Charitable Contributions

Legal Developments

Meeting Substantiation Requirements

Lack of donation proof can cause tax problems.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1996-05-01

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• Key point. Contributions to a church or other charity are not deductible unless they can be substantiated.

The Tax Court ruled that a volunteer music minister could not deduct most of his church contributions since he lacked sufficient proof that he made most of the contributions he claimed. A computer consultant (the taxpayer) served as a volunteer and unpaid minister of music at his church. In this position the taxpayer organized choirs, played music, and performed other music—related functions. A tenet of the taxpayer’s church is tithing—contributing 10 percent of one’s income to the church. To set an example for the congregation, church leaders often contribute a greater amount to the church. For 1989 the taxpayer reported income from his consulting business of $80,000, and charitable contributions to his church in the amount of $18,151. The IRS audited the taxpayer’s 1989 tax return, and reduced his charitable contribution deduction to $2,657 since the taxpayer had records (check carbons) to substantiate only this amount. The taxpayer appealed to the Tax Court. He claimed that he made cash and check contributions to his church and that he believed in tithing. The pastor of the church testified that the taxpayer made contributions to the church but could not identify specific dates or amounts. However, he did testify that the church maintained records pertaining to contributions, that he did not bring those records to the trial, and that the taxpayer did not request him to do so.

Following the trial, the taxpayer attempted to remedy this lack of evidence by submitting a brief to the Court accompanied by several documents purporting to verify his charitable contributions to the church. The Court refused to consider this evidence, noting that “evidence must be submitted at trial. Documents attached to briefs and statements made therein do not constitute evidence and will not be considered by the Court.” The Court concluded:

EXT [The taxpayer’s] testimony, as well as the testimony of [the pastor] as to [his] general giving patterns is not sufficient to substantiate [the] charitable contributions. In addition, [the taxpayer’s] argument on brief that the 1990 check carbons, which were submitted as evidence, are representative of his giving patterns is not sufficient to substantiate … charitable contributions for 1989. [The taxpayer] presented no receipts, canceled checks, or written records to substantiate the claimed deduction. We note that written records of contributions were maintained by [the church]; however, [the taxpayer] failed to present those documents. Accordingly, [he] is not entitled to a charitable contribution deduction in excess of the amount previously allowed by [the IRS].

The Court stressed that charitable contributions must be substantiated, and the burden of proof is on the taxpayer. It observed: “For charitable contributions of cash, a taxpayer shall maintain for each contribution a canceled check or receipt from the donee indicating the name of the donee, the date of the contribution, and the amount of the contribution, or in the absence of a check or receipt from the donee, reliable written records showing the name of the donee, the date of the contribution, and the amount of the contribution.” Additional requirements apply to individual contributions of $250 or more. Brown v. Commissioner, T.C. Memo. Dec. 51,145(M) (1996).

© Copyright 1996, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0396

Legal Developments

Court Won’t Address Church’s Claim to Decedent’s Estate

Will’s language was too vague for Catholic diocese’s claim.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1996-05-01

Wills, Trusts and Estates

Richard R. Hammar, J.D., LL.M., CPA

• Key point. The civil courts will not address a church’s claim that a decedent intended to leave a portion of his estate to the church, if that intention is not reflected in his will.

A New York court refused to address the claim of a Catholic diocese that a decedent intended to leave a portion of his estate to the diocese. A decedent left a $5 million estate which under the terms of his last will and testament was to be distributed to those charities designated by his executor. The executor later selected a number of charities, but left nothing to the local Catholic diocese. The diocese sought an opportunity to prove in court that the decedent intended to leave his estate to the diocese. A court refused to allow the diocese to intervene. It noted that the diocese was one among an unlimited and undefined group lacking a preferred status under the will, and was precluded from suing to enforce the charitable disposition under decedent’s will.The state attorney general was the duly authorized party to represent the interests of potential beneficiaries. The court concluded that “were we to address the merits of the diocese’s argument that it was an intended charitable beneficiary under the estate, we would be precluded from considering the extrinsic evidence offered in support of that argument because we find the [decedent’s] language to be a clear and unambiguous expression of an intent to make charitable bequests by vesting sole discretion in the executor to select charitable beneficiaries.” Matter of the Estate of May, 623 N.Y.S.2d 650 (A.D. 3 Dept. 1995).

© Copyright 1996, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m80 c0396

Legal Developments

Georgia Court Upholds Will Donating Part of an Estate to Charity

Deceased was not a victim of ‘undue influence,’ court says.

Richard R. Hammar, Attorney, CPA
Bio

Yancey v. Hall, 458 S.E.2d 121 (Ga. 1995)

Key point. A gift of property to a church that is contained in a decedent's will can be invalidated if the gift was the product of "undue influence."

A Georgia court ruled that a gift of a portion of an estate to a church agency was not invalid on the ground that the attorney who drafted the will suggested the charity.

A man (the deceased) went to an attorney to have a will drafted. The deceased had no surviving spouse or children, and left $50,000 of his estate to a niece and $1,000 to a nephew. The smaller amount distributed to the nephew was based on the deceased's expressed belief that his nephew was a ne'er do well who drank a lot. The deceased expressed a desire to leave the balance of his estate to charity, and the attorney suggested a particular church agency. The deceased agreed with this recommendation, and a will was drafted and signed containing these provisions.

Following the death of the deceased, the will was filed with a probate court. The nephew challenged the will on two grounds. First, he insisted that the gift to the church agency was invalid on the ground that it was the product of the attorney's undue influence of the deceased. Second, he claimed that the will was invalid on the ground that it was based on the deceased's mistaken belief that the nephew was a ne'er do well who drank a lot.

The Georgia Supreme Court rejected the nephew's claims. First, it ruled that the attorney's suggestion of a particular charity in response to the deceased's expression of a desire to leave a portion of his estate to a charity was not undue influence. The court observed that [a]n influence becomes undue so as to invalidate a will only when it is extended to such a degree as to override the discretion and destroy the free agency of the [deceased]. The attorney's mere advice or suggestions fell far below this standard. Second, the court rejected the nephew's claim that the will should be invalidated on the basis of mistake.

The nephew insisted that the deceased left him only a nominal amount based on a mistaken assumption that he was a ne'er do well who drank a lot. The nephew claimed that he had not had a drink in 20 years, and therefore the deceased was operating under a mistaken assumption in drafting the will. The court disagreed. While a will can be invalidated in some cases on the basis of mistake, this rule does not apply to a mistake resulting from an error of judgment after investigation or from negligent or willful failure to make a proper investigation by means of which the truth could be readily and surely ascertained.

The court noted that the nephew and the deceased lived only a mile apart and they saw each other on a daily basis. As a result, if the deceased gave the nephew $1,000 on the basis of a mistaken belief that he was a ne'er do well who drank a lot, he deliberately arrived at his conclusion of fact after an investigation satisfactory to himself, without choosing, as he might easily have done, to make one more thorough and searching. That his conclusion was wrong affords no cause for destroying his [will].Undue Influence

Legal Developments

Gift to Church Orphanage Lapsed, Court Says

Orphanage no longer existed; succeeding charity technically not an orphanage.

Richard R. Hammar, Attorney, CPA
Bio

• Key point. A gift in a decedent's will to a defunct charity may "lapse."

