibility of warehousing offering envelopes and other supporting documentation for long periods of time.

EXAMPLE A church member ordinarily contributes cash (in church envelopes and in individual amounts of less than $250) rather than checks. Since the member will have no canceled checks to substantiate her contributions, she must rely upon the periodic receipts provided by her church. If the church does not issue the member a receipt, the member will not be able to deduct any of her cash contributions. The offering envelopes will not suffice.

EXAMPLE A taxpayer attended church regularly. Sometimes he would attend his father’s church, and other times his grandfather’s, but he contributed to both churches. He made weekly payments using offering envelopes provided by the churches. He put both cash and checks into these envelopes. He also made a contribution by cash or check to the Salvation Army. The taxpayer claimed a deduction of $6,000 for these contributions. The IRS audited his tax return and disallowed any deduction for these contributions on the ground that the taxpayer lacked adequate substantiation. The Tax Court conceded that the taxpayer had no canceled checks or credit card receipts proving his charitable contributions. However, “he did produce letters from the two churches he attended acknowledging contributions of $3,750 and $4,500. These contributions total $8,250, and exceed the $6,000 claimed on the taxpayer’s return. The court is satisfied with the credibility of the taxpayer’s testimony as verified by his documentation under the cited legal standards and, therefore, allows a charitable contribution deduction of $8,201 for the year at issue.” Jones v. United States, T.C. Summary Opinion 2004-76.

EXAMPLE A married couple (the “taxpayers”) claimed a $5,000 deduction on their tax return for contributions made to their church. The IRS audited the couple and denied any deduction due to a lack of substantiation. The couple appealed to the Tax Court, which affirmed the IRS determination:

The taxpayers contend that the $5,000 deduction “represents our weekly cash basket giving of around $100 a week” to our church. But the taxpayers never identify what church they attended or its location. In any event, anonymous cash contributions to a collection plate hardly satisfy the substantiation requirements of section 170 and the applicable regulations, and the taxpayers candidly admit that no record of such contributions was ever maintained. On the other hand, the court is satisfied that petitioners did donate some cash when they attended religious services. Accordingly, bearing heavily against petitioners whose inexactitude is of their own making, the Court holds that petitioners are entitled to a deduction for cash contributions of $500. Koriakos v. Commissioner, T.C. Sum. Op. 2014-70 (2014).

Rule 2—individual cash contributions of $250 or more

Written acknowledgment

Donors must substantiate individual cash contributions of $250 or more “by a contemporaneous written acknowledgment of the contribution by the donee organization.” Donors cannot substantiate individual cash contributions of $250 or more with canceled checks. They must receive a written acknowledgment from the church or other charity.

The IRS has clarified that “as long as it is in writing and contains the information required by law, a contemporaneous written acknowledgment may be in any format.” The law specifies that a written acknowledgment must include the following information:

It is not necessary to include the donor’s Social Security number on the acknowledgment.

The IRS has provided the following clarification regarding acceptable written acknowledgments:

A separate acknowledgment may be provided for each single contribution of $250 or more, or one acknowledgment, such as an annual summary, may be used to substantiate several single contributions of $250 or more. There are no IRS forms for the acknowledgment. Letters, postcards, or computer-generated forms with the above information are acceptable. An organization can provide either a paper copy of the acknowledgment to the donor, or an organization can provide the acknowledgment electronically, such as via an e-mail addressed to the donor. A donor should not attach the acknowledgment to his or her individual income tax return, but must retain it to substantiate the contribution. Separate contributions of less than $250 will not be aggregated. An example of this could be weekly offerings to a donor’s church of less than $250, even though the donor’s annual total contributions are $250 or more. IRS Publication 1771.

Contemporaneous

The tax code requires that written acknowledgments be contemporaneous. The IRS explains this requirement as follows: “For the written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of the date on which the donor actually files his or her individual federal income tax return for the year of the contribution, or the due date (including extensions) of the return.”

EXAMPLE A taxpayer made several contributions to a church (Church A) during 2007. The contributions to Church A were reported in a letter from the church dated January 19, 2009, indicating that the taxpayer contributed a total of $7,500, and several copies of checks, all for amounts of $250 or more. In addition, the taxpayer made several contributions to a second church (Church B). These contributions were reflected in a “tithing statement” from the church dated January 19, 2009, stating that she contributed a total of $2,255, and several copies of checks, some of which are for amounts less than $250.

The IRS disallowed any charitable contribution deduction for these contributions, and the taxpayer appealed to the Tax Court. The court concluded that the taxpayer was not entitled to deduct the $7,500 she contributed to Church A: “The taxpayer introduced a letter from the church dated January 19, 2009, and copies of several checks, each for more than $250 and made out to the church’s pastor and his wife. The letter does not state whether she received goods or services in exchange for contribution and was not received by the earlier of her return’s filing date or its due date of April 15, 2008. Thus, there is no contemporaneous written acknowledgment from the donee that would permit petitioner to deduct the contributions.”

The court also concluded that the taxpayer could not deduct most of the contributions she made to Church B: “To substantiate the contributions, the taxpayer introduced checks made out to Church B and a 2007 tithing statement from Church B dated January 19, 2009. Because the taxpayer did not receive the tithing statement by the earlier of her return’s filing date or its due date of April 15, 2008, it is not a contemporaneous written acknowledgment. Thus, she does not have proper substantiation for the contributions of $250 or more.” Linzy v. Commissioner, T.C. Memo. 2011-264. See also Kalapodis v. Commissioner, T.C. Memo. 2014-205.

Example The United States Tax Court upheld the IRS’s denial of a $65 million charitable contribution deduction because the written acknowledgment issued by donee charity was not “contemporaneous” as required by the tax code. 15 West 17th Street LLC v. Commissioner, 147 T.C. 19 (2016).

Goods or services

The acknowledgment must describe goods or services a charity provides in exchange for a contribution of $250 or more. It must also provide a good faith estimate of the value of such goods or services, because a donor must generally reduce the amount of the contribution deduction by the fair market value of the goods and services provided by the charity. Goods or services include cash, property, services, benefits, or privileges. However, two important exceptions are described below:

Generally, they are benefits provided by a tax-exempt organization operated exclusively for religious purposes and are not usually sold in commercial transactions outside a donative (gift) context. Examples include admission to a religious ceremony and a de minimis tangible benefit, such as wine used in a religious ceremony. Benefits that are not intangible religious benefits include education leading to a recognized degree, travel services, and consumer goods. IRS Publication 1771.

To substantiate an individual charitable contribution of $250 or more, a donor must obtain a receipt from the charity that states whether the charity provided any goods or services in exchange for a contribution of $250 or more (other than intangible religious benefits), and if so, a description and good faith estimate of the value of those goods and services.

IRS regulations define a good faith estimate as an estimate of the fair market value of the goods or services provided by a charity in return for a donor’s contribution. The fair market value of goods or services may differ from their cost to the charity. The charity may use any reasonable method it applies in good faith in making the good faith estimate.

However, a taxpayer is not required to determine how the charity made the estimate. IRS regulations specify that a taxpayer generally may treat an estimate of the value of goods or services as the fair market value for purposes of computing a charitable contribution deduction if the estimate is in a receipt issued by the charity. For example, if a charity provides a book in exchange for a $100 payment and the book is sold at retail prices ranging from $18 to $25, the taxpayer may rely on any estimate of the charity that is within the $18 to $25 range (the charitable contribution deduction is limited to the amount by which the $100 donation exceeds the fair market value of the book that is provided to the donor). However, a taxpayer may not treat an estimate as the fair market value of the goods or services if the taxpayer knows, or has reason to know, that such treatment is unreasonable. For example, if the taxpayer is a dealer in the type of goods or services it receives from a charity, or if the goods or services are readily valued, it is unreasonable for the taxpayer to treat the charity’s estimate as the fair market value of the goods or services if that estimate is in error and the taxpayer knows, or has reason to know, the fair market value of the goods or services.

Unreimbursed expenses

If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses (such as out-of-pocket transportation expenses) incurred in order to perform donated services for a church, the donor must obtain a written acknowledgment from the church containing the following information: (1) a description of the services provided by the donor; (2) a statement of whether the organization provided goods or services in return for the contribution; (3) a description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution; and (4) a statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits (described above) if that was the case. In addition, a donor must maintain adequate records of the unreimbursed expenses. The church’s acknowledgment must meet the contemporaneous requirement (see above).

Example A taxpayer claimed a charitable contribution deduction for expenses incurred in performing charitable activities for a religious organization. The Tax Court acknowledged that a charitable contribution deduction may be claimed for expenses incurred in performing charitable activities, but it stressed that a taxpayer must substantiate the amounts of unreimbursed expenses incurred while rendering services to a charity in order for the expenses to be deductible as charitable contributions. The court explained:

No deduction is allowed . . . ​for a contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee organization. A taxpayer who incurs unreimbursed expenditures incident to the rendition of services is treated as having obtained a contemporaneous written acknowledgment of those expenditures if the taxpayer (1) has adequate records to substantiate the amounts of the expenditures; and (2) obtains (a) a statement prepared by the donee organization containing a description of the services provided by the taxpayer, (b) a statement of whether the donee organization provides any goods or services in consideration, in whole or in part, for the unreimbursed expenditures, and (c) a description and good faith estimate of the value of those goods or services, and if the donee organization provides any intangible religious benefits, a statement to that effect.

Because the taxpayer did not obtain any contemporaneous written acknowledgments, “his expenses of $250 or more are not deductible.” Oliveri v. Commissioner, T.C. Memo 2019-57 (2019).

EXAMPLE A chosen representative to an annual church convention purchases an airline ticket to travel to the convention. The church does not reimburse the delegate for the $500 ticket. The representative should keep a record of the expenditure, such as a copy of the ticket. The representative should obtain from the church a description of the services the representative provided and a statement that the representative received no goods or services from the organization.

EXAMPLE Greg participates in a short-term mission project sponsored by his church and incurs $700 of unreimbursed out-of-pocket travel expenses. Here is an example of an abbreviated written acknowledgment that complies with the regulations: “Greg Jones participated in a mission trip sponsored by [name of church] in the nation of Panama in 2025. His services included [working in a medical clinic]. The church provided no goods or services in return for these services.” The church should be sure that Greg receives this receipt before the earlier of (1) the date he files a tax return claiming the contribution deduction, or (2) the due date (including extensions) for the tax return for that year.

Examples of written acknowledgments

Here are examples of acceptable written acknowledgments:

Below are a few additional points to note concerning the substantiation rules.

Donor’s, not the church’s, responsibility

A congressional committee report states that the substantiation requirement for contributions of $250 or more does “not impose an information reporting requirement upon charities; rather, it places the responsibility upon taxpayers who claim an itemized deduction for a contribution of $250 or more to request (and maintain in their records) substantiation from the charity of their contribution (and any good or service received in exchange).”

While the sole risk of failing to comply with substantiation rules for contributions of $250 or more is upon the donor (who will not be able to substantiate a charitable contribution deduction), churches should take an active role in informing donors of the substantiation requirements to ensure the deductibility of contributions.

No reporting to the IRS

A church’s written acknowledgments are issued to donors. They are not sent to the IRS. Exceptions exist for some contributions of noncash property and vehicles, as noted later in this chapter.

