Legal Developments

Contributions that Refer to the Donor’s Name

The IRS clarifies the deductibility of these donations.

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1992-05-01 Recent Developments

Charitable Contributions

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

• The IRS clarified the deductibility of “contributions” that refer to the name of the donor. For many years, there has been some question regarding the deductibility of gifts that name the donor. For example, many churches honor large donations by inscribing the name of the donors on a memorial plaque. Such gifts often are associated with building programs, or with a donor’s payment of a substantial portion of the purchase price of a particular item (e.g., stained glass windows, a church organ). Does mentioning a donor’s name in such a way affect the deductibility of the gift? The argument could be made that it does, since a charitable contribution (to be tax-deductible) must be a transfer without any expectation of a return benefit. Does the public disclosure, for many years to come, of the donor’s identity on a memorial plaque constitute a “benefit” received in exchange for the gift that nullifies a charitable contribution deduction? The IRS said no, in a recent news release. The IRS observed: “Payments an exempt organization receives from donors are nontaxable contributions where there is no expectation that the organization will provide a substantial return benefit. Mere recognition of a … contributor as a benefactor normally is incidental to the contribution and not of sufficient value to the contributor to [preclude a charitable contribution deduction]. Examples of mere recognition [that do not nullify a charitable contribution deduction] are naming a … building after a benefactor … ” IRS News Release IR-92-4.

© 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 c0392

Legal Developments

Tax Court Denies Deductions for Alleged Contributions

A church trustee’s deductions were denied.

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1991-11-01 Recent Developments

Charitable Contributions

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

• The Tax Court denied a charitable contribution deduction to a church trustee for alleged contributions made to his church. In 1972, the trustee (who also served as choir leader and youth director of his church) purchased a home jointly with the church’s pastor. A few years later, the trustee transferred his interest in the home to the pastor. However, the trustee continued to live in the home. In 1983, the trustee claimed an income tax deduction for cash contributions to the church in the amount of $9,354.10. Attached to the trustee’s tax return was a letter from the pastor which stated: “Please be advised that the amount of monies reflected below indicates your contributions given to the church during the Year: Tithes (20%) of $ 3,346.22, church dues of $36, freewill offerings of $468, and building fund drive for 1983 of $5,503.88, for a total of $ 9,354.10.” The IRS later audited the trustee’s 1983 return and denied a deduction for the claimed contributions. The IRS based its action on the ground that the trustee received direct personal benefits from the church in exchange for his “contributions” (including housing and support). Accordingly, the IRS asked the trustee to respond to several questions. When the trustee refused to do so, the IRS subpoenaed several documents pertaining to the trustee’s personal financial records as well as the records of the church. The trustee failed to respond to this subpoena, and a court ordered him to respond. The trustee still refused to respond. The case went to trial, and the Tax Court agreed with the IRS that no deduction was allowable. The court noted that a charitable contribution is a gift given to a charity with no expectation of a return benefit. The court continued:

In this case, petitioner testified that he lived with [the pastor]. He testified that he paid no rent to the church or pastor and he paid nothing for the running or maintenance of the household, such as utilities, real estate taxes, etc. [The trustee] presented no evidence of his personal living expenditures above and beyond the alleged “contributions” made to the church. Furthermore, the record contains no information about the income and expenditures of the church and, accordingly, we do not know whether funds received by the church were used to defray expenses in the running of [the pastor’s] house. Based upon the record in this case, it is reasonable to infer that any monies contributed by [the trustee] were used in the running of [the pastor’s] household. It is further reasonable to infer that any “contributions” made by [the trustee] to the [church] benefitted him and were in anticipation of such housing or other benefits and, thus, did not proceed from “detached and disinterested generosity.” Based on the record before us, we hold that [the trustee] has failed to prove that he made a “contribution or gift” to the church during 1983 ….

The court added that the trustee failed another requirement of a valid charitable contribution—that the contribution must be made to a tax-exempt organization. The court pointed out that one of the requirements for tax-exempt status is that no part of the net earnings of the organization inures to the benefit of a private individual. The court concluded that “we infer that any contributions made by [the trustee] to the [church] were used to pay his personal living expenses and, therefore, inured to his benefit.” Finally, the court assessed negligence penalties against the trustee, along with a $2,000 penalty for maintaining a frivolous position before the Tax Court.