An Illinois court ruled that a gift to a church orphanage lapsed since the orphanage no longer existed and it was succeeded by another charity that was not organized as an orphanage. A decedent died leaving one—fourth of his estate to the Lutheran Orphan Home, Paris, Missouri. There was no Lutheran Orphan Home in Paris, Missouri at the time of the decedent's death, and never had been. There was a Lutheran Orphan Home in Des Peres, Missouri, but it closed some 25 years prior to the decedent's death. The assets of the orphanage were transferred to the Lutheran Family & Children's Services of Missouri, which claimed that it was entitled to the portion of the decedent's estate that was earmarked for the Lutheran Orphan Home. A court concluded that the decedent must have intended that one—fourth of his estate go to the Lutheran Orphan Home in Des Peres, Missouri, since this was the only entity by that name that had ever existed in the state of Missouri. However, the court refused to distribute this portion of the decedent's estate to the Lutheran Family & Children's Services of Missouri, even though it was the legal successor of the orphanage, since its purposes were not closely enough related to the decedent's express purpose of benefiting an orphanage. The court observed: "[Lutheran Family & Children's Services of Missouri] provides services such as foster care, adoption, counseling for families, and medical care for at—risk infants, which are very commendable; however, they are not in the nature of services provided by an orphanage and cannot be construed as such. [The decedent's will] makes clear that [he] intended his bequest to directly benefit the children at the orphanage and not an organization which provides general child welfare services to the community. If the [decedent] had intended to generally benefit a Lutheran charity that assisted children and families through general services, he could have made a specific bequest to [such an entity]." In re Estate of Beck, 649 N.E.2d 1011 (Ill. App. 1995).

Legal Developments

Wills, Trusts, and Estates

Some documents may be invalid if donor was under ‘undue influence.’

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1996-03-01

Wills, Trusts, and Estates

Richard R. Hammar, J.D., LL.M., CPA

• Key point. A will or other legal document that transfers property to a church may be invalidated if the donor lacked mental capacity, or if the transfer was the result of “undue influence.”

A Louisiana court ruled that the fact that an elderly person changes her will to remove a gift to her church is not evidence of either a lack of mental capacity or undue influence. A woman left a substantial portion of her estate to her Catholic church in a will executed in October of 1992. In April of 1993, a few months prior to her death, she changed her will and removed the gift to her church and left her entire estate to a friend. The church alleged that the woman’s April 1993 will should not be admitted to probate since she lacked mental capacity a few months prior to her death to change her will, and that it was the product of “undue influence.” In rejecting these claims, the court acknowledged that the deceased for many years had intended to leave most of her estate to her church. However, it further noted that she “changed her mind about the Catholic church because of the many reports of homosexuality and pedophilia among priests.” This is indeed a tragic observation, and it suggests a further consequence of the tragedy of child molestation within churches. Succession of Braud, 646 So.2d 1168 (La. App. 4 Cir. 1994). [ Undue Influence]

© Copyright 1996, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m80 c0296

Legal Developments

Gifts of Property and ‘Undue Influence’

Gifts of property in a decedent’s will can be invalidated.

Richard R. Hammar, Attorney, CPA
Bio

• Key point. A gift of property to a church that is contained in a decedent's will can be invalidated if the gift was the product of undue influence.

The Oklahoma Supreme Court ruled that a provision in a deceased church member's will leaving the bulk of her estate to her church was invalid since it was a product of the pastor's "undue influence". A 96—year—old woman died, leaving the bulk of her estate to the Baptist church she had attended for many years. For many years, the woman suffered from alcoholism and during the 1970's her health and living conditions deteriorated. From 1980 to 1983 the pastor of a local Baptist church became closely acquainted with her and visited in her home several times. By 1984 all of the woman's friends were members of this church. The pastor arranged for several of them to regularly assist the woman by cleaning her home. Through this process the woman became very dependent upon the pastor and reposed great trust in him. Although in 1983 the woman attended several sessions of an estate planning seminar at her church, she failed to make the last session where a "will information guide" was distributed. In 1984, when the woman was 89 years of age, the pastor brought her a copy of the will information guide and spent several hours assisting her in cataloging her assets. The pastor later asked a church member who was an attorney to contact the woman and discuss her will's preparation. This attorney had not represented the woman in any other legal matters. Before the attorney drafted the will he had one 15—minute telephone conversation with her in which he discussed the contents of her estate using the will information guide provided him by the pastor. After the will was drafted, it was sent to the pastor who delivered it personally to the woman and discussed its terms with her. The attorney later discussed the will's provisions in a second 15—minute telephone conversation with her. A few weeks later the woman was taken to the attorney's office by a church member. She reviewed her will and signed it. All of the subscribing witnesses were church members chosen by the pastor. They testified later that the woman understood the provisions of her will, appeared normal, and was aware of the existence of her sole heir (a nephew). The attorney sent the pastor a bill for the preparation of the will, which was presented to and paid by the woman. Seven years after the will was signed the woman died. Her nephew claimed that the gift to the church should not be honored since it was based on undue influence. Undue influence is a legal doctrine that invalidates gifts that are prompted by the "undue influence" of another person. A trial court agreed with the nephew that the pastor's actions amounted to undue influence since he had overcome the woman's "free agency." A state appeals court concluded that since the pastor received nothing under the will he was incapable of unduly influencing the deceased. The nephew appealed this ruling to the state supreme court. The supreme court reversed the appeals court's decision and reinstated the trial court's order that invalidated the gift to the church.

The court applied a "2—prong test" to determine whether undue influence invalidates a provision in a will: First, does a confidential relationship exist between the deceased and another person; and second, did the stronger party in the relationship assist in the preparation of the weaker person's will. Factors to be considered in applying this 2—prong test include: (1) whether the person charged with undue influence was not a natural object of the maker's bounty; (2) whether the stronger person was a trusted or confidential advisor or agent of the will's maker; (3) whether the stronger person was present or active in the procurement or preparation of the will; (4) whether the will's maker was of advanced age or impaired faculties; (5) whether independent and disinterested advice regarding the will was given to its maker. The court then noted that

[u]pon finding that a confidential relationship existed between the will's maker and another and ascertaining that the stronger party actively assisted in the preparation or procurement of the will, a rebuttable presumption of undue influence will at once arise. The person who desires to overcome this presumption must then go forward to produce evidence showing either that (a) the confidential relationship had been severed before the critical events in controversy or (b) the will's maker actually received independent and competent advice about the disposition of his or her estate.

The court concluded that a confidential relationship existed between the deceased and her pastor who was her "spiritual advisor and a close personal friend for more than the last 14 years of her life," and that the pastor was instrumental in procuring the gift. The court remarked that the church "was not a natural object of [the deceased's] bounty," and then observed:

It is unquestionable that he actively participated in securing the will which was economically beneficial to [the church. The woman] had suffered from alcoholism and was of advanced age at the time she executed her will. The record does not disclose that she ever received from any person independent and disinterested advice regarding her will. Upon finding that [the pastor] stood in a confidential relationship with [her] and that he had unduly influenced her in the procurement and making of the will in contest, the [trial] court properly shifted to [the pastor] the burden of producing evidence which would rebut the presumption of undue influence.