Why some church contribution receipts are inadequate

Most churches provide some form of periodic written statement to donors acknowledging their contributions. However, any statements currently being used must be carefully reviewed to ensure compliance with the requirements summarized above. In some cases, they will need to be changed. Here are a few common examples of receipts that do not comply with the law:

The $250 threshold

If a donor makes a $50 cash contribution each week to a church, the substantiation requirements addressed in Rule 2 do not apply, even though the donor will have made $2,600 in contributions for the year, because no individual contribution was $250 or more. The donor can rely on canceled checks to substantiate the contributions or on an acknowledgment provided by the church that satisfies the requirements of Rule 1.

Combining separate contributions of $250

If a donor makes 10 separate contributions of $250 or more to her church during 2025, must the church issue a receipt listing each contribution separately, or can the 10 contributions be combined as one amount? The IRS has provided the following clarification: “A separate acknowledgment may be provided for each single contribution of $250 or more, or one acknowledgment, such as an annual summary, may be used to substantiate several single contributions of $250 or more.” IRS Publication 1771. This may mean that a single acknowledgment may be issued by a church that combines all individual contributions into a lump sum. Or it may mean that in lieu of providing donors with separate receipts for each contribution of $250 or more, it may provide a single receipt that itemizes all such contributions. Since this issue has not been clarified by the tax code, regulations, or the courts, it would be prudent to take the more conservative approach and separately itemize individual contributions of $250 or more on one receipt.

Effect of noncompliance

No penalty is imposed on a church that does not issue written acknowledgments to donors who comply with Rule 2. However, a donor will not be able to substantiate individual charitable contributions of $250 or more if audited, and a deduction for such contributions may be denied. Thus it is essential for church leaders to be familiar with these rules and issue acceptable written acknowledgments to donors who have made one or more individual contributions to the church of $250 or more during the year.

Note that a penalty ($10) may be imposed on churches that fail to provide donors with an appropriate written acknowledgment for quid pro quo contributions of more than $75, as noted under Rule 4.

Making contributions through payroll deductions

If you make a contribution by payroll deduction and your employer withheld $250 or more from a single paycheck, you must keep

A single pledge card may be kept for all contributions made by payroll deduction regardless of amount as long as it contains all the required information.

If the pay stub, Form W-2, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, Form W-2, pledge card, or other document does show the date of the contribution, you do not need any other records except those described in (1) and (2).

Examples

The following examples help to illustrate the application of Rule 2, concerning contributions of $250 or more.

EXAMPLE B is a member of a church. She makes 52 weekly contributions of $10 (for a total of $520) during 2025 and receives only intangible religious benefits in exchange. The substantiation rules that apply to contributions of $250 or more do not affect either B or the church. She will be permitted to deduct her contributions (if she can itemize her deductions on Schedule A), and she can substantiate her contributions using canceled checks or a written statement from the church that meets the requirements summarized under Rule 1 (above).

EXAMPLE Same facts as the previous example, except that B made a one-time cash contribution of $1,000 to the church’s missions fund on June 28, 2025. In order to ensure the deductibility of the $1,000 contribution, B must receive a written acknowledgment from the church not later than the date she files her tax return or the due date of her tax return, whichever is earlier, that (1) reports the date and amount of the $1,000 contribution, and (2) states that the only goods or services received by the donor in return for her $1,000 contribution were intangible religious benefits (assuming this is the case). The $1,000 contribution may be aggregated with the weekly contributions for a total of $1,520, or all of the contributions can be separately itemized.

EXAMPLE A member makes weekly contributions to his church in 2025 that averaged $50 (none is for $250 or more). However, the member made a cash contribution of $500 to the missions fund and an additional cash contribution of $1,000 to the building fund. The church treasurer is aware of the substantiation requirements that apply to donations of $250 or more and plans to issue the member a written acknowledgment by February 15, 2026. The member files his 2025 tax return on February 1, 2026. A contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment, which is defined as an acknowledgment that is received by the donor by the earlier of (1) the date the donor files a tax return claiming a deduction for the contribution, or (2) the due date (including extensions) for filing the return. Since the member filed a tax return on February 1, 2026, a receipt issued by the church on February 15 is not contemporaneous and may result in a loss of a deduction for the $500 and $1,000 contributions. This example illustrates the importance of issuing proper receipts as soon as possible.

EXAMPLE A church treasurer has heard that special substantiation requirements apply to cash contributions of $250 or more, but she assumes that these requirements do not affect her church since it issues annual contribution receipts to each donor. The church’s receipts are issued by the end of January of the following year and report the date and amount of each contribution of cash as well as the date and a description of each contribution of property. The treasurer is in error. The church’s current reporting is deficient in the following respects:

EXAMPLE In 2024 a church gave a coffee mug bearing its logo that cost $13.20 or less to a donor who contributed $66 or more. The church may state that no goods or services were provided in return for the contribution. The contribution is fully deductible.

EXAMPLE A church conducts a fund-raising auction. T buys a bicycle with a value of $200 for an offer of $132. The value of the bicycle does not satisfy the definition of “goods or services of insubstantial value.” The church’s receipt should not state that no goods or services were provided in connection with the contribution. It must specify a good faith value for the bicycle and indicate on its receipt (or in a separate statement) that the contribution is deductible to the extent it exceeds the value of the goods or services provided by the church.

EXAMPLE The Tax Court ruled that a married couple could not use canceled checks to substantiate charitable contributions of $250 or more. The couple made donations of $21,000 to various charities and claimed that they could use their personal testimony and canceled checks to substantiate all these contributions, including those of $250 or more. The court disagreed, noting that the tax code requires contributions of $250 or more to be substantiated with a written acknowledgment from the charity that meets various requirements. It concluded, “Given that the taxpayers in this case do not have such a written acknowledgment from any of the recipients of the disputed amounts . . . ​we conclude that they are precluded by the statute from deducting the disputed amounts as charitable contributions.” Hill v. Commissioner, T.C. Memo. 2004-156 (2004).

EXAMPLE A woman (the donor) claimed a charitable contribution deduction of $22,000 for cash and property donated to her church. The cash contributions amounted to $12,000 and consisted of 12 monthly contributions ranging from $250 to $450 and several other contributions ranging from $125 for the annual choir concert to $1,200 for the building fund. The donor also made several donations of miscellaneous noncash property, including furniture, kitchen equipment, a television, and several items of clothing. She valued each of these items at more than $250 but less than $5,000.

The IRS audited the donor’s tax return and asked her to substantiate her charitable contributions of cash and property. She submitted a receipt from her church that listed each contribution of cash and property. The IRS concluded that the receipt failed to substantiate any contribution of $250 or more because it failed to state whether the church had provided any goods or services in exchange for the contributions, as required by the tax code. Further, the receipt failed to adequately describe the items of donated property. The Tax Court agreed with the IRS that the contributions of cash and property of $250 or more were not deductible because the church’s receipt failed to state “whether the church provided any goods or services in consideration, in whole or in part, for those contributions.” The court upheld the imposition of a negligence penalty against the donor. Kendrix v. Commissioner, T.C. Memo. 2006-9 (2006).

EXAMPLE A couple claimed a charitable contribution deduction of $6,500 on their tax return for contributions they made to their church consisting of 10 checks totaling $6,100 (each check was in excess of $250) and an additional eight checks totaling $400 (each check was for less than $250). The IRS audited the couple’s tax return and asked them to substantiate their charitable contributions consisting of checks of $250 or more. The couple produced a letter from their church stating that they had made contributions of $6,500 to the church for the year in question. The IRS concluded that this letter failed to substantiate any contribution of $250 or more for two reasons: first, it was not contemporaneous, and second, it failed to state whether the church had provided any goods or services in exchange for the contributions, as required by the tax code. The couple appealed to the Tax Court.

The Tax Court agreed with the IRS that the couple’s contributions of $250 or more were not deductible. The court concluded that the letter the church sent to the couple (acknowledging contributions of $6,500) was not contemporaneous because the couple did not receive it by the later of the date they filed their tax return or the due date of their return. Rather, the church did not issue the letter to the couple until two years later, on the day they had their hearing before the court.

The court also noted that “the letter from [the church] does not meet the substantiation requirements set forth in the Internal Revenue Code and regulations. According to the Internal Revenue Code and regulations, the required acknowledgment of the charitable contribution not only must include the amount contributed, but also must state whether the charity provided any goods or services in consideration for the contributions and describe and set forth a good faith estimate of the value of those goods or services. Gomez v. Commissioner, T.C. Memo. 2008-93.

EXAMPLE The Tax Court denied a taxpayer’s charitable contribution deduction due to a lack of adequate substantiation. A registered nurse worked for several employers in different cities. She claimed a $17,000 deduction on her federal tax return for charitable contributions, which she reported on line 16 of Schedule A (“Gifts by cash or check”). Next to the $17,000 amount, she wrote, “Church tithes different churches—cash each Sunday.” She testified that she attended “any kind of [her denomination’s] churches that I could find [and contributed] 10 percent of what I earned that week.” She also testified that she donated $1,000 to a charity that failed to provide her with a written acknowledgment of the contribution. The court denied a deduction for this $1,000 contribution since the taxpayer did not receive a written acknowledgment. It concluded that “even if we were persuaded that the taxpayer did make the $1,000 contribution and all the other requirements for a deduction had been met, the statute would prohibit allowance of a deduction for this asserted $1,000 contribution” since the charity failed to comply with the written acknowledgment requirement.

When the IRS pressed the taxpayer on the remaining $16,000 that she allegedly donated to various churches and noted that this was more than 20 percent of her gross income and would have required her to donate more than $300 a week, she testified that “I go to various churches. I don’t walk around with $300 in my pocket, but I know when I am leaving work on Saturday night I will stop at whatever church before I go home to sleep, and if it is $100, yes, I will take that along with me.” She added, “This isn’t a guess or an estimate. If I go back home and think about things, or whatever, I will probably be able to come up with why it is $17,000.” The court concluded that the taxpayer was not entitled to any charitable contribution deduction. It also imposed a penalty in the amount of 20 percent of the taxpayer’s total tax liability because of her understatement of income tax. Section 6662 of the tax code empowers the IRS to assess the 20-percent penalty if an understatement of tax is more than the greater of $5,000 or 10 percent of the amount required to be shown on the tax return. The court affirmed the imposition of this tax since the taxpayer had understated her tax liability by more than $5,000. Woodard v. Commissioner, T.C. Summary Opinion 2008-45.

EXAMPLE The Tax Court ruled that a married couple could not deduct $26,000 in contributions made to their church due to a lack of adequate substantiation. The husband claimed he lacked substantiating documents for the $26,000 of charitable contributions because he and his wife made anonymous cash donations to their church. He alleged that he was unaware that he needed to substantiate the contributions. However, when asked whether he followed the instructions on the tax return that relate to charitable contributions over $250, he stated: “I don’t have to follow [them], I just put whatever is necessary to put the deduction. This is my deduction, the cash plate that I donated.” The court agreed with the IRS that the couple was not entitled to any tax deduction for charitable contributions. Guerrero v. Commissioner, T.C. Memo. 2009-164 (2009).

EXAMPLE The Tax Court ruled that a pastor could not deduct cash contributions of $37,000 to her church due to a failure to comply with the substantiation requirements. A woman (the “pastor”) was employed as a full-time law enforcement technician and served as pastor of a church. On her 2004 and 2005 federal income tax returns, she claimed charitable contribution deductions totaling $37,000 for gifts of cash or check to her church. The IRS audited her tax return and disallowed all of her cash contributions because she “did not verify that the amounts shown were contributions and paid.” The pastor attempted to substantiate her charitable contributions with letters received from church officials and a log she kept that recorded cash contributions she made to her church. The Tax Court ruled that these documents did not provide adequate substantiation of her contributions of $250 or more since they “failed to satisfy the requirement that the organization provide a statement as to whether the organization provided any goods or services in consideration for the donation. Therefore, the pastor’s charitable contribution deduction is not allowable.” Coleman v. Commissioner, T.C. Summary Opinion 2009-16 (2009). See also Fuentes v. Commissioner, T.C. Summary Opinion 2009-39 (2009).

