• The IRS has clarified the deductibility of contributions that "earmark" a specific individual. Many churches have collected special offerings for the benefit of a particular individual. For example, a church collects an offering to help pay the medical expenses of a person with a catastrophic and uninsured illness. Or, a church collects an offering to benefit an unemployed family, or a family whose house has been destroyed by fire or some other disaster. Are such "designated" offerings tax-deductible as charitable contributions by the donors? This has been a very difficult question to answer. The problem is that charitable contributions are tax-deductible only to the extent that they are made to a tax-exempt organization. The IRS ruled in 1962:
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.
In other words, if a donor contributes funds to a church, and stipulates that the funds must be used for a particular individual (for example, a named student or needy person), then the contribution is not tax-deductible since the church does not have "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 is the conclusion reached by the IRS in a recent announcement. In Announcement 92-128, the IRS addressed the question of the deductibility of contributions made for the benefit of victims of Hurricane Andrew. The IRS noted that it had "received questions from taxpayers regarding the tax consequences of contributions earmarked for Hurricane Andrew relief to organizations currently recognized by the IRS as tax exempt." The IRS concluded that "such contributions will be fully deductible," but cautioned that "taxpayers may not deduct contributions earmarked for relief of a particular individual or family." What does this mean? The IRS is saying that donors can make tax-deductible contributions to a church or other charity even if those contributions specify that they are to be used for "Hurricane Andrew relief." Such contributions are deductible since the donor does not know who the ultimate recipient will be. Therefore, it is reasonable to assume that the intent of the donor is to contribute to the charity which in turn will make the decision of how the funds will be distributed. In other words, the charity in such a case exercises "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." On the other hand, if a donor contributes funds to a church for hurricane relief, but specifies a particular individual or family who is to receive the contributed funds, then this contribution is not tax-deductible since the church did not maintain "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."