The court rejected the pastor's claim that he could not have unduly influenced the woman since he received nothing under her will. It observed: "[A] will which is the product of an influence brought to bear against the maker in any manner which overcomes his or her free agency cannot be sustained. Whether the person exerting the overbearing influence actually benefits personally under the will's terms is immaterial. A person's lack of beneficiary status under the will's terms does not render one legally incapable of, or excuse him or her from, exerting undue influence." Suagee v. Cook, 897 P.2d 268 (Okla. 1995). [ Undue Influence]

© Copyright 1996, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m80 c0196

Legal Developments

Church Gift from Will Ruled Invalid

Court says gift was product of pastor’s “undue influence.”

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-11-01 Recent Developments

Wills, Trusts, and Estates

Richard R. Hammar, J.D., LL.M., CPA

• Key point: A gift of property to a church that is contained in a decedent’s will can be invalidated if the gift was the product of “undue influence.”

• The Oklahoma Supreme Court ruled that a provision in a deceased church member’s will leaving the bulk of her estate to her church was invalid since it was a product of the pastor’s “undue influence.” A 96-year-old woman died, leaving the bulk of her estate to the Baptist church she had attended for many years. For many years, the woman suffered from alcoholism and during the 1970’s her health and living conditions deteriorated. From 1980 to 1983 the pastor of a local Baptist church became closely acquainted with her and visited in her home several times. By 1984 all of the woman’s friends were members of this church. The pastor arranged for several of them to regularly assist the woman by cleaning her home. Through this process the woman became very dependent upon the pastor and reposed great trust in him. Although in 1983 the woman attended several sessions of an estate planning seminar at her church, she failed to make the last session where a “will information guide” was distributed. In 1984, when the woman was 89 years of age, the pastor brought her a copy of the “will information guide” and spent several hours assisting her in cataloging her assets. The pastor later asked a church member who was an attorney to contact the woman and discuss her will’s preparation. This attorney had not represented the woman in any other legal matters. Before the attorney drafted the will he had one 15-minute telephone conversation with her in which he discussed the contents of her estate using the “will information guide” provided him by the pastor. After the will was drafted, it was sent to the pastor who delivered it personally to the woman and discussed its terms with her. The attorney later discussed the will’s provisions in a second 15-minute telephone conversation with her. A few weeks later the woman was taken to the attorney’s office by a church member. She reviewed her will and signed it. All of the subscribing witnesses were church members chosen by the pastor. They testified later that the woman understood the provisions of her will, appeared normal, and was aware of the existence of her sole heir (a nephew). The attorney sent the pastor a bill for the preparation of the will, which was presented to and paid by the woman. Seven years after the will was signed the woman died. Her nephew claimed that the gift to the church should not be honored since it was based on “undue influence.” Undue influence is a legal doctrine that invalidates gifts that are prompted by the undue influence of another person. A trial court agreed with the nephew that the pastor’s actions amounted to undue influence since he had overcome the woman’s “free agency.” A state appeals court concluded that since the pastor received nothing under the will he was incapable of unduly influencing the deceased. The nephew appealed this ruling to the state supreme court. The supreme court reversed the appeals court’s decision and reinstated the trial court’s order that invalidated the gift to the church.

The court applied a “2-prong test” to determine whether undue influence invalidates a provision in a will: First, does a “confidential relationship” exist between the deceased and another person; and second, did the stronger party in the relationship assist in the preparation of the weaker person’s will. Factors to be considered in applying this 2-prong test include: (1) whether the person charged with undue influence was not a natural object of the maker’s bounty; (2) whether the stronger person was a trusted or confidential advisor or agent of the will’s maker; (3) whether the stronger person was present or active in the procurement or preparation of the will; (4) whether the will’s maker was of advanced age or impaired faculties; (5) whether independent and disinterested advice regarding the will was given to its maker. The court then noted that

[u]pon finding that a confidential relationship existed between the will’s maker and another and ascertaining that the stronger party actively assisted in the preparation or procurement of the will, a rebuttable presumption of undue influence will at once arise. The person who desires to overcome this presumption must then go forward to produce evidence showing either that (a) the confidential relationship had been severed before the critical events in controversy or (b) the will’s maker actually received independent and competent advice about the disposition of his or her estate.

The court concluded that a confidential relationship existed between the deceased and her pastor who was her “spiritual advisor and a close personal friend for more than the last 14 years of her life,” and that the pastor was instrumental in procuring the gift. The court remarked that the church “was not a natural object of [the deceased’s] bounty,” and then observed:

It is unquestionable that he actively participated in securing the will which was economically beneficial to [the church. The woman] had suffered from alcoholism and was of advanced age at the time she executed her will. The record does not disclose that she ever received from any person independent and disinterested advice regarding her will. Upon finding that [the pastor] stood in a confidential relationship with [her] and that he had unduly influenced her in the procurement and making of the will in contest, the [trial] court properly shifted to [the pastor] the burden of producing evidence which would rebut the presumption of undue influence.

The court rejected the pastor’s claim that he could not have unduly influenced the woman since he received nothing under her will. It observed: “[A] will which is the product of an influence brought to bear against the maker in any manner which overcomes his or her free agency cannot be sustained. Whether the person exerting the overbearing influence actually benefits personally under the will’s terms is immaterial. A person’s lack of beneficiary status under the will’s terms does not render one legally incapable of, or excuse him or her from, exerting undue influence.” Suagee v. Cook, 897 P.2d 268 (Okla. 1995).

See Also: Undue Influence

© Copyright 1995, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m80 c0695

Legal Developments

IRS Extends Time Limit for 1994 Charitable Contribution Substantiations

Extension results from charities often give receipts that do not comply with new laws.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1995-05-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• Key point: The IRS has provided limited relief from the new charitable contribution substantiation rules that took effect in 1994.

• The IRS has issued a notice giving donors until October 16, 1995 to obtain a receipt for individual charitable contributions of $250 or more that complies with the new charitable contribution substantiation rules that took effect in 1994. Under the new rules donors can substantiate an individual contribution of $250 or more only with a receipt issued by the charity that contains the following information: (1) the donor’s name; (2) a listing of each individual contribution of $250 or more; (3) a statement indicating whether or not the charity provided any goods or services to the donor in exchange for the contribution, and if so, a good faith estimate of the value of those goods or services; (4) if the charity provided no goods or services to a donor in exchange for a contribution, or if the only goods or services the church provided were “intangible religious benefits,” then the receipt must contain a statement to that effect. In addition, the receipt must be “contemporaneous,” meaning that it must be received by the donor on or before the earlier of the following two dates: (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.

The IRS has acknowledged that taxpayers are experiencing difficulties in obtaining receipts complying with these requirements. In most cases, this is because the charity is not familiar with the new rules. The IRS responded to these difficulties by releasing a notice informing taxpayers that they can still claim deductions for charitable contributions of $250 or more on their 1994 returns if they make a good faith effort on or before Oct. 16, 1995, to obtain the required written receipt from the charity. One example of a good faith effort would be sending a letter to the charity requesting the receipt.

The full text of the IRS notice is reproduced below:

The Service has received numerous inquiries about the substantiation requirements for charitable contributions of $250 or more imposed by Congress in the 1993 tax law changes. Those requirements, found in section 170(f)(8) of the Internal Revenue Code, generally provide that a taxpayer will not be allowed a charitable contribution deduction for a contribution of $250 or more unless the taxpayer substantiates the contribution with a “contemporaneous written acknowledgment” from the donee organization. The law requires the taxpayer to obtain the acknowledgment before the taxpayer files the return reporting the contribution or before the due date (including extensions) for the return, whichever comes first. These new substantiation requirements apply to contributions made on or after January 1, 1994.