EXAMPLE The Tax Court ruled that a married couple was not entitled to a charitable contribution deduction for contributions of noncash property they had valued at $217,000, since the written acknowledgement they had received from the charity did not contain a statement that no goods or services were provided by the donee in exchange for the contributions. The court concluded that such a statement

is necessary for a charitable contribution deduction under section 170(f)(8)(B)(ii) of the tax code. The donors argue that section 170(f)(8)(B)(ii) can be read to require the statement only when the donee actually furnishes goods or services to the donor. We disagree. Courts must presume that a legislature says in a statute what it means and means in a statute what it says there. In the absence of a clearly expressed legislative intent to the contrary, unambiguous statutory language ordinarily must be regarded as conclusive. Section 170(f)(8)(B)(ii) plainly states that the written acknowledgment is sufficient if it includes information as to whether the donee organization provided any goods or services in consideration, in whole or in part, for any property donated by the taxpayer. The language used is clear and unconditional. There is no reason to read into section 170(f)(8)(B)(ii) the limitation suggested by petitioners. Friedman v. Commissioner, 99 T.C.M. 1175 (2010). See also Hendrix v. Commissioner, 2010 WL 2900391 (S.D. Ohio 2010).

EXAMPLE The Tax Court denied any charitable contribution deduction to a donor who donated property valued at $700,000 to charity because the receipt he received from the charity failed to disclose whether he had received any goods or services in return for his donation. The court concluded that “even if the charity actually provided no consideration for the contribution, the written acknowledgment must say so in order to satisfy the requirement of [the tax code].” It referred to a congressional conference committee report commenting on the substantiation requirements for charitable contributions: “If the donee organization provided no goods or services to the taxpayer in consideration of the taxpayer’s contribution, the written substantiation is required to include a statement to that effect.” Schrimsher v. Commissioner, T.C. Memo. 2011-71 (2011).

EXAMPLE A married couple (the “taxpayers”) timely filed their 2007 income tax return. On their attached Schedule A, the taxpayers claimed a deduction of $25,171 for charitable contributions made by cash or check. Most of the contributions were made by check to their church. Except for five checks totaling $317, the checks the taxpayers wrote to their church were for amounts larger than $250. In 2009 the IRS sent a notice to the taxpayers disallowing their charitable contribution deduction for 2007. In response, the taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church that acknowledged contributions from them during 2007 totaling $22,517 (the “first acknowledgment”). The IRS did not accept the first acknowledgment and informed the taxpayers that it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.

The taxpayers obtained a second letter from the church (the “second acknowledgment”) that contained the same information found in the first acknowledgment as well as a statement that no goods or services were provided to them in exchange for their contributions.

The IRS concluded that the taxpayers were not entitled to a deduction for any of their contributions of $250 or more because of their failure to comply with the substantiation requirements. It noted that the church’s first letter to the taxpayers failed to comply with the written acknowledgment requirement because it did not include a statement regarding whether any goods or services were provided in consideration for their contribution. And the second letter, which included the statement, was not contemporaneous. The couple conceded that they had not strictly complied with the tax code’s substantiation requirements. But they insisted that they had substantially complied with the requirements and therefore were entitled to deduct their contributions.

The Tax Court agreed with the IRS and denied any deduction for contributions of $250 or more. The taxpayers claimed that the omission of a statement regarding goods or services in the church’s first letter was sufficient to indicate that no goods or services were provided in consideration for their contributions. The court disagreed, noting that “the express terms of the statute require an affirmative statement.” The court also agreed with the IRS that the church’s second letter, which included the required statement that no goods or services were provided to the donors in consideration of their contribution, did not meet the tax code’s “contemporaneous” requirement because it was issued after the earlier of the date on which the taxpayer files a return for the taxable year in which the contribution was made or the due date (including extensions) for filing such return.

The court rejected the taxpayers’ argument that they should be allowed to deduct their donations to their church because they had “substantially complied” with the tax code’s substantiation requirements. It acknowledged that it had found substantial compliance in prior cases that involved compliance with the “essential purpose” of the substantiation requirements despite a lack of strict compliance. But in the present case, the taxpayers had not complied with the “essential purpose” of the law, which includes both the contemporaneous requirement and the requirement that the charity’s written acknowledgement indicate whether any goods or services were provided in consideration of the contribution. Durden v. Commissioner, TC Memo. 2012-140 (2012).

EXAMPLE A donor made a cash contribution of $25,000 to a religious organization. The IRS audited the donor’s tax return and denied the charitable contribution deduction on the ground that it was not properly substantiated. The donor appealed to the United States Tax Court. The Tax Court agreed with the IRS that the charitable contribution was not tax-deductible:

Because the amount of the alleged contribution exceeds $250, it must be evidenced by a contemporary written acknowledgment in order to be deductible. As evidence of his alleged contribution [the donor] provided a self-generated letter signed by himself. The letter states that the amount of cash contributed was $25,000, but it does not include any of the other required information. In particular, the letter is silent as to whether the donor received any goods or services in exchange for the cash. Both the Code and the regulations provide that such information is a necessary element of the contemporary written acknowledgment. Because he failed to provide a contemporary written acknowledgment of his contribution, we find that he is not entitled to deduct any amount for [the] contribution.

This case illustrates the consequences that can result from a church’s failure to comply with the substantiation requirements for charitable contributions. Those requirements are stricter for contributions of $250 or more and, as this case demonstrates, require the written acknowledgment (receipt) provided by a charity to donors to be contemporaneous and to include a statement indicating whether the charity provided goods or services to the donor in consideration of the contribution. If goods or services were provided, the church’s written acknowledgment must provide a description and good faith estimate of the value of those goods or services or, if only intangible religious benefits were provided, a statement to that effect. The Tax Court stressed that whether the donor made the donation was irrelevant. Even if he did make the $25,000 contribution, he was not entitled to a charitable contribution deduction because he was unable to meet the strict substantiation requirements that apply to contributions of $250 or more. Longino v. Commissioner, T.C. Memo. 2013-80 (2013). See also Beaubrun v. Commissioner, T.C. Memo. 2015-217.

Rule 3—individual quid pro quo cash contributions of $75 or less

While the special quid pro quo substantiation rules (discussed below) do not apply to contributions of $75 or less, these contributions are still only deductible to the extent they exceed the value of the goods or services provided in exchange. To illustrate, a donor who contributes $50 to a charity and receives a “free” book with a market value of $20 is entitled to a deduction of only $30 since donors may only deduct the amount by which a contribution exceeds the value of any goods or services received in return.

Raffles, auctions, and bazaars

In Revenue Ruling 67-246, the IRS addressed the “deductibility, as charitable contributions . . . ​of payments made by taxpayers in connection with admission to or other participation in fund-raising activities for charity such as charity balls, bazaars, banquets, shows, and athletic events.” The IRS noted:

As a general rule, where a transaction involving a payment is in the form of a purchase of an item of value, the presumption arises that no gift has been made for charitable contribution purposes, the presumption being that the payment in such case is the purchase price. Thus, where consideration in the form of admissions or other privileges or benefits is received in connection with payments by patrons of fund-raising affairs of the type in question, the presumption is that the payments are not gifts. In such case, therefore, if a charitable contribution deduction is claimed with respect to the payment, the burden is on the taxpayer to establish that the amount paid is not the purchase of the privileges or benefits and that part of the payment, in fact, does qualify as a gift.

In showing that a gift has been made, an essential element is proof that the portion of the payment claimed as a gift represents the excess of the total amount paid over the value of the consideration received therefor. This may be established by evidence that the payment exceeds the fair market value of the privileges or other benefits received by the amount claimed to have been paid as a gift. . . . ​Regardless of the intention of the parties, however, a payment of the type in question can in any event qualify as a deductible gift only to the extent that it is shown to exceed the fair market value of any consideration received in the form of privileges or other benefits. . . .

The mere fact that tickets or other privileges are not utilized does not entitle the patron to any greater charitable contribution deduction than would otherwise be allowable. The test of deductibility is not whether the right to admission or privileges is exercised but whether the right was accepted or rejected by the taxpayer. If a patron desires to support an affair but does not intend to use the tickets or exercise the other privileges being offered with the event, he can make an outright gift of the amount he wishes to contribute, in which event he would not accept or keep any ticket or other evidence of any of the privileges related to the event connected with the solicitation.

The IRS ruling illustrated these principles with the following examples:

Example. The X Charity sponsors a fund-raising bazaar, the articles offered for sale at the bazaar having been contributed to X by persons desiring to support X’s charitable programs. The prices for the articles sold at the bazaar are set by a committee of X with a view to charging the full fair market value of the articles. A taxpayer who purchases articles at the bazaar is not entitled to a charitable contribution deduction for any portion of the amount paid to X for such articles. This is true even though the articles sold at the bazaar are acquired and sold without cost to X and the total proceeds of the sale of the articles are used by X exclusively for charitable purposes.

Example. A taxpayer paid $5 for a ticket which entitled him to a chance to win a new automobile. The raffle was conducted to raise funds for the X Charity. Although the payment for the ticket was solicited as a “contribution” to the X Charity and designated as such on the face of the ticket, no part of the payment is deductible as a charitable contribution. Amounts paid for chances to participate in raffles, lotteries, or similar drawings or to participate in puzzle or other contests for valuable prizes are not gifts in such circumstances, and therefore, do not qualify as deductible charitable contributions.

The IRS issued a similar ruling in 1983. Revenue Ruling 83-130. It quoted Revenue Ruling 67-246 and noted that “amounts paid for chances to participate in raffles, lotteries, or similar drawings or to participate in puzzle or other contests for valuable prizes conducted by a charity are not gifts and therefore do not qualify as charitable contributions.”

The IRS website contains the following information on “charity auctions”:

Donors who purchase items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value. The donor must be able to show, however, that he or she knew that the value of the item was less than the amount paid. For example, a charity may publish a catalog, given to each person who attends an auction, providing a good faith estimate of items that will be available for bidding. Assuming the donor has no reason to doubt the accuracy of the published estimate, if he or she pays more than the published value, the difference between the amount paid and the published value may constitute a charitable contribution deduction.

In addition, donors who provide goods for charities to sell at an auction often ask the charity if the donor is entitled to claim a fair market value charitable deduction for a contribution of appreciated property to the charity that will later be sold. Under these circumstances, the law limits a donor’s charitable deduction to the donor’s tax basis in the contributed property and does not permit the donor to claim a fair market value charitable deduction for the contribution. Specifically, the Treasury Regulations under section 170 provide that if a donor contributes tangible personal property to a charity that is put to an unrelated use, the donor’s contribution is limited to the donor’s tax basis in the contributed property. The term unrelated use means a use that is unrelated to the charity’s exempt purposes or function, or, in the case of a governmental unit, a use of the contributed property for other than exclusively public purposes. The sale of an item is considered unrelated, even if the sale raises money for the charity to use in its programs.