The Service understands that there has been confusion about these new requirements, and as a result, many taxpayers have had difficulty obtaining the required written acknowledgments from donee organizations for contributions made during 1994. In light of these difficulties, the Service is providing the following relief:

For contributions of $250 or more made during calendar year 1994, a taxpayer who has not obtained the necessary contemporaneous written acknowledgment by the date specified in section 170(f)(8) will be treated as having satisfied the requirements of that section if (1) the taxpayer has obtained the acknowledgment by October 16, 1995, or (2) the taxpayer has made a good faith effort to obtain the acknowledgment by that date. An example of a good faith effort would be sending the donee organization a letter requesting a written acknowledgment that meets the requirements of section 170(f)(8). A “contemporaneous written acknowledgment” is a written statement from a donee organization that contains the following information: (1) the amount of cash and a description (but not value) of any property other than cash contributed, (2) whether the donee organization provided any goods or services in consideration for the property contributed, and (3) a description and good faith estimate of the value of any goods or services provided by the donee organization in consideration for the property contributed. In addition (except for contributions made during calendar year 1994, for which relief is provided by this Notice), the taxpayer must obtain the acknowledgment before the taxpayer files the return reporting the contribution or before the due date (including extensions) for the return, whichever comes first. Taxpayers are reminded that they must comply with all of the requirements of section 170 in order to be allowed a charitable contribution deduction. If the taxpayer receives goods or services in exchange for a contribution to a donee organization, section 170 generally allows the taxpayer to take a deduction only to the extent that the taxpayer intended to and did make a payment in excess of the fair market value of what was received in return.

The principal author of this notice is Rosemary DeLeone of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this notice, contact Rosemary DeLeone at (202) 622-4930 (not a toll-free call).

© Copyright 1995, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0395

Legal Developments

Contributions Can Be Returned for “Undue Influence”

Members accused church pastor, leaders of coercing gifts.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1993-11-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• Key point: Contributions made to a church can be canceled if they were the result of “undue influence” by a minister or church official.

• A District of Columbia court of appeals ruled that substantial contributions made by a couple to their church may have been the result of the pastor’s undue influence. A church launched a fundraising program to finance the construction of a new facility. Several members of the church who contributed to the program sued the church and its leaders, claiming that the church leadership used improper means to raise the building funds. They demanded a refund of their contributions, on the ground that church leaders used “undue influence” in soliciting the contributions. Specifically, they alleged that the pastor informed church members from the pulpit that God required each member to give $5,000 to the building fund within five months. Those who did not do so were publicly identified by name during church services and were forced to “walk a gauntlet” in disgrace between two lines of deacons. At the end of the gauntlet the delinquent members were given an opportunity to make a public pledge to give the amount demanded. Anyone who failed to do so was ordered to leave the church, in disgrace, by the front door. Deacons who failed to make the required contributions, or who questioned the fundraising program, were threatened with excommunication. One member who asked for a church accounting was summoned before a church tribunal in the middle of the night, denounced for her defiance of church directives, and threatened with expulsion and damnation. Many members of modest means made pledges or contributions well beyond what they could reasonably afford. Members who claimed they were unable to come up with the required donation were informed that it was the will of God that they either sell their worldly possessions (including their homes, if necessary) or borrow the funds from as many lenders as possible. One couple claimed that the pastor visited them and insisted that they sell their home in order to pay their contribution. Church leaders denied most of these allegations, and insisted that those who contributed did so “gladly and joyfully.” A trial court dismissed the lawsuit, and the case was appealed. An appeals court ruled that some of the contributions may have been the product of undue influence, and it sent the case back to the trial court for further proceedings.

The appeals court agreed that contributions can be returned to donors if they are the product of undue influence. In general, undue influence refers to conduct that destroys the free will of another so that a gift is not the product of the donor’s free will. It is often difficult to prove undue influence. This is due in part to the fact that it is perfectly legal to attempt to influence others to make gifts. As the court observed, “one can use argument and persuasion so long as it is fair and honest and does not go to an oppressive degree where it becomes coercive.” The court noted that there are several factors that tend to support a finding of undue influence. These include (1) the donor’s age, and physical and mental health; (2) the existence of a confidential relationship between the perpetrator and victim of the alleged undue influence, and “one-on-one” contacts between the two; and (3) solicitation of donations disproportionate to a donor’s resources. The first factor was not relevant in this case, since the donors who filed the lawsuit were under no physical or mental limitations. As to the second factor, the court conceded that the relationship between a minister and church members is a confidential one. However, it concluded that threats made by a minister to church members at large, from the pulpit, are not enough. Undue influence must occur in the course of “one-on-one” contacts with individual members. Accordingly, a minister’s threats of divine retribution made from the pulpit to church members who fail to make expected contributions is not undue influence—even if members who fail to contribute are forced to “walk a gauntlet” between lines of deacons and in other ways are publicly humiliated. However, when a pastor visits members in their homes, this is the kind of confidential relationship that suggests undue influence, since pressures directed against church members as individuals makes resistance uniquely difficult. The court observed: “A sound claim of undue influence could rarely, if ever, be founded solely upon the generalized invocation from the pulpit of the wrath of God, without one-on-one or similar pressures focused upon the complaining party rather than on the audience as a whole ….” As to the third factor, the court noted that “if a gift comprises all of nearly all of the donor’s means, the inference of undue influence is more easily made, while if a gift is but a small part of the donor’s total wealth, the presumption of undue influence is less likely to be drawn.”

The court concluded that some of the members may have been victims of undue influence on the basis of these criteria. In particular, if referred to the couple who was visited in their home by the pastor, and strongly urged to sell their home in order to finance their expected contribution. This arrangement clearly satisfied the confidential relationship requirement. It also satisfied the “disproportionate” requirement since the couple had to take out a second mortgage on their home to pay their contributions. Roberts-Douglas v. Meares, 615 A.2d 1114 (D.C. App. 1992).

© Copyright 1993, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0693

Legal Developments

Contributions to Music Ministry Not Deductible

Ministry not registered as an exempt organization.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1993-07-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• Key point: Contributions made to a religious ministry generally are not tax-deductible if the ministry is not a church and has not obtained IRS recognition of tax-exempt status.

• The Tax Court ruled that a taxpayer who organized a religious music ministry could not deduct contributions he made to the ministry since it was not a church and was not recognized by the IRS as an exempt organization. A musician and composer of religious music claimed a tax deduction of $5,000 for contributions he made to a religious ministry he founded called “My Father’s Son.” Through My Father’s Son, the musician provides sound services and musical performances to several churches and religious groups with which he is affiliated. The musician claimed to have given sound equipment to My Father’s Son, including two speakers, an amplifier, a mixer, condensers, and microphones. He stores this equipment in his garage and transports it to religious services in a van. The musician deducted $550 in transportation expenses as part of his contribution. The IRS audited the musician’s tax return and disallowed the $5,000 charitable contribution deduction since My Father’s Son was never recognized by the IRS to be an exempt organization. The musician claimed that the $5,000 was tax deductible since he actually performed services for a religious purpose. The Tax Court agreed with the IRS that no deduction was available for contributions to My Father’s Son. However, it concluded that the musician was entitled to a tax deduction for his travel to churches in which he performed religious services. The Court noted that an organization cannot receive tax-deductible charitable contributions unless it applies for recognition of exempt status and its application is approved by the IRS. There are limited exceptions to this requirement. For example, churches are not required to apply for recognition of exempt status. However, none of these limited exceptions applied to My Father’s House. The Court observed:

However praiseworthy [the taxpayer’s] activities may be, he carried them on solely in his individual capacity. The name of his organization expresses the fact that it is none other than himself. My Father’s Son is not a corporation, trust, community chest, fund, or foundation. It is not formally organized. The Code makes no provisions for the deduction of contributions to the religious undertaking of an individual as a personal venture where there is no form of organization which conforms to the requirements of the statute. By the same token, the record contains no indication of [the taxpayer’s] efforts to apply for recognition of exempt status for My Father’s Son, as generally required …. We find that My Father’s Son is not an exempt organization. Therefore, we hold that [the taxpayer’s] claimed contributions are not deductible for federal income tax purposes.