The Tax Court addressed raffle tickets in a 1966 ruling. Goldman v. Commissioner, 46 T.C. 136 (1966), aff’d 388 F.2d 476 (6th Cir. 1967). A taxpayer purchased raffle tickets in the following amounts from the following organizations: Good Samaritan Hospital ($50), Jewish Community Center ($10), Chofetz Chaim (Hebrew School) Bazaar ($10), and Cancer Aid ($10). The taxpayer received tickets for these payments, and these tickets were placed in a “blind draw” from which he conceivably might have won something. The taxpayer acknowledged that he would have won something if his ticket number had been drawn in the lottery but contended that in purchasing the tickets he did not intend to gamble on a risk but intended to make a gift, characterizing his payments as “a regular donation that is made year after year, to these institutions.” The taxpayer insisted that “the odds of winning were infinitesimal” and that “the amount of the payment far exceeded the actuarial value of the ‘chance’.”

The taxpayer treated all these purchases as charitable contributions on his tax return. The IRS challenged these deductions, and the case was appealed to the Tax Court. The court acknowledged that “it is possible to hypothesize a raffle ticket situation where the charitable nature of the gift would scarcely be debated, as where the purchase for $10 is one of one thousand chances and the prize a nosegay of violets.” But the court concluded that payment for the raffle tickets did not qualify as charitable contributions:

A raffle is generally held to be within the general definition of a lottery. It is a disposal by chance of a single prize among purchasers of separate chances. Petitioner was not a contributor to the charitable organization when he bought its raffle ticket. He was merely purchasing that which the charitable organization had to sell, namely, chances for a valuable prize. We are not told what the prizes were but it is stipulated they were valuable prizes. The charitable organization selling raffle tickets was in effect disposing of its prize by sale and petitioner was paying a small portion of the purchase price and receiving the chance to receive the prize for his payment. He received full consideration and he got just what he paid for. He was not making a charitable contribution within the meaning of the statute.

Rule 4—individual quid pro quo cash contributions of more than $75

In addition to providing a written acknowledgment for contributions of $250 or more (as discussed under Rule 2 above), a church must issue a written disclosure statement to persons who make quid pro quo contributions of more than $75. A quid pro quo contribution is a payment “made partly as a contribution and partly in consideration for goods or services provided to the donor by the donee organization.” For example, a donor contributes $100 to her church, but in return she receives a dinner worth $30.

The written disclosure statement a church or charity provides to a donor of a quid pro quo contribution of more than $75 must

EXAMPLE A donor gives a charitable organization $100 in exchange for a concert ticket with a fair market value of $30. In this example the donor’s tax deduction may not exceed $70. Because the donor’s payment (quid pro quo contribution) exceeds $75, the charitable organization must furnish a disclosure statement to the donor even though the deductible amount does not exceed $75.

Exceptions to the quid pro quo reporting rule

A written statement need not be issued to a donor of a quid pro quo contribution in any of the following situations:

Token goods or services are given to the donor by the charity. Token goods or services are defined in either of the following two ways:

The $132 and $13.20 amounts are adjusted annually for inflation and represent the 2024 amounts.

The donor receives an intangible religious benefit. The term intangible religious benefit is defined by the tax code as “any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.” A congressional committee report states that the term intangible religious benefit includes “admission to a religious ceremony” or other insignificant “tangible benefits furnished to contributors that are incidental to a religious ceremony (such as wine).” However, the committee report clarifies that “this exception does not apply, for example, to tuition for education leading to a recognized degree, travel services, or consumer goods.”

Penalties

The tax code imposes a penalty of $10 per contribution (up to a maximum of $5,000 per fund-raising event or mailing) on charities that fail to make the required quid pro quo disclosures, unless a failure was due to reasonable cause. The penalties will apply if a charity either fails to make the required disclosure in connection with a quid pro quo contribution (as explained above) or makes a disclosure that is incomplete or inaccurate.

Intent to make a charitable contribution

For many years the IRS has ruled that persons who receive goods or services in exchange for a payment to a charity are eligible for a charitable contribution deduction only with respect to the amount by which their payment exceeds the fair rental value of the goods or services they received. The tax regulations add an additional condition: donors may not claim a charitable contribution in such a case unless they intended to make a payment exceeding the fair market value of the goods or services. Treas. Reg. 1.170A-1(h).

EXAMPLE A church sells tickets to a missions banquet. The cost of each ticket is $100, though the fair market value of the meal is only $20. Persons who purchase tickets are eligible to claim a charitable contribution deduction in the amount of $80 if they intended to make a payment exceeding the amount of the dinner.

How will church treasurers know when donors intend to make a payment exceeding the value of goods or services received in exchange? The tax regulations state that “the facts and circumstances” of each case must be considered.

Refusal of benefits

What if a member purchases a $100 ticket to a church’s missions banquet (as in the above example) but has no intention of attending the banquet? Is the member entitled to a charitable contribution deduction of $100 or $80? In other words, must a charitable contribution be reduced by the amount of goods or services that a donor refuses to accept? The IRS has ruled that “a taxpayer who has properly rejected a benefit offered by a charitable organization may claim a deduction in the full amount of the payment to the charitable organization.” Revenue Ruling 67-246. How does a donor reject a benefit? The IRS suggested that charities create a form containing a “check-off box” that donors can check at the time they contribute if they want to refuse a benefit.

EXAMPLE A church conducted an auction in 2024 to raise funds for missions. Members are asked to donate baked items, which are then auctioned to other members at the highest price. A member donates a pie, which is sold to another member for $150 (assume that it has a value of $5). Do the quid pro quo rules apply to the donor who bought the pie for $150? The answer is yes, since this member contributed more than $75, in return for which she received goods or services other than token items or intangible religious benefits. The pie is not a token item, since its value ($5) exceeds the lesser of $132 or 2 percent of the contribution ($3).

EXAMPLE A church conducts an auction of donated items. A member purchases a used bicycle (with a value of $50) for $250. This is a quid pro quo contribution since it is part contribution and part purchase of goods or services. Accordingly, in addition to the substantiation requirements mentioned above, the church must issue the donor a written statement that (1) informs the donor that the amount of the contribution that is tax-deductible is limited to the excess of the amount of any money contributed by the donor over the value of any goods or services provided by the church in return, and (2) provides the donor with a good faith estimate of the value of the goods or services furnished to the donor. Accordingly, the church’s written acknowledgment should report the contribution of $250, inform the donor that the contribution is deductible only to the extent it exceeds the value of goods or services received in exchange, provide the donor with a description and good faith estimate of the value of the bicycle provided in return ($50), and then list the deductible portion of the contribution ($200).

EXAMPLE A church-affiliated college conducts an annual banquet for persons who have contributed more than $1,000 during the year. The value of the meal provided is $30 per person. Do the quid pro quo reporting requirements apply? At first glance the answer would appear to be yes, since donors are receiving a $30 benefit in exchange for their contributions. However, the tax code defines a quid pro contribution as “a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization.” When donors contribute $1,000 to the college, do they do so in order to receive a free dinner? Is the dinner in any sense relevant to a donor in deciding whether to make the contribution?

Obviously, the answer in most cases is no. Most donors do not make their contributions “in consideration for goods or services.” Most donors would have made their contributions even if no dinner were provided. As a result, an argument can be made that contributions to the college are not quid quo pro contributions. However, this rationale has never been recognized by the IRS or the courts and should not be adopted without the advice of a tax professional.

EXAMPLE A religious radio ministry offers a “free” book in exchange for contributions of $50 or more. The book has a value of $10. The quid pro quo rules apply to contributions of more than $75 but not to contributions of $75 or less. Note, however, that while the quid pro quo rules do not apply to contributions of $75 or less, these contributions are still only deductible to the extent they exceed the value of the goods or services provided in exchange.

EXAMPLE Many churches conduct sales of merchandise to raise funds for various programs and activities. Examples include bake sales, auctions, and bazaars. Should a church issue a Form 1099-NEC to persons who purchase items at such events? No, ruled the IRS. Charities that sell items during fund-raising events need not issue Forms 1099-NEC to purchasers, since no compensation is being paid to them. Form 1099-NEC is issued to nonemployees who are paid compensation of $600 or more during the year. IRS Letter Ruling 9517010.

The substantiation requirements for contributions of noncash property (e.g., land, equipment, stock, books, art, vehicles) are more stringent than for contributions of cash or checks. It is important to note that more than one rule may apply to a particular contribution. For example, any contribution of property valued by the donor at less than $250 will trigger only Rule 5. But contributions of property valued at $250 or more will trigger Rule 6 and possibly Rule 7 or Rule 10 (depending on the value of the donated property).

Rule 5—individual contributions of noncash property valued by the donor at less than $250

The church’s written acknowledgment

The income tax regulations specify that

any taxpayer who makes a charitable contribution of property other than money . . . ​shall maintain for each contribution a receipt from the donee showing the following information:

(1) The name of the donee.

(2) The date and location of the contribution.

(3) A description of the property in detail reasonably sufficient under the circumstances. Although the fair market value of the property is one of the circumstances to be taken into account in determining the amount of detail to be included on the receipt, such value need not be stated on the receipt.

(4) For a security, the name of the issuer, the type of security, and whether it is publicly traded as of the date of the contribution. Treas. Reg. 1.170A-13.

A letter or other written communication from the church acknowledging receipt of the contribution and containing the information in (1), (2), (3), and (4) above will serve as a receipt. You are not required to have a receipt where it is impractical to get one (for example, if you leave property at a charity’s unattended drop site).

Records maintained by donors

In addition to the receipt provided by the church, donors themselves must keep reliable written records for each item of donated noncash property. Records must include the following information:

Rule 6—individual contributions of noncash property valued by the donor at $250 to $500

The church’s written acknowledgment

Donors who claim a deduction of at least $250 but not more than $500 for a noncash charitable contribution must get and keep an acknowledgment of their contribution from the church. Donors who make more than one contribution of $250 or more must have either a separate acknowledgment for each contribution or one acknowledgment that shows the total contributions. The church’s written acknowledgment must contain the same information as under Rule 5 (above). It must also meet these tests:

Records maintained by donors

IRS regulations specify that donors who make contributions of $250 or more, but not more than $500, are required to obtain a contemporaneous written acknowledgment from the donee charity and, in addition, maintain all the donor records described under Rule 5 above.

Rule 7—individual contributions of noncash property valued by the donor at more than $500 but not more than $5,000

Donors who claim a deduction over $500 but not over $5,000 for a noncash charitable contribution must have the acknowledgment and written records described under Rule 6, and their records must also include

Donors who claim a deduction over $500 but not over $5,000 for a noncash charitable contribution must complete Form 8283 and have the contemporaneous written acknowledgment (defined earlier). The completed Form 8283 must include the following:

Rule 8—quid pro quo contributions of noncash property

The quid pro quo rules are explained fully in the previous section dealing with cash contributions (see Rules 3 and 4). Those rules apply to contributions of property as well and should be reviewed at this time.

Rule 9—individual contributions of noncash property valued by the donor at more than $5,000

In this section the rules for substantiating a contribution of property valued by the donor at more than $5,000 will be reviewed. Unfortunately, many donors and church leaders are not familiar with these rules. This can lead to unfortunate consequences since IRS regulations warn that no deduction for any contribution of property valued by the donor at more than $5,000 will be allowed unless these requirements are satisfied. There is no “substantial compliance” exception.

The requirements discussed below ordinarily are triggered by a contribution of a single item of property valued by the donor at more than $5,000, but they also can be triggered by contributions of similar items within a calendar or fiscal year if the combined value claimed by the donor exceeds $5,000.

Publicly traded stock listed on a stock exchange is not subject to these requirements, since its value is readily ascertainable. Note, however, that gifts of publicly traded stock must be substantiated by completing Part A of Form 8283, even if the stock is valued at more than $5,000. Part A does not require a qualified appraisal.

Contributions of nonpublicly traded stock (i.e., stock held by most small, family-owned corporations) are subject to the qualified appraisal requirement, but only if the value claimed by the donor exceeds $10,000.

Contributions of cars, boats, and planes are subject to special rules, as explained in Rule 10.

EXAMPLE S contributes equipment to a church in September 2025. The equipment has a retail value of $4,000, but S believes $6,000 is a more accurate value and plans to deduct this amount as a charitable contribution on her 2025 federal income tax return. The substantiation rules discussed in this section apply.

EXAMPLE Same facts as the preceding example, except that S plans to claim a contribution deduction of only $4,000. The substantiation rules discussed in this section do not apply.

EXAMPLE B contributes a vacant lot and a computer to a church in 2025. B plans to claim a charitable contribution deduction of $4,000 for each item. The substantiation rules discussed in this section (with respect to contributions of noncash property valued at more than $5,000) do not apply. If B had given two lots and planned to claim a contribution deduction of $4,000 for each, the rules discussed in this section would apply since the lots are similar items whose values must be combined.

The substantiation requirements that apply to contributions of $250 or more were enacted to make it more difficult for donors to improperly reduce taxable income by intentionally overvaluing contributed property and then claiming inflated charitable contribution deductions on their income tax returns.

The donor’s obligations

Donors who contribute property valued at more than $5,000 to a church or other charity must satisfy each of the following three requirements to claim a charitable contribution deduction:

In addition, a qualified appraisal must be prepared in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the IRS. The income tax regulations define a qualified appraisal as an appraisal prepared by a qualified appraiser in accordance with generally accepted appraisal standards. Generally accepted appraisal standards are defined in the proposed regulations as “the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), as developed by the Appraisal Standards Board of the Appraisal Foundation.”

Qualified appraiser. A qualified appraisal, as noted above, is one prepared by a qualified appraiser. The regulations define the term qualified appraiser as follows:

In addition, the appraiser must complete Form 8283, Section B, Part III. More than one appraiser may appraise the property, provided that each complies with the requirements, including signing the qualified appraisal and Form 8283, Section B, Part III.

The qualified appraisal must be received by the donor before the due date (including extensions) of the federal income tax return on which the deduction is claimed. Finally, note that a qualified appraisal must be obtained for each item of contributed property valued by the donor in excess of $5,000.

Exceptions. You do not need an appraisal if the property is

See IRS Publication 561 for additional information.

Donors and appraisers may be subject to penalties, as follows:

Penalties against the appraiser. An appraiser who prepares an incorrect appraisal may be subject to a penalty if: (1) the appraiser knows or should have known the appraisal would be used in connection with a return or claim for refund and (2) the appraisal results in the 20-percent or 40-percent penalty for a valuation misstatement described below. The penalty imposed on the appraiser is the smaller of

In addition, any appraiser who falsely or fraudulently overstates the value of property described in a qualified appraisal of a Form 8283 that the appraiser has signed may be subject to a civil penalty for aiding and abetting as understatement of tax liability and may have his or her appraisal disregarded.

Penalties against the donor. You may be liable for a penalty if you overstate the value or adjusted basis of donated property. The penalty is 20 percent of the underpayment of tax related to the overstatement if

The penalty is 40 percent, rather than 20 percent, if

Section A (side 1) of Form 8283 is completed by donors who contribute property valued between $500 and $5,000, as noted under Rule 7.

Section B of Form 8283 contains four parts. Part I is completed by the donor or appraiser and sets forth information from the qualified appraisal regarding the donated property, including its appraised value. Part I is completed by the donor and identifies individual items in groups of similar items having an appraised value of not more than $500. Part II contains the appraiser’s certification that he or she satisfies the definition of a qualified appraiser. Part V is a donee acknowledgment, which must be completed by the church. The church simply indicates the date on which it received the contribution and agrees to file an information return (Form 8282) with the IRS if it disposes of the donated property within three years. The regulations specify that the church’s acknowledgment “does not represent concurrence in the appraised value of the contributed property. Rather, it represents acknowledgment of receipt of the property described in the appraisal summary on the date specified in the appraisal summary.”

The instructions for Form 8283 permit a church to complete Part V before the qualified appraisal is completed. They instruct the donor to “complete at least your name, identification number, and description of the donated property,” along with Part II if applicable, before submitting the Form 8283 to the church (or other donee). In other words, the donor should fill in his or her name and Social Security number on the lines provided at the top of page 1 of the form, and also complete line 5(a) of Section B, Part I (on the back page of the form) before submitting the form to the church. After completing Section B, Part V, the church returns the form to the donor, who then completes the remaining information required in Part I. The donor should also arrange to have the qualified appraiser complete Part II at this time.

If the amount of a contribution of property other than cash, inventory, or publicly traded securities exceeds $500,000 (if art, $20,000), the qualified appraisal must be attached to the donor’s tax return. For purposes of the dollar thresholds, property and all similar items of property donated to one or more charities are treated as one property.

EXAMPLE A member contributes equipment valued at $15,000 to his church. The member asks an appraiser who attends the church to appraise the property. Such an appraiser may not satisfy the definition of a qualified appraiser, since his relationship to the church might cause a reasonable person to question his independence.

EXAMPLE A member contributes property to a church in 2025 that is worth well in excess of $5,000. To assist the member in complying with the substantiation requirements, the church should (1) acknowledge receipt of the contribution in a signed document; (2) inform the member of the necessity of obtaining a qualified appraisal; and (3) inform the member of the obligation to complete an appraisal summary (Form 8283) prior to the due date for the 2025 income tax return (and, as a convenience, give the member a copy of the current form). The church is required to sign Section B, Part V, of the donor’s Form 8283 and to complete and file with the IRS an information return (Form 8282) within 125 days of the date it disposes of the property (if it does so within 3 years of the date of the contribution).

EXAMPLE The Tax Court ruled that a taxpayer who donated property to charity had substantially complied with the law even though a separate appraisal had not been obtained and the qualifications of the appraiser were omitted from the appraisal summary attached to the donor’s tax return. The court noted that the donor had obtained an appraisal of the property prior to the time he decided to donate it to charity and that this appraisal contained substantially all the information required by law. When the donor later decided to donate the property to charity, he simply enclosed a copy of this appraisal with the tax return on which a charitable contribution was claimed. The court concluded that the qualified appraisal rules are “directory, not mandatory,” and therefore they could be met by substantial, rather than strict, compliance. The fact that the donor did not obtain a new appraisal did not preclude a charitable contribution deduction. Bond v. Commissioner, 100 T.C. 32 (1993).

EXAMPLE A donor contributed nonpublicly traded stock worth more than $10,000 to a church but obtained no qualified appraisal and attached no qualified appraisal summary to the tax return on which the charitable contribution deduction was claimed. The Tax Court ruled that the donor was not entitled to a charitable contribution deduction, even though there was no dispute as to the value of the donated stock. Hewitt v. Commissioner, 109 T.C. 12 (1997).

EXAMPLE A donor claimed two charitable contributions of clothing that she valued at $4,000 and $2,000. The IRS denied a charitable contribution deduction for these gifts because the donor failed to comply with the substantiation requirements. The donor appealed to the Tax Court, which agreed with the IRS. The court noted that persons who contribute property valued at more than $5,000 must obtain a qualified appraisal of the property and attach a qualified appraisal summary (IRS Form 8283) to the tax return on which the deduction is claimed. Items of similar property are combined when applying the $5,000 test. Since the donor in this case gave similar property (clothing), the value of the two separate donations had to be combined. And since the combined value exceeded $5,000, the donor was required by law to obtain a qualified appraisal and attach a qualified appraisal summary to her tax return. Since she failed to comply with these requirements, she was not eligible for any charitable contribution deduction for the gifts of clothing. Fast v. Commissioner, T.C. Memo. 1998-272 (1998).

EXAMPLE A corporation made a sizeable contribution of property to a charity for the care of the needy. The charity issued the corporation a receipt acknowledging the contribution but failing to indicate whether the charity provided any goods or services in return for the contribution. The IRS ruled that the corporation was not entitled to a charitable contribution deduction for three reasons:

First, the income tax regulations require that a charity’s written acknowledgment of a contribution be furnished on or before the earlier of the date on which the taxpayer files a return for the taxable year in which the contribution was made or the due date for filing such return. The IRS concluded that this requirement was not met.

Second, the charity’s written acknowledgment did not comply with the substantiation requirements for contributions valued at $250 or more, since it did not indicate whether the charity provided any goods or services in return for the contributed property.

Third, since the corporation donated property that it valued at more than $5,000, it was required by the income tax regulations to obtain a qualified appraisal of the property and enclose a summary of the appraisal (on IRS Form 8283) with the tax return on which the contribution deduction was claimed. A Form 8283 was not enclosed with the corporation’s tax return. When asked by an IRS agent about the missing Form 8283, the corporation furnished the missing form; but the IRS concluded that this was too late since the form did not accompany the corporation’s tax return. IRS Letter Ruling 200003005.

EXAMPLE A taxpayer claimed a deduction of $950,000 for contributions of several items of property he made to a church. The donated items included historical books and paintings. The taxpayer completed a Form 8283, on which he listed the donated items and his estimate of their market value, but he did not obtain an appraisal for any of the items. The IRS audited the taxpayer and allowed a charitable contribution deduction of only $12,900. On appeal, the Tax Court agreed with the IRS. It noted that the taxpayer failed to obtain a qualified appraisal of the donated items within the time limits specified by law. In general, persons who donate property valued at more than $5,000 must obtain a qualified appraisal no later than the date they file the tax return on which the contribution deduction is claimed. The taxpayer retained an appraiser only after his tax return was audited.

Further, the court noted that the appraiser’s valuations were not credible, since “he gave no persuasive explanation of his methodology, made no reference to comparable sales or a valuation rationale, and made no reference to any experience he had that would support the values at which he arrived. Without any reasoned analysis, his report is useless. His opinions are so exaggerated that his testimony is not credible.” Jacobson v. Commissioner, T.C. Memo. 1999-401 (1999).

EXAMPLE A married couple (the “taxpayers”) donated property having a fair market value of $10,000 to their local Boys and Girls Club. The next year they donated a truck having a fair market value of $14,850 to their church. The taxpayers failed to obtain qualified appraisals for both charitable contributions prior to the due date of their tax returns. They were audited by the IRS, and only then did they produce letters from two appraisers (dated after the taxpayers filed their tax returns). The IRS disallowed any deduction for either of these contributions, and the taxpayers appealed. The Tax Court noted that the tax code specifies that a taxpayer must obtain a qualified appraisal for donated property (except money and certain publicly traded securities) in excess of $5,000. In addition, the income tax regulations require that the taxpayer attach an appraisal summary to the tax return, and the IRS has prescribed Form 8283 to be used as the appraisal summary. The Tax Court concluded:

Although we have not demanded that the taxpayer strictly comply with the reporting requirements of [the regulations] we have required that the taxpayer substantially comply with the regulations in order to take the deduction for a charitable contribution. Based on the record, we find that [the taxpayers] did not timely obtain qualified appraisals and failed to include complete appraisal summaries with their tax returns. Because [they] failed to comply substantially with [the regulations] we hold that [they] are not entitled to deduct the noncash charitable contributions. Jorgenson v. Commissioner, 79 T.C.M. 1444 (2000).

EXAMPLE A couple made a gift of privately held corporate stock to a charity and claimed a charitable contribution deduction in the amount of $500,000. The couple based this amount on the opinion of a stockbroker who occasionally traded the stock. The Tax Court ruled that the couple could not deduct any amount for the gift of stock because they failed to comply with the substantiation requirements that apply to gifts of privately held stock.