However, the Court acknowledged that the taxpayer “did establish to the satisfaction of the Court that he had incurred transportation expenses in the course of contributing services to his churches” and that the income tax regulations specify that “while no deduction is allowable for a contribution of services, unreimbursed expenditures made incident to the rendition of services to an exempt organization may constitute a deductible contribution, citing as an example out-of-pocket transportation expenses.” The Court noted that the taxpayer had presented a log of his mileage showing 2,447 miles driven to religious services, or a total of 58 roundtrips. The Court concluded: “While these expenditures were based on a reconstruction, we do not find them unreasonable. The standard mileage rate for charitable contributions [is] 12 cents per mile. [The taxpayer] is not entitled to deduct registration fees for the van, as the standard mileage rate is allowed in lieu of actual expenses. [The taxpayer] is entitled to a charitable deduction of $293.64 [2,447 miles multiplied times 12 cents].” Stephens v. Commissioner, T.C. Memo. 1993-173 (1993).

© Copyright 1993, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 m15 c0493

Legal Developments

Tax Deductibility of Donations to Benevolence Funds

Key is the size of the “class of potential beneficiaries.”

Richard R. Hammar, Attorney, CPA
Bio

Key point: Contributions to a church benevolence or scholarship fund may not be tax deductible if the "class of potential beneficiaries" is only one or a few people.

The IRS recently addressed the issue of "benevolence funds" established by charitable organizations.

Here are the facts. A hospital employing 2,900 people established a restricted fund (the "fund") to provide emergency assistance to financially needy persons who suffer economic hardship due to accident, loss, or disaster. Over 9,000 people, including approximately 2,900 current employees, 600 former employees, 400 volunteers, and their immediate families (the "beneficiaries") are eligible to receive assistance from the fund. The fund consists of contributions received from the hospital and its employees and former employees. The fund is administered by an employee committee made up of approximately 25 employees. Members of the committee serve without compensation and are not eligible to benefit from the fund while serving. In accordance with the fund bylaws, 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. A typical grant might consist of $200 to $500 paid to a utility company or other provider of an essential service to a beneficiary, or a grant of food vouchers redeemable for groceries. No beneficiary has any vested right to receive assistance, nor is there any guarantee that funds will be available at any time.

Contributions to the fund are made on a voluntary basis and may not be earmarked for a particular recipient. Employees may make cash contributions, either directly to the fund or through payroll deductions. Once each year, employees may donate the cash equivalent of all or part of their accumulated earned time, which consists of vacation, sick, and holiday benefits, to the fund. Where the employee donates earned time to fund, that earned time is reported as taxable income to the employee. In 1991, 541 employees, or 19%, made donations to the fund averaging $25.00 per donation. The hospital asked the IRS if employees' cash contributions to the fund were deductible as charitable contributions. The IRS began its ruling by noting that a tax-deductible charitable contribution must be made "to or for the benefit of" a tax-exempt charitable organization, and that the donor must intend to benefit the charity rather than a specific individual or small group of individuals. As a result, a deduction may be denied if the class of potential beneficiaries of a donor's contribution is too small. The IRS observed:

A class of beneficiaries designated by the donor … may be challenged where the class of prospective beneficiaries is so limited in size that the donee organization is considered to benefit specified individuals. Such contributions must be examined in light of the totality of the surrounding facts and circumstances to determine if the class of beneficiaries is too narrow to qualify the contributions for a deduction under section 170 of the Code. An example of too small a class can be seen in Charleston Chair Co. v. U.S., 203 F. Supp. 126 (E.D.S.C. 1962). In that case, a corporation was denied a deduction for amounts given to a foundation established to provide educational opportunities for employees and their children where the foundation's educational benefits inured to only four children of the corporation's employees and where 30 percent of the foundation's income was paid to the son of the corporation's president and foundation trustee.

In this case, the IRS concluded that the class of potential beneficiaries was sufficiently large:

[A]ll 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 … as well as their families. Such a class of beneficiaries is not so limited in size that the donee organization is considered to benefit specified individuals.

As a result, the IRS concluded that employees' cash contributions to the fund were tax-deductible. What is the significance of this ruling to church leaders? First, note that it was a private letter ruling, and that such a ruling is directed only to the organization that requested it. Further, federal law prohibits such rulings from being used or cited as precedent in other cases. However, private letter rulings are useful in predicting how the IRS will rule in similar cases, and in this sense they are relevant. This ruling suggests that donations to church benevolence funds or scholarship funds may not be tax deductible if the "class of potential beneficiaries" is too small. For example, assume that a church establishes a "scholarship fund" to benefit members who are attending seminary, and that only one member currently attends a seminary. Can that student's parents contribute thousands of dollars to the church's scholarship fund and then claim a tax deduction for their contributions? Obviously not, since the class of potential beneficiaries is too small. In each case, the IRS noted that "[s]uch contributions must be examined in light of the totality of the surrounding facts and circumstances to determine if the class of beneficiaries is too narrow to qualify the contributions for a deduction under section 170 of the Code." IRS Private Letter Ruling 9316051.

Legal Developments

Distributing Leftover Funds from a Medical Fundraiser

New Jersey court issues important ruling.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1993-07-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• Key point: Funds established to assist a medically needy person should not necessarily be distributed to the needy person’s family in the event of his or her death.

• 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 advertisements in newspapers 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 claimed that the fund balance should be distributed to them on the basis of the “cy pres” doctrine. The cy pres doctrine provides that if a donor creates a charitable trust for a specified purpose, and the purpose of that trust becomes impossible or impracticable, then a court may order a distribution of the fund to a similar charitable purpose. The bank claimed that the cy pres doctrine compelled the distribution of the fund balance to the National Leukemia Foundation. A court concluded that the cy pres doctrine did not apply in this case, and accordingly it rejected the positions of both the family and the bank. The court noted that the cy pres doctrine only applies to charitable trusts, and that a charitable trust is one that is devoted to the benefit of the community rather than to a particular individual or small group. Since the trust in this case was designed to defray the medical expenses of one person, it was a private trust rather than a charitable trust. As a result, the cy pres doctrine did not apply. How then should the trust balance be distributed? The court acknowledged that this was an issue that “surprisingly has not been addressed” by any previous case in New Jersey. The family members again 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. The court was unpersuaded. It observed:

[A]lthough records were maintained as to donations received by the fund, which identified some of the contributors, there were numerous anonymous donations. So too, the passage of time may create administrative difficulties in locating the present whereabouts of some contributors whose identities were known …. Research has not revealed any specific authority governing the distribution on a pro-rata basis of trust funds where the identity of the original donors cannot be ascertained. However [a 1958 English case] is helpful. In [the English case] the court ordered a judicial inquiry be conducted to determine the identity of anonymous donors whose addresses have changed. Without any other relevant precedent, this court will adopt this novel, but practical approach.

To accomplish this inquiry, the court directs the [bank] to compile a list of all donors and the last known addresses of each donor. A written inquiry shall be directed to each donor verifying the accuracy of the address and original contribution. Thereafter, the names of donors, and last known addresses who do not respond to the written inquiry, together with a general announcement to anonymous donors, shall be published in [the local newspaper]. At the completion of this inquiry, under court supervision, the funds shall be paid on a pro-rata basis to the identified donors. The balance of the fund, constituting the pro-rata share of all unidentified donors shall be payable into the court. At the conclusion of six months from the date of advertisement, all claims by unidentified donors shall be barred and the then existing balance will again be distributed on a pro-rata basis among the same group of identified donors who received the initial distribution.

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, then any fund balance should not necessarily be distributed to family members. According to the New Jersey court, the cy pres doctrine will not apply in such cases, and accordingly the church should attempt to identify individual donors to the fund and return to them a pro-rata share of their contributions. For example, if half of the fund balance remains, then individual donors should be refunded half of their contributions. Of course, donors are free to decline a refund of their contribution and redirect it to some other charitable or religious purpose. This raises another question that was not addressed by the court—are donations to such a fund tax-deductible as charitable contributions? This is an issue that neither the IRS nor any court has addressed directly. However, the fact that this court concluded that a trust established for the health expenses of a cancer victim was a private rather than a charitable trust suggests that contributions to such a trust are not deductible as charitable contributions. On the other hand, there are arguments that would support the deductibility of such contributions in some cases. Note, however, that donors who claim a deduction for their contributions to such a fund will need to file an amended tax return if they deducted the full amount of their contribution as a charitable contribution and they request a pro-rata refund of their contributions. This complication will induce many donors to simply redesignate their contribution to some other charitable or religious purpose. Matter of Gonzalez, 621 A.2d 94 (N.J. Super. Ch. 1992).

© Copyright 1993, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 m18 c0493

Legal Developments

Charitable Trusts and the Rule Against Perpetuities

This rule often cannot invalidate these trusts.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1993-05-01 Recent Developments

Wills, Trusts, and Estates

Richard R. Hammar, J.D., LL.M., CPA

• Key point: In many states, charitable trusts cannot be invalidated on the basis of the “rule against perpetuities.”

• A federal appeals court refused to invalidate a charitable trust that violated the rule against perpetuities. Most persons are not aware that trusts can be invalidated if they continue too long. The so-called “rule against perpetuities” renders such trusts legally invalid. Fortunately, there are some exceptions to this rule, as this case illustrates. A husband and wife established a trust for the benefit of charitable causes. The trust specified that it was to continue indefinitely following the death of the couple. The couple died in 1989, and some of their heirs filed a lawsuit seeking to have the trust declared invalid on the basis of the rule against perpetuities and all of the trust assets distributed to them. A federal district court agreed with the heirs, and the case was appealed. A federal appeals court reversed the lower court’s ruling, and ordered the trust reinstated. Applying the law of Arkansas (where the trust was created), the court observed:

Charitable bequests and trusts have traditionally been favorites of the law and courts will struggle to uphold them, whenever possible …. By the law of England [from the 16th century] and by the law of this country at the present day (except in those states in which it has been restricted by statute or judicial decision) trusts for public charitable purposes are applied under circumstances under which private trusts would fail. Being for objects of permanent interest and benefit to the public, they may be perpetual in their duration, and they are not within the rule against perpetuities …. A charitable trust constitutes an exception to the rule against perpetuities and cannot be invalidated for a violation of that rule. The Arkansas Supreme Court … held that “a charitable trust is not invalid although by the terms of the trust it is to continue for an indefinite or an unlimited period.” Because we hold that the trust [in this case] is a charitable trust, the trust may continue in perpetuity and not violate the rule against perpetuities.

This case illustrates an important point—while the rule against perpetuities generally prohibits trusts from continuing indefinitely, this rule (in many states) does not apply to charitable trusts. Lancaster v. Merchants National Bank, 961 F.2d 713 (8th Cir. 1992).

© Copyright 1993, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m80 c0393

Legal Developments

Deductibility of Designated Contributions

IRS says contributions meant for specific individuals aren’t deductible.

Richard R. Hammar, Attorney, CPA
Bio

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."

Note, however, that the IRS ruled privately in 1987 that a contribution to a charity may be tax-deductible even if it designates a particular individual so long as the designation is "advisory" rather than mandatory. The IRS concluded: "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. Private Letter Ruling 8752031.

What this means for churches

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.

This private letter ruling suggests that contributions to a church benevolence fund can be deductible even if the donor mentions a beneficiary, if the facts demonstrate that (1) the donor's recommendation is advisory only, (2) the church retains "full control of the donated funds, and discretion as to their use," and (3) the donor understands that his or her recommendation is advisory only and that the church retains full control over the donated funds, including the authority to accept or reject the donor's recommendations.

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 designated 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.

Churches adopting such a policy should make copies available to any person wanting to make a designated contribution to the church benevolence fund. A sample policy is reproduced in the Richard Hammar's Church and Clergy Tax Guide. There is no guaranty that such a policy will render a designated contribution deductible. But it does appear that such an interpretation is reasonable, if the church in fact exercises full control over the earmarked funds.

Obviously, a church can administer a program in such a way as to jeopardize the deductibility of contributions. For example, a church can adopt a benevolence fund policy yet honor every "recommendation" made by a donor. Clearly, it is doubtful that donors could deduct their earmarked contributions under these circumstances, since the "control" exercised by the church is illusory. IRS Announcement 92-128.

Legal Developments

Substantiating Charitable Contributions

What are the reporting requirements?

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-11-01 Recent Developments

Taxation – Church Property

Richard R. Hammar, J.D., LL.M., CPA

• The Tax Court refused to permit a taxpayer to deduct cash contributions she made to a television evangelist and her local church, since she could not substantiate any of the contributions. The taxpayer claimed charitable contribution deductions of $2,765 in 1987 and $2,904 in 1988. The IRS audited the taxpayer, and disallowed any deduction for the claimed contributions. The IRS based this decision on the fact that the taxpayer had made all of the alleged contributions in cash and was not able to substantiate any of them with canceled checks or other written evidence (such as notations in her personal diary or written receipts from the organizations to which the contributions allegedly had been made). The Tax Court agreed that the taxpayer could not deduct any of her alleged contributions. It observed:

We begin by noting that deductions are strictly a matter of legislative grace, and a taxpayer has the burden of establishing that he or she is entitled to any deduction claimed on the return. All taxpayers are required to keep sufficient records to enable [the IRS] to determine their correct tax liability. [The Internal Revenue Code] allows a deduction for charitable contributions subject to certain limitations. If a taxpayer makes a cash contribution, in the absence of a canceled check or receipt from the donee, he or she must maintain other reliable written records showing the name of each charity and the date and amount of each contribution. None of the above-listed forms of documentation exists. [The taxpayer] offers the defense of destruction of her records. The [televangelist] had no record of the contributions …. This Court is not bound to accept the unverified, undocumented testimony of taxpayers. [The taxpayer’s] testimony, without more, is not sufficient to carry her burden of proof. [She] has not met her burden of proof to substantiate any portion of her cash charitable contributions.