Gifts of privately held stock (valued at more than $10,000) are not deductible unless (1) the donor obtains a qualified appraisal of the donated shares no earlier than 60 days prior to the date of the contribution, and (2) the donor completes a qualified appraisal summary (IRS Form 8283) and encloses it with the Form 1040 on which the contribution deduction is claimed. Note that the donee (church or other charity) must sign this appraisal summary.

In this case the couple did not obtain a qualified appraisal and did not attach a Form 8283 appraisal summary to their tax return. The court concluded, “We find that the couple failed to meet the substantiation requirements. Accordingly . . . ​no charitable deductions are allowed to them on account of the transfer of the shares.” Todd v. Commissioner, 118 T.C. No. 19 (2002).

EXAMPLE The Tax Court ruled that a church member could not deduct a contribution of a BMW automobile to his pastor, for two reasons. First, the contribution was to an individual rather than to a charity, and “such gifts are not deductible as charitable contributions.” Second, the donor failed to obtain a qualified appraisal of the donated car and attach a qualified appraisal summary (Form 8283) to his tax return, as is required for any contribution of noncash property (other than publicly traded stock) with a claimed value of more than $5,000. Brown v. Commissioner, T.C. Summary Opinion 2002-91 (2002).

EXAMPLE A taxpayer donated a “garage full” of obsolete computer equipment to a church and claimed a charitable contribution deduction of $15,320. The Tax Court ruled that the contribution was not deductible for a number of reasons, including the fact that the donor failed to comply with the qualified appraisal requirement. The court noted that the contribution deduction for the computer equipment exceeded $5,000, and therefore the donor was required to obtain a qualified appraisal and attach an appraisal summary (Form 8283, Section B) to his tax return. Since he failed to file an appraisal summary with his tax return, no deduction was permissible. Castleton v. Commissioner, T.C. Memo. 2005-58 (2005).

EXAMPLE The Tax Court denied a charitable contribution deduction of $210,000 for donations of two pieces of property made by a married couple to a charity. The court noted that the couple failed to obtain a timely qualified appraisal of the donated properties. It rejected the donors’ claim that they had “substantially complied” with the law:

None of the appraisals the donors obtained is a qualified appraisal. . . . ​The qualified appraisal requirement is mandatory, not merely directory. Our case law is clear that we cannot apply the doctrine of substantial compliance to excuse a taxpayer’s failure to meet this requirement. . . . ​We also note that the requirements that the appraiser and the donee sign the Form 8283 also appear to be mandatory. By signing the appraiser’s declaration, the appraiser potentially subjects himself to a penalty. . . . ​This requirement . . . ​discourages the overvaluation of charitable contributions. . . . ​By signing the donee’s acknowledgment, the donee asserts that it is a charitable organization. This requirement thus relates to the substance or essence of whether or not a charitable contribution was actually made. Ney v. Commissioner, T.C. Summary Opinion 2006-154.

EXAMPLE The Tax Court disallowed a donor’s charitable contribution deduction of $23,200 due to lack of proper substantiation. The donor claimed that he made several contributions of clothing to various religious organizations and that the total value of the donated items amounted to $5,600. He also claimed a deduction of $5,560 for several items of furniture that he claimed he donated to the same organizations. The rest of his contributions were in the form of cash. The IRS disallowed all of the contributions as a result of inadequate substantiation. On appeal, the Tax Court agreed. It noted that for noncash contributions in excess of $5,000, taxpayers must “(1) obtain a qualified appraisal, (2) attach a fully completed appraisal summary (Form 8283) to the tax return on which the deduction is claimed, and (3) maintain records pertaining to the claimed deduction.” The court correctly pointed out that “similar items of property, such as generic items like clothing and furniture, are aggregated when determining whether the $5,000 threshold is met. In this case the claimed deductions for jackets, clothes, shoes, and bags are aggregated and satisfy the $5,000 threshold. The claimed deduction for furniture also exceeds $5,000.”

The donor conceded that he neither obtained a qualified appraisal of the donated clothing and furniture nor attached a Form 8283 to his tax return. The only forms that he attached to his return were a receipt that he filled out and an itemized list of the donated items, which he also compiled. The court concluded that “neither the receipt nor the itemized form meet the requirements prescribed under [the tax code] as they do not meet the requirements for a qualified appraisal made by a qualified appraiser.”

The court also denied the donor’s cash contributions since he failed to provide any receipts, canceled checks, or other written records for the claimed contributions. Obiakor v. Commissioner, T.C. Summary Opinion 2007-185 (2007). See also Tilman v. United States, 2009-2 U.S.T.C. ¶50,549 (S.D.N.Y. 2009).

EXAMPLE The Tax Court ruled that a married couple was not entitled to a charitable contribution deduction for contributions of noncash property they had valued at $217,000.

The donors conceded that they had not strictly complied with the appraisal and appraisal summary requirements. But they insisted that they were nonetheless entitled to deduct their contributions since they had “substantially complied” with the substantiation requirements. The Tax Court concluded that even if the contributions were allowable based on substantial compliance with the law, the donors had not satisfied this test since their compliance with the law was far from substantial:

The donors’ documents fail to provide an adequate description of or the condition of the donated items. The Forms 8283 and the appraisal reports provide very generic descriptions, stating the items were in “good working condition” or “operational, clean and in good saleable condition.” An adequate description is necessary because “Without a more detailed description the appraiser’s approach and methodology cannot be evaluated.” In fact, their documents fail to even indicate the valuation method used or the basis for the appraised values. We have previously held such information to be essential because “Without any reasoned analysis . . . ​[the appraiser’s] report is useless.” Friedman v. Commissioner, 99 T.C.M. 1175 (2010).

EXAMPLE The Tax Court ruled that a married couple (the “donors”) was not eligible for a charitable contribution deduction for a donation of property because their appraisal failed to comply with the qualified appraisal requirements. The donors argued that their appraisal should be accepted because it was in substantial compliance with the law. The court rejected this argument for two reasons. First, the tax code contains no provision suggesting that substantial compliance is sufficient to meet the substantiation requirements enumerated in the code and regulations. Second, even if such an exception existed, it would not benefit the donors, since their compliance was far from substantial:

Assuming arguendo that the [substantial compliance] doctrine indeed could apply in such taxpayer actions, the court finds that the appraisal at issue wholly lacks even a modicum of content in critical areas to say that it substantially complies with numerous statutory and regulation mandates. The substantial compliance doctrine is not a substitute for missing entire categories of content; rather, it is at most a means of accepting a nearly complete effort that has simply fallen short in regard to minor procedural errors or relatively unimportant clerical oversights. The required content the donors neglected does not constitute such instances of technicalities. Much of the content provides necessary context permitting the Internal Revenue Service to evaluate a claimed deduction. Without, for example, the appraiser’s education and background information, it would be difficult if not impossible to gauge the reliability of an appraisal that forms the foundation of a deduction. The simple inclusion of an appraiser’s license number does not suffice given that there are distinctions between appraisers that the required information targets. . . .

Nowhere is it more apparent that donors’ actions negate the equitable safe haven they pursue than in recognizing that the purpose of the qualified appraisal is to present an understandable rationale for the claimed deduction, and the deduction of $287,400.00 claimed here hardly matches the $520,000.00 appraisal offered. Hendrix v. Commissioner, 2010 WL 2900391 (S.D. Ohio 2010).

EXAMPLE A successful real estate broker and appraiser donated several properties to his charitable remainder unitrust and claimed a charitable contribution deduction in the amount of $23 million. The IRS audited the tax return on which the deduction was claimed and denied any deduction on the ground that the donor failed to comply with the substantiation requirements that apply to donations of noncash property valued by the donor in excess of $5,000. Specifically, the donor did not obtain an appraisal of any of the donated properties prior to their donation, and he filled out his federal income tax return himself, including the Form 8283 (Noncash Charitable Contributions), which is used to substantiate donations of property valued at more than $5,000. The donor used his own appraisals of the donated properties. He didn’t report his basis in any of the donated properties but stated that he had bought all the properties “in the 1970s and 1980s.” The IRS disallowed any charitable contribution deduction on the ground that the substantiation requirements for donations of noncash property were not met.

The Tax Court agreed, noting that the donor’s Form 8283 did not constitute a valid qualified appraisal summary because it failed to comply with several of these requirements: “[The donor] failed to include information about several of these categories on his Form 8283 and the attached statements. For instance, he didn’t include his bases in the properties, there is no bargain-sale statement, and there are no statements from a qualified appraiser.” In addition, the donor did not seek independent appraisals until after the IRS audit started (well after his returns were due).”

The court rejected the donor’s argument that he should be allowed a deduction since he had “substantially complied” with the legal requirements: “The cases make clear that substantial compliance requires a qualified appraisal. . . . ​Since it is an essential requirement of [the tax code] that the taxpayer obtain a qualified appraisal, we can’t excuse failure to do so as substantial compliance.” Mohamed v. Commissioner, 103 T.C.M. 1814 (2012).

Example The IRS audited a taxpayer’s tax return and disallowed a charitable contribution deduction of $250,000 for the taxpayer’s contribution of his home to a religious charity (the “donee”) on the ground that he failed to comply with the substantiation requirements that apply to donations of noncash property valued at more than $5,000. The IRS concluded, and the Tax Court agreed, that these requirements were not met, and so the taxpayer’s contribution of his home was not deductible. These deficiencies included the following: (1) the “appraiser” who appraised the taxpayer’s home was a real estate agent who did not satisfy the tax code’s definition of a qualified appraiser, and (2) the appraisal was not performed within the time limits prescribed by the tax code.

The court rejected the taxpayer’s argument that he was entitled to a deduction based on his “substantial compliance” with the tax code’s substantiation requirements. The court concluded that there was no substantial compliance: “On the record before us, we find that the taxpayer failed to carry his burden of establishing that he satisfied all of the charitable contribution deduction substantiation requirements that apply to the charitable contribution deduction that they claimed.” A federal appeals court affirmed the lower court’s decision on appeal. Presley v. Commissioner, T.C. Memo. 2018-171 (2018), aff’d 790 Fed. Appx. 914 (10th Cir. 2019).

Example A married couple donated 150 acres of property to a charity, claiming a deduction of $1.5 million. Their tax return for the year of the contribution included an IRS Form 8283 (qualified appraisal summary) as required by the tax code and regulations. The IRS audited the taxpayers’ return and disallowed the contribution deduction based on the taxpayers’ failure to properly substantiate their contributions because the appraisals attached to their Form 8283 did not identify the dates (or expected dates) of the contributions and did not contain statements that the appraisals were prepared for income tax purposes as required by the tax code and regulations for a qualified appraisal. The Tax Court ruled that the taxpayers were entitled to a charitable contribution deduction based on their substantial compliance with the law:

“The taxpayer who does not strictly comply may nevertheless satisfy the elements if he has substantially complied with the requirements.” The taxpayers acknowledged that they did not strictly comply with the requirements—since neither of their appraisals stated the date of contribution or stated that it was prepared for income tax purposes—but they argue that they substantially complied with the qualified appraisal requirements. Because this is not a case where the taxpayers “furnished practically none of the information required,” the substantial compliance doctrine can apply. . . . ​We hold that the [taxpayers] provided sufficient information to permit the IRS to evaluate the reported contributions and to investigate and address concerns about overvaluation and other aspects of the reported charitable contributions. The IRS did perform that investigation without any impediment arising from the two alleged defects in the appraisals . . . ​Thus [they] have substantially complied with the regulations for qualified appraisals. Emanouil v. Comm’r, T.C. Memo. 2020-120 (2020).