What is the significance of this case? It demonstrates the importance of church members maintaining documentary evidence of their charitable contributions. As the Court noted, the income tax regulations permit church members to substantiate contributions to their church in any one of the following three ways: (1) a canceled check, (2) a receipt or letter from the donee church showing the church’s name and the amount and date of the contribution, or (3) any other reliable written record showing the name of the church and the amount and date of the contribution. If the donor has no canceled check or church receipt to support a contribution, then he or she has the burden of maintaining reliable written records supporting the contribution. It cannot be assumed that oral testimony will be adequate substantiation (oral testimony commonly was used to substantiate contributions prior to 1985). Written records generally are considered to be reliable if made at or near the time of an alleged contribution, or if part of a donor’s regular recordkeeping procedures. They may include entries in a taxpayer’s diary or personal calendar. Jones v. Commissioner, T.C. Memo. 1992-466.

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0692

Legal Developments

The “Charitable Contribution Tax Act of 1992”

This bill would require churches to provide written acknowledgment to donors of $100 or more.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-09-01 Recent Developments

Richard R. Hammar, J.D., LL.M., CPA

• The “Charitable Contribution Tax Act of 1992” (Senate bill 2979), if enacted, would require charities to provide written acknowledgement to any donor of a contribution of $100 or more. The bill contains the following two provisions of interest to churches:

1. No deduction shall be allowed . . . for any contribution of $100 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization . . . .

An acknowledgment meets the requirements of this [bill] if it provides information sufficient to substantiate the amount of the deductible contribution. If the contribution was made by means of a payment part of which constituted consideration for goods or services provided by the donee organization, the acknowledgment must provide a good faith estimate of the value of such goods or services. . . . [A]n acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of—(i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii) the due date (including extensions) for filing such return.

2. If [a charitable organization] receives a quid pro quo contribution, the organization shall, in connection with the solicitation or receipt of the contribution—(1) inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization, and (2) provide the donor with a good faith estimate of the value of such goods or services. For purposes of this section, the term “quid pro quo contribution” means a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization.

What would be the impact of this bill on churches (if it is enacted)? Many churches currently provide written acknowledgements of contributions to all donors. These churches would not be affected by the bill. There is nothing more that such churches would be required to do. The bill does not require that any governmental form (e.g., Form 1099) be filed with the IRS. What about churches that currently do not issue written acknowledgement of charitable contributions to donors? These churches would be affected to a minimal degree. To the extent that any donor makes an individual contribution of $100 or more, the church would have to issue the person a written acknowledgement of the contribution. The acknowledgement need not be on any official form. The bill specifies that an acknowledgment is satisfactory “if it provides information sufficient to substantiate the amount of the deductible contribution” and it is “contemporaneous” (i.e., the taxpayer obtains the acknowledgment 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 bill’s “quid pro quo” provision will not apply to most churches. Under this provision, a charity that solicits specified contributions in return for a specified product or service must (1) inform donors that their “contributions” are deductible only to the extent they exceed the fair market value of the product or service received in exchange, and (2) provide donors with a good faith estimate of the fair market value of the product or service. Quid pro quo contributions would include a “premium” offered by a radio or television ministry in exchange for a specified contribution, counseling services offered by a church at a prescribed hourly rate, or a private school education provided in exchange for a specified tuition fee. None of these payments would be deductible except to the extent they exceed the fair market value of the product or service provided in return.

The bill is illustrated by the following examples.

• Example. A member contributes $50 every week to the church. No written acknowledgement would be required.

• Example. Same facts as the previous example, except that the member makes a single contribution of $250 for missions. The church would have to issue a written acknowledgement of the $250 contribution. The acknowledgement need not be on any particular form. It need only be in writing, and issued not later than the date the taxpayer files his or her tax return for the current year (or the due date for the filing of such return). Generally, this will mean that the written acknowledgment must be provided to donors not later than April 15 of the following year. Note that no government forms (1099 or anything else) need be completed by the church, and there is no form that the church files with the government. The church’s sole obligation is to provide the donor with a written acknowledgement.

• Example. In January of each year, First Church provides all members with annual written summaries of their contributions for the previous year. This procedure fully complies with the bill, and there is nothing else that First Church would be required to do (assuming that it does not solicit quid pro quo contributions).

• Example. A small church receives no individual contribution of $100 or more. It is not affected by the bill (assuming that it does not solicit quid pro quo contributions).

• Example. A religious television program solicits contributions by offering to give donors a special book. This is a “quid pro quo” contribution. If enacted into law, the bill would require the religious organization to (1) inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of the amount of any money contributed by the donor over the value of the product provided by the organization, and (2) provide the donor with a good faith estimate of the value of such product.

In summary, the bill would not have a major impact on churches since (1) most churches currently provide their members with periodic contribution summaries that would fully comply with the bill’s requirements; (2) many smaller churches have few if any donors who contribute one-time offerings of $100 or more; (3) there is no “penalty” imposed on a church for not providing donors with a written acknowledgment of their contributions (the penalty is imposed on the donors, who cannot claim a charitable contribution deduction on their tax return of any individual contribution of $100 or more without a written acknowledgment from their church); (4) a declining percentage of taxpayers (perhaps as few as 15%) are able to itemize their deductions on Schedule A (Form 1040), and these persons are unaffected by the bill even if their church fails to provide them with a written acknowledgement of their contributions of $100 or more; and (5) most churches do not solicit quid pro quo contributions. Nevertheless, there are some churches that currently do not issue periodic written acknowledgement of charitable contributions, and these churches will have to begin doing so in order to assure the deductibility of individual contributions of $100 or more. Church Law & Tax Report has contacted every member of the Senate Finance Committee, including the two major sponsors of this bill (Senators Moynihan and Danforth) to urge an exemption for churches, or at a minimum, a substantial increase in the $100 amount. Sadly, there will be a few unscrupulous individuals who will attempt to “profit” from this proposed legislation by alarming churches of the “dire consequences” of not complying. They will offer their questionable and excessively-priced services as a church’s “only remedy.” Our advice—stay away from any organization that uses such tactics. As noted above, the impact of this bill upon most churches, even if it is enacted, will be minimal or non-existent.

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m52 c0592

Legal Developments

The “Truth in Tax Exempt Giving Act of 1992”

This bill was recently introduced in the U.S. Senate.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-09-01 Recent Developments

Richard R. Hammar, J.D., LL.M., CPA

• The “Truth in Tax Exempt Giving Act of 1992” was introduced recently in the United States Senate by Senator Warner. The bill, if enacted, would require charities to disclose to any donor (who contributes at least $25) the salaries of the 5 highest compensated employees. The bill would accomplish its goal by modifying IRS Form 990—the annual information return filed by most charitable organizations. Note that churches, and some other religious organizations, are exempt from the 990 filing requirement, and accordingly they would not be covered by this bill if it becomes law. The bill itself confirms that churches would be exempt from the disclosure requirements. In explaining the purpose for the legislation, Senator Warner observed:

I am pleased to come before the Senate today to introduce legislation, which, I believe, will strengthen public confidence in tax-exempt giving. In the wake of the startling financial disclosures regarding excessive compensation of high-level executives of certain tax-exempt organizations … the public has understandably become concerned about donating their hard-earned dollars to tax-exempt organizations. A more detailed knowledge of how the money is to be spent by a tax-exempt organization will help restore their confidence …. The American public—good-hearted, good-natured people, who want to help—is entitled to the basic information necessary for them to make an informed judgment respecting those organizations to which they want to donate their services and perhaps, more importantly, donate their money. It is for that purpose that I introduce this piece of legislation today ….