Example A donor was denied a charitable deduction of $338,080 for the donation of a private plane to charity due to inadequate substantiation. A federal appeals court ruled that the donor was not entitled to any charitable contribution deduction, since the substantiation requirements were not satisfied. In particular, the written acknowledgment provided by the charity did not identify the charity’s employer identification number or name. Izen v. Commissioner, 2022 PTC 182 (5th Cir. 2022).

The church’s obligations

Churches receiving contributions of property valued by the donor at more than $5,000 have the following obligations (assuming that the donor plans to claim a deduction for the contribution):

Written acknowledgment. The church should provide the donor with a written acknowledgment described under Rule 7, above.

Form 8283. The church must complete and sign Part V of Section B of the donor’s Form 8283 appraisal summary.

Form 8282. Churches are required to file a Form 8282 (Donee Information Return) with the IRS if three conditions are met: (1) a donor makes a contribution of noncash property to the church that is valued at more than $5,000 (other than publicly traded securities); (2) the donor presented the church with a qualified appraisal summary (Form 8283, Section B, Part V) for signature; and (3) the church sells, exchanges, consumes, or otherwise disposes of the donated property within three years of the date of contribution. This form is reproduced at the end of this chapter. The purpose of this reporting requirement is to ensure that donors do not claim inflated values for donated property.

Note the following specific rules that apply to the Form 8282 reporting requirement:

(1) When to file. If your church is required to file a Form 8282 (no exception applies), it should file Form 8282 within 125 days of the date it disposed of the property. An exception applies if the church did not file a Form 8282 because there was no reason to believe that the qualified appraisal requirement applied to a donor, but you later learned that it did apply. Then you must file Form 8282 within 60 days of learning of your obligation to file.

(2) Missing information. The instructions for Form 8282 specify that you must complete at least “column a” of Part II. If you do not have enough information to complete the other columns, you may leave them blank. This may occur if you did not keep a copy of the donor’s appraisal summary (Form 8283, Section B).

(3) Where to file. Send the completed Form 8282 to the Department of the Treasury, Internal Revenue Service Center, Ogden, UT 84201-0027.

(4) Informing the donor. You must provide the donor with a copy of the Form 8282 you filed with the IRS.

(5) Exceptions. A Form 8282 does not need to be filed if either or both of the following exceptions apply: (a) The church consumes the donated property or distributes it without charge to another organization or individual. The consumption or distribution must be in furtherance of the church’s tax-exempt purposes. (b) At the time the church signed the donor’s appraisal summary, the donor had signed a statement on the appraisal summary (Form 8283, Section B, Part II) that the appraised value of the donated property was not more than $500. This exception will apply if a donor contributes several similar items of property (having a combined value in excess of $5,000) to a church during a calendar year, and the church disposes of or consumes one item that is separately valued by the donor at $500 or less.

(6) Certification. The charitable contribution deduction available to donors who contribute tangible personal property to a charity is not reduced (from market value to cost basis) if the donee charity makes a certification to the IRS by written statement, signed under penalties of perjury by an officer of the charity, that either (a) certifies that the use of the property by the charity was related to the purpose or function constituting the basis for its exemption and describes how the property was used and how such use furthered such purpose or function, or (b) states the intended use of the property by the charity at the time of the contribution and certifies that such use became impossible or infeasible to implement. This certification is made in Part IV of Form 8282.

Examples. The following examples illustrate the application of the Form 8282 reporting requirement to churches:

EXAMPLE A member contributes a house to her church on July 1, 2025. The church sells the property on November 1, 2025. The church must complete and file Form 8282 with the IRS within 125 days of the date of sale and also mail a copy to the donor.

EXAMPLE A member contributed property to his church on October 1, 2024. The property had an apparent value in excess of $5,000, but the church was never asked to sign a qualified appraisal summary (Form 8283, Section B, Part V). The church sells the property on July 1, 2025. It is not required to file Form 8282.

EXAMPLE A member contributed property to her church on May 1, 2025. The property has an apparent value in excess of $5,000. The church sells the property on June 1, 2025, for $8,000. The church was never asked to sign a qualified appraisal summary (Form 8283, Section B, Part V), so it does not file a Form 8282. However, on November 1, 2025, the donor provides the church treasurer with a qualified appraisal summary for signature. Since November 1 is more than 125 days after the church’s disposition of the property, the filing deadline for Form 8282 was missed. However, an exception permits the church to file a Form 8282 within 60 days of learning that it is required to file the form. Since the church treasurer had no reason to believe that a Form 8282 was required until the donor presented the qualified appraisal summary on November 1, the church has 60 days from that date to file the form.

EXAMPLE A member contributes several shares of publicly traded stock to his church in July 2025. The stock has a market value of $15,000. The church sells the stock within a few weeks. It is not required to file a Form 8282 because it will not be asked to sign a qualified appraisal summary (Form 8283, Section B, Part V). The qualified appraisal summary requirement does not apply to gifts of publicly traded stock. Note that the qualified appraisal and Form 8282 requirements are designed to ensure that donors claim fair valuations for contributions of noncash property. In the case of publicly traded stock, the valuation is determined each business day by the stock market. There is no question as to proper valuation. As a result, the qualified appraisal summary and Form 8282 requirements do not apply.

EXAMPLE A member contributed property to her church in June 2025. In November the member has a church board member sign a qualified appraisal summary on behalf of the church. The board member is not familiar with this requirement and so does not inform the pastor, church treasurer, or any other member of the board. In January 2025 the church sold the property. The church treasurer is familiar with the Form 8282 requirement but does not file this form after the property is sold because he was never informed that the church had signed a qualified appraisal summary.

This is a real problem that can occur in any church. It can be prevented in a number of ways. For example, the church could establish a written policy requiring a designated person (such as the senior pastor or church treasurer) to sign any qualified appraisal summary (Form 8283) on behalf of the church and requiring a log or journal to be made of each qualified appraisal summary that is signed. If such a policy is clearly communicated to all staff and board members, it is unlikely that the church will fail to comply with the Form 8282 reporting requirement.

EXAMPLE A member donates property to his church in June 2025. The church issues the member a receipt acknowledging the contribution. The church uses the property for four years before selling it. It is not required to file Form 8282 because it did not dispose of the property within three years of the date of the gift.

EXAMPLE A local business contributes food to a church for distribution to the needy. The church is not required to file a Form 8282, even if it is asked to sign a qualified appraisal summary by the donor. The Form 8282 requirement does not apply if a church transfers the donated property without charge to another organization or individual in furtherance of the church’s tax-exempt purposes.

EXAMPLE Same facts as the previous example, except that the church distributes the donated food to its members. The Form 8282 reporting requirement may apply. While the donated food is distributed without charge to church members, this may not further the church’s tax-exempt purposes unless the congregation is predominantly poor.

EXAMPLE John donated property to First Church on July 1, 2022. He obtained a qualified appraisal (that valued the property at $9,500), and he had the church sign his qualified appraisal summary (Form 8283, Part B). First Church donates the property to Second Church on May 1, 2025, in furtherance of its religious purposes. First Church is required to file Form 8282. Second Church will also have to file a Form 8282 if it disposes of the property within three years of the date John gave it to First Church—unless it does so at no charge and in direct furtherance of its exempt purposes.

How will Second Church know the date of the original gift? First Church is required to provide Second Church with the following information that will assist Second Church in complying with the Form 8282 reporting requirement: (1) its name, address, and employer identification number, and a copy of John’s qualified appraisal summary, within 15 days after the later of the date it transferred the property to Second Church, or the date it signed the qualified appraisal summary (Form 8283, Part B); and (2) an unofficial copy of Form 8282. If First Church does not provide this information, Second Church should request it.

EXAMPLE Same facts as the previous example, except that Second Church does not dispose of the property until December 2026. Since this is more than three years after John donated the property to First Church, Second Church is not required to file Form 8282.

Rule 10—special rules for donations of (a) cars, boats, and planes; (b) stock; and (c) clothing and household items

Donations of cars, boats, and planes

Special rules apply to donations of cars, boats, and planes. It is important for church leaders to be familiar with these rules for two reasons. First, churches have reporting requirements that must be followed; and second, church leaders need to be ready to explain the rules to members who indicate an interest in donating a car (or a boat or plane) to the church.

The substantiation and reporting requirements that apply to donations of cars, boats, and planes are summarized in Table 8-4. Note the following:

EXAMPLE On October 1, 2024, Don donated a vehicle with a fair market value of $2,500 to his church. On December 1, 2024, the vehicle was sold without any significant intervening use or material improvement. Gross proceeds from the sale are $1,000. The church must provide Don with a contemporaneous written acknowledgment of the donation by December 31, 2024. It may use IRS Form 1098-C to ensure that it has met all the requirements for a contemporaneous written acknowledgment issued to the donor. It must use Form 1098-C to provide the same information to the IRS by February 28, 2025. You may obtain this form from the IRS website (IRS.gov).

EXAMPLE Same facts as the previous example, except that the church plans to use the donated car several times a week in the course of church activities. If the church “significantly uses” the car, it must certify this intended use (and duration) and provide a written acknowledgment to Don within 30 days of the contribution. The church may use IRS Form 1098-C to comply with these requirements. It must use Form 1098-C to provide the same information to the IRS by February 28, 2025.

EXAMPLE On July 1, 2025, Carrie contributes a used car to a charity whose exempt purposes include helping needy individuals who are unemployed develop new job skills, finding job placements for these individuals, and providing transportation for these individuals who need a means of transportation to jobs in areas not served by public transportation. The charity determines that, in direct furtherance of its charitable purpose, it will sell the qualified vehicle at a price significantly below fair market value to a trainee who needs a means of transportation to a new workplace. On or before July 31, 2025, the charity provides an acknowledgment to Carrie containing her name and taxpayer identification number; the vehicle identification number; a statement that the date of the contribution was July 1, 2025; a certification that it will sell the qualified vehicle to a needy individual at a price significantly below fair market value; and a certification that the sale is in direct furtherance of its charitable purpose. It may use IRS Form 1098-C to ensure that it has met all the requirements for a contemporaneous written acknowledgment issued to the donor. It must use Form 1098-C to provide the same information to the IRS by February 28, 2026.

Deductions of $500 or less. A donation of a car with a claimed value of at least $250 must be substantiated by a contemporaneous written acknowledgment of the contribution by the charity. For a donation of a car with a claimed value of at least $250 but not more than $500, the acknowledgment must contain the following information (as noted above): the amount of cash and a description (but not value) of any property other than cash contributed; whether the donee organization provided any goods or services in consideration, in whole or in part, for the cash or property contributed; and a description and good faith estimate of the value of any goods or services provided by the donee organization in consideration for the contribution, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.

If a donor contributes a car that is sold by the charity without any significant intervening use or material improvement, and if the sale yields gross proceeds of $500 or less, the donor may be allowed a deduction equal to the lesser of the fair market value of the qualified vehicle on the date of the contribution or $500. Under these circumstances the donor must substantiate the fair market value and, if the fair market value is $250 or more, must substantiate the contribution with an appropriate acknowledgment.

Penalties. The tax code imposes penalties on any charity required to furnish an acknowledgment to a donor that knowingly furnishes a false or fraudulent acknowledgment or knowingly fails to furnish an acknowledgment in the manner, at the time, and showing the information required under the rules summarized above. For example, the penalty applicable to an acknowledgment relating to the sale of a donated car is the greater of (1) the product of the highest individual income tax rate (currently 37 percent) and the sales price stated on the acknowledgment, or (2) the gross proceeds from the sale of the qualified vehicle.