I do not say that the heads of these tax-exempt organizations are not entitled to a significant salary. I simply say that the public should be allowed to view the disclosure forms, albeit in a more readable, more understandable form, and then make their own decision. The public will then signal their approval or disapproval by writing or not writing their checks to the various charities and other tax-exempt organizations. I do believe, however, that if my legislation passes, the era of excessive salaries, first class airline flights, limousines, high-priced dinners, vacations and other perks may be over. A more efficient organization can net greater proceeds for the ultimate beneficiaries.

As noted before, the bill itself specifically exempts churches. However, some religious organizations are not exempt from filing 990 forms, and such organizations would be directly affected by this bill should it become law.

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m52 c0592

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Legal Developments

Deductions and Benefits Received

Donors cannot deduct contributions if they receive benefits in exchange.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-09-01 Recent Developments

Clergy – Taxes

Richard R. Hammar, J.D., LL.M., CPA

• The Tax Court ruled that a woman who made contributions to a religious organization was not entitled to a charitable contribution deduction since the organization provided her with the necessities of life. The taxpayer lives and works at a Christian parachurch ministry devoted to the rehabilitation of drug addicts and alcoholics. Her duties included working as school principal and teacher, leader of religious services, rehabilitation counselor, administrator, clerical worker, cook, and member of ministry’s board. She is not an ordained minister. She also is employed in a secular job, and donated all of her secular earnings to the ministry. Members of the ministry live under a covenant whereby they hold no private property and own all material possessions in common. It is as a result of this covenant that the taxpayer turned over her salary to the ministry. The taxpayer lived frugally at the ministry, but did receive benefits as a resident member of the community. The community provided lodging, food, clothing, and transportation to the taxpayer and her children at no cost. Under these facts, the Tax Court concluded that the taxpayer was not entitled to any charitable contribution deduction. It observed:

In recent years, this Court has held that contributions made to communal organizations which offer secular benefits to their members are not exclusively for exempt purposes and hence not tax deductible … It is clear that [the ministry] performs important social and spiritual functions and that its leaders give selflessly of themselves to the extent of their ability. [The taxpayer] has given far more than she has received, having committed all her possessions, her earnings, and her time to the [ministry]. She and her children did receive provision, however meager, for their necessities from [the ministry]. It would be impossible under the circumstances to place a monetary value on the benefits received, nor have we been asked to do so, as [the IRS] is not seeking to tax them as compensation. Receipt of such benefits, however, constitutes private inurement, and under these circumstances it is impossible to value the amount of the charitable contribution unless the value of the benefits received can be determined.

The Court also rejected the taxpayer’s claim that she was a “minister of the gospel” and thereby eligible for a parsonage allowance. Ohnmeiss v. Commissioner, T.C. Memo. 1991-594.

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m27 m08 c0592

Legal Developments

Value of Donated Assets

IRS rules that donated computer is worth $800, not $53,000.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-09-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• The Tax Court ruled that the value of a computer donated to a church was $800 rather than the $53,000 claimed by the donor. A computer technician began acquiring scrapped and obsolete parts from his employer, and assembled what appeared to be a “mainframe computer.” He incurred only $800 in out-of-pocket expenses in constructing the computer. The technician donated the computer to a church. Some of the components of the computer were visibly labeled as “scrap”. It took 4 months to complete the process of assembly, low-level diagnostics, and loading the software. The church kept the computer in a 10 by 13-foot room, with an air-conditioning system. A church member responsible for operating the computer encountered frequent problems. He was never able to run the computer for more than 30 to 45 minutes before encountering operating problems. The church kept the computer for approximately 18 months, and then disposed of it by hauling it to a dump. The technician reported a $53,400 charitable contribution deduction on his tax return. At the time of the donation, the technician was not aware of any companies, other than scrap yards, that were purchasing “reconditioned” computers. He ascertained that the list price for a new mainframe computer (of the same type that he constructed) was $89,000. He then discounted the list price by 40 percent to arrive at the value reported on his tax return. The 40 percent discount was based on the technician’s assumption that a 40 percent discount was standard for “used equipment”. The IRS audited the technician’s tax return, and determined that he was limited to a charitable contribution deduction of $800 (his out-of-pocket expenses in constructing the computer). The Tax Court agreed with the IRS. It noted that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution. Fair market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of relevant facts.” The court agreed with the IRS that at the time of the contribution there was no evidence that there was an active market for a computer constructed exclusively from scrapped or obsolete parts. The court concluded that the technician’s computation of market value (40% of the selling price for a new computer) was “totally unsupported”. Rochin v. Commissioner, T.C. Memo. 1992-262 (1992).

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0592

Legal Developments

Determining the Value of Donations

The Tax Court was recently asked to determine the value of ancient Biblical fragments.

Richard R. Hammar, Attorney, CPA
Bio

Church Law and Tax 1992-09-01 Recent Developments

Charitable Contributions

Richard R. Hammar, J.D., LL.M., CPA

• The Tax Court was asked recently to determine the value of ancient Biblical fragments donated to a public university by a collector. The collector donated to Duke University a number of fragments, including excerpts from the books of Genesis, Exodus, Leviticus, Deuteronomy, and Numbers. The collection included the oldest known version of Exodus 15 (the “song of the sea”). The collector claimed a charitable contribution deduction in the amount of $700,000 for the collection. The IRS audited the collector’s tax return, and asserted that the collection was not worth more than $25,000. The collector appealed, and the Tax Court concluded that both valuations were wrong since they had been based on the testimony of academic experts rather than antiquities dealers. The Court determined that the true value of the collection was $337,000, since this was the amount that an antiquities dealer offered to pay for it. The Court observed:

Generally, when a taxpayer donates property, other than money, to a qualified charitable organization, the taxpayer may deduct the fair market value of the property on the date of contribution …. Fair market value is the “price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” The parties take diametrically opposite positions as to the fair market value of the collection. Valuation is an inexact science, and each case necessarily turns on its own particular facts. In most cases, each party presents one or more expert witnesses who argue a valuation formula that should be used, and testify to the misguided approach used by the opposing side’s expert …. In determining the fair market value of the collection, we must examine the market in which it would ordinarily be sold to the ultimate consumer …. The values determined by the expert witnesses range from a low of $25,000 … to a high of $700,000 …. Both [witnesses] are eminently qualified in the academic fields of ancient Biblical manuscripts and both have impeccable backgrounds. Both, however, in general, presented academic rather than commercial valuations. They are scholars, not professional appraisers of ancient documents. They convinced us of the authenticity of the collection, but not of the financial value of the collection. Accordingly, we reject their respective values placed on the collection …. On the other hand, we believe Professor Bikhazi’s offer of 1,000,000 Lebanese pounds (approximately $337,500) to purchase the collection was bona fide. Professor Bikhazi was a knowledgeable collector of antiquities and had the financial capability to fulfill his purchase commitment had his offer been accepted. We accept his offer of $337,500 as probative of the fair market value of the collection at the time of donation. Ashkar v. Commissioner, T.C. Memo. 1991-11 (1991).

© Copyright 1992, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 c0592

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