The penalty applicable to an acknowledgment relating to a vehicle that was materially improved or used significantly by the church for its religious purposes is the greater of (1) the claimed value of the vehicle multiplied times the highest individual income tax rate or (2) $5,000.

EXAMPLE A church receives a contribution of a used car. It sells the car without any significant intervening use or material improvement. Gross proceeds from the sale are $300. The church provides an acknowledgment to the donor in which it knowingly includes a false or fraudulent statement that the gross proceeds from the sale of the vehicle were $1,000. The church is subject to a penalty for knowingly furnishing a false or fraudulent acknowledgment to the donor. The amount of the penalty is $370, the product of the sales price stated in the acknowledgment ($1,000) and 37 percent (the highest individual income tax rate), because that amount is greater than the gross proceeds from the sale of the vehicle ($300).

Donations of stock

With more than half of all Americans now owning stock, it is not surprising that many of them have donated shares of stock to their church. As a result, it is important for church leaders and donors to be familiar with the tax rules that apply to stock donations. Unfamiliarity with these rules can result in additional taxes. This section will review what donors and church leaders need to know.

Why should donors consider donating stock to their church? Gifts of stock can provide donors with a double tax benefit. First, they may be able to claim a charitable contribution deduction in the amount of the current market value of the donated stock. That is, they can deduct not only the original cost they paid for the donated shares but also the value of any increase in the value of those shares. Second, donors avoid paying taxes on the appreciated value of the donated stock.

EXAMPLE Bob purchased 100 shares of ABC stock at a cost of $1,000 in 2011, and he donates these shares to his church in 2025, when their value is $3,000. Subject to the limitations discussed later in this section, Bob would be able to deduct the full $3,000 market value, and he would not have to pay capital gains tax on the $2,000 gain in the value of the stock.

Many church members own stock that has appreciated in value. The greater the amount of appreciation, the more the capital gains tax a member will face if the stock is sold. But this tax can be avoided if the member donates the stock to his or her church. And remember, the church pays no capital gains tax when it sells the donated stock, so the entire amount of the gift furthers the church’s mission.

What about gifts of privately held stock? Most stock is either publicly traded or privately held by the owners of a business that has not offered its shares for sale to the public. When donors make gifts of privately held stock, three special rules must be understood by both donors and church leaders:

(1) Qualified appraisals. If privately held stock valued at more than $10,000 is donated, a donor must obtain a qualified appraisal of the donated shares no earlier than 60 days prior to the date of the contribution. The cost of obtaining a qualified appraisal of privately held shares can be high and has caused some donors to reconsider making such a gift.

(2) Qualified appraisal summaries (Form 8283). The donor must complete a qualified appraisal summary (IRS Form 8283) and enclose it with the Form 1040 on which the contribution deduction is claimed. Note that the church must sign this appraisal summary. Unfortunately, some donors have sent this form to their church for signature only to have it discarded or misplaced. The failure of a donor to submit a properly executed appraisal summary will jeopardize the deductibility of the contribution.

(3) If the donor buys back the donated shares. It is common for donors who donate privately held stock to a church to buy back those shares after the gift. After all, there usually is little if any market for shares in privately held companies, so the church cannot sell the shares to anyone else. However, if an agreement exists at the time the shares are donated for the donor to buy back the shares or for the church to sell them to the donor, the charitable contribution may be disallowed by the IRS, and any gain in the value of the shares may be taxed to the donor. Such transactions should never be consummated without legal advice.

What limitations apply to gifts of stock? Three limitations apply to a gift of stock that has appreciated in value:

(1) The one-year rule. When contributing capital gain property, such as stock, to a church or other public charity, a donor generally is entitled to claim a deduction in the amount of the fair market value of the donated property on the date of the gift. Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than one year.

Donated stock that was held by the donor for less than one year is not capital gain property. The IRS classifies it as “ordinary income property,” since a sale of the stock would result in ordinary taxable income rather than capital gain on any appreciation in value. The amount a donor can deduct for a contribution of ordinary income property is its fair market value less the amount that would have been ordinary income or short-term capital gain if the donor had sold the property for its fair market value on the date of the gift. Generally, this rule limits the deduction to the donor’s basis (cost) in the property.

EXAMPLE Barb donates stock that she held for five months to her church. The fair market value of the stock on the date of the donation was $1,000, but Barb paid only $800 (her “basis”) for the stock. Because the $200 of appreciation would be short-term capital gain if she had sold the stock on the date of the contribution, her deduction is limited to $800 (fair market value less the appreciation).

(2) The 30-percent limit. Gifts of capital gain property (including stock) to a church are deductible only up to 30 percent of a donor’s AGI. The 30-percent limit does not apply to donors who elect to reduce the fair market value of donated property by the amount that would have been long-term capital gain had the property been sold on the date of the gift. In such cases the 50-percent limit applies.

Donors can carry over contributions that they could not deduct in the current year because they exceed the 30 percent of AGI limit. Donors can deduct the excess in each of the next five years until it is used up, but not beyond that time. Contributions that are carried over are subject to the same percentage limits in the year to which they are carried. For example, contributions subject to the 30-percent limit in the year in which they are made are subject to the same limit in the year to which they are carried. Donors deduct carryover contributions only after deducting all allowable contributions in that category for the current year.

(3) Itemized deductions. Donors claim charitable contribution deductions as itemized expenses on Schedule A (Form 1040). Donors who do not itemize their expenses cannot claim a charitable contribution deduction for a gift of stock.

What about stock that has declined in value? Some donors give their church stock that has declined in value. In general, donors who contribute stock with a fair market value that is less than their basis (cost) are entitled to a deduction in the amount of the stock’s fair market value. They cannot claim a deduction for the difference between the stock’s basis and its fair market value (the decrease in value). Persons who have stock that has declined in value generally will pay less taxes if they sell the stock, give the proceeds to charity, and then claim a loss on their income tax return.

What about selling the stock and donating the proceeds? Some donors consider selling their stock and then donating the cash proceeds to their church. Is this a good idea? Not if the stock has increased in value. Let’s illustrate this with an example. Assume that Bill buys shares of stock for $6,000 in 2022 that are worth $10,000 in 2025. Bill sells the stock for $10,000 and donates the proceeds to his church. By selling the stock, Bill realized capital gains on the appreciation, and he will have to pay taxes on this amount. However, if Bill had donated the stock to his church without selling it, he would have avoided capital gains tax on the appreciation and still could have claimed a charitable contribution.

By giving the stock directly to the church, Bill avoids paying tax on the $4,000 gain on his stock investment, and he gets a charitable contribution deduction for the full value of his shares (unless one of the limitations previously mentioned applies).

How does a donor value donated stock? Donors who contribute publicly traded stock to a church or charity can claim a charitable contribution deduction in the amount of the fair market value of the donated shares, subject to the limitations previously discussed. The fair market value of donated stock is determined by (1) determining the “mean price” of the donated shares by adding the high and low quoted prices of the stock on the day of the gift, and dividing by two; then (2) multiplying the mean price by the number of donated shares.

What are the mechanics of donating stock? Donors can donate stock in a number of ways, including

What about gifts of mutual fund shares? Donors generally determine the fair market value of donated mutual fund shares by multiplying the net asset value on the date of the gift by the number of donated shares.

How do donors substantiate gifts of stock? Gifts of stock are subject to special substantiation rules. Note the following:

EXAMPLE A donor contributed nonpublicly traded stock worth more than $10,000 to a church but obtained no qualified appraisal and attached no qualified appraisal summary to the tax return on which the charitable contribution deduction was claimed. The Tax Court ruled that the donor was not entitled to a charitable contribution deduction, even though there was no dispute as to the value of the donated stock. Hewitt v. Commissioner, 109 T.C. 12 (1997).

Donations of clothing and household items

Americans love to donate used clothing and household items to charity. The IRS reports that the amount claimed as deductions in a recent year for clothing and household items was more than $9 billion. These items are notoriously difficult to value, and the attempt to do so often wastes valuable time and resources.

The tax code responds to this dilemma by denying a charitable contribution deduction for a contribution of clothing or household items unless the clothing or household items are in “good used condition or better.” The Treasury Department is authorized to deny (by regulation) a deduction for any contribution of clothing or a household item that has minimal monetary value, such as used socks and used undergarments.

A deduction may be allowed for a charitable contribution of an item of clothing or a household item not in good used condition or better only if the amount claimed for the item is more than $500 and the taxpayer obtains a qualified appraisal of the property and attaches a qualified appraisal summary (Form 8283) to the tax return claiming the deduction.

Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition.

If the donated item is in good used condition or better and a deduction of more than $500 is claimed, the taxpayer must file a completed Form 8283 (Section A or B, depending on the type of contribution and claimed amount), but a qualified appraisal is required only if the claimed contribution amount exceeds $5,000.

If the donor claims a deduction of less than $250, the donor must obtain a receipt from the church or charity or maintain reliable written records of the contribution. A reliable written record for a contribution of clothing or a household item must include a description of the condition of the item. If the donor claims a deduction of $250 or more, the donor must obtain from the church or charity a receipt that meets the requirements of a contemporaneous written acknowledgment (see Rule 6, above).

EXAMPLE A married couple (the “taxpayers”) claimed a deduction for clothing donated to the Salvation Army. The Tax Court denied this deduction, concluding:

The taxpayers contend that they inadvertently shredded their receipt from the Salvation Army. Yet on their Form 8283 they did not even describe or otherwise identify the type or nature of the property donated, and at trial spoke only of “stuff” and “goods.” They may very well have donated clothing and household items to the Salvation Army. But if so, the record contains not a shred of evidence regarding the fair market value of such property . . . ​other than their self-serving statement on Form 8283. Under these circumstances the court is unable to estimate any allowance for to do so would amount to unguided largesse. Accordingly, the court holds that the taxpayers are not entitled to a deduction for any contribution of property. Koriakos v. Commissioner, T.C. Sum. Op. 2014-70 (2014).

EXAMPLE United States Tax Court disallowed a married couple’s $37,315 charitable contribution deduction for lack of proper substantiation. Most of the alleged contributions were for donations of household goods. The court noted that no deduction is allowed for “any contribution of clothing or a household item” unless such property is “in good used condition or better.” The tax regulations specify that the term household items includes “furniture, furnishings, electronics, appliances, linens, and other similar items.” Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition. The court concluded: “Most of the items the taxpayers allegedly donated consisted of clothing and household items. They failed to present credible evidence that these items were in good used condition or better, and they did not furnish a qualified appraisal with their return. For all these reasons, petitioners have not satisfied the substantiation requirements for donations of property valued over $500.” Kunkel v. Commissioner, T.C. Memo. 2015-71 (U.S. Tax Court 2015).

In most churches, the only contributions donors make are cash contributions. Illustration 8-2 is a receipt that acknowledges only cash contributions. If a church only receives cash contributions, this form is all that will be required. Illustration 8-2 satisfies all the substantiation rules with minimal complexity. However, it makes three important assumptions:

Obviously, these assumptions will hold true for many, if not most, donors. However, if any one or more of these assumptions is not met, appropriate adjustments will be required. For example, if a donor made a quid pro quo contribution, an appropriate statement would need to be incorporated into the form (or issued on a separate form). And if the church provides goods or services of more than insubstantial value in exchange for a contribution of $250 or more, it will need to adapt this form.