What is the significance of this ruling? Consider the following points: (1) The decision illustrates that no charitable contribution deduction will be allowed if the donor expects to receive a benefit in return for the “contribution.” This principle applies in several contexts, including attempts by parents to deduct “contributions” for tuition they pay to a church school in which their child is enrolled, or payments to a pastoral counselor for counseling services. (2) The tax-exempt status of a church is jeopardized if any of the church’s assets are distributed to a private individual other than as reasonable compensation for services rendered, or in the furtherance of the church’s exempt purposes. This is an extremely important point that churches must keep in mind before distributing monies for the personal support of private individuals. Again, exceptions to this rule would be compensation, and distributions (such as benevolence distributions, or missionary support) in direct furtherance of the church’s exempt purposes. (3) Federal law currently permits the Tax Court to assess penalties of up to $25,000 for maintaining frivolous positions before the court (the court only assessed $2,000 in this case). (4) The court also assessed a penalty against the trustee for intentional disregard of tax law, noting that “this Court has repeatedly sustained the [penalty] involving an alleged charitable contribution to a ‘church’ where, in fact, the funds were used for personal and family expenses.” Williamson v. Commissioner, 62 T.C. 610 (1991).

© Copyright 1991, 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 c0691

Legal Developments

Man’s Attempt to Give Money to Minister Challenged in Court

A Missouri court ruled on the matter.

Richard R. Hammar, Attorney, CPA

Bio

State: Missouri
Categories: Charitable Contributions, Wills, Trusts, and Estates

Church Law and Tax 1991-09-01 Recent Developments

Wills, Trusts, and Estates

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

• A husband’s attempt to give more than half of his estate to his minister was challenged in court. A Missouri couple was married in 1967, and they signed wills and a “postnuptial agreement” specifying that they would not “give away any of their property during their marriage.” Shortly before his death from kidney failure in 1987, the husband withdrew $26,000 from an investment account and gave it to the minister of his church. This transaction was never revealed to his wife. Following the husband’s death, his widow began investigating his affairs, and discovered the $26,000 gift to the minister. When she asked the minister about the gift, he replied “that is between him and God. If you knew about the money, it would only hurt you, and you don’t need to be hurt any more.” The widow continued to investigate her husband’s affairs, and later discovered that her husband had given the $26,000 to the minister, and that the minister used the money to buy 10 acres of land and a house. In exchange for the $26,000, the minister had agreed to pay the husband a monthly income “for life” of $266, and to “say some good words” about the husband at his funeral. When asked why the husband gave him the money, the minister later explained, “Because he wanted to, I feel. He wanted to help me out. He wanted me to go into full-time ministry, and he thought I had a message. And he said I need to be preaching it.” The widow filed a lawsuit seeking to recover the $26,000 on the ground that the transfer was a “fraudulent conveyance” in violation of her marital rights under state law. A jury agreed with her, and ordered the land and home sold and the proceeds returned to the widow. The minister appealed this verdict. A state appeals court agreed with the trial court’s decision. The court noted that a court can revoke a gift made by a husband to a third party with an intent to deprive his widow of her full legal rights in his estate. Factors indicating an intent to defraud a spouse include (1) a transfer of property for less than market value, (2) a reservation of some control by the husband over the property that is transferred, (3) the property transferred is a substantial portion of the estate, (4) a lack of open and frank disclosure by the husband to the surviving spouse about the transfer, and (5) the property is transferred by the spouse “in contemplation of death.” While not all of these factors are necessary for a fraudulent intent to be established, the court concluded that they all were present in this case. The property was conveyed to the minister for little if any value; the husband retained control over the property by requiring a monthly income of $266; the $26,000 transferred to the minister represented more than one-half of the estate; the husband purposely concealed the transfer from his wife; and, the husband made the gift at a time when he was dying of kidney failure. Accordingly, the appeals court agreed with the trial court, and ordered the home and 10 acres sold and the proceeds paid to the widow. In the Matter of the Estate of Froman, 803 S.W.2d 176 (Mo. App. 1991).

© Copyright 1991, 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 c0591

Legal Developments

Deductability of Testamentary Gifts

The IRS national office recently ruled on this issue.

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1991-09-01 Recent Developments

Charitable Contributions

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

• Does a testamentary gift left to a church in a decedent’s will, with the instruction that masses are to be said for the benefit of the deceased and other individuals, qualify for a charitable contribution deduction for estate tax purposes? Yes, ruled the IRS national office. The deceased’s will contained the following article:

Two thousand Dollars ($2,000) shall be paid to [the church] to say Masses for the … souls [of five named deceased individuals] at the payment of three dollars ($3.00) paid for each Mass; the balance of the money left from the sale of the said [property] after these bequests are paid out, shall be paid to [the church] to say Masses for my soul … at the payment of three dollars ($3.00) paid for each Mass. [The church] shall use the money exclusively for Masses for my soul.

It is the policy of the church and of the religious order staffing the church to honor all requests for masses for the repose of the souls of the deceased regardless of whether a donation accompanies the request. In addition, the church is prohibited from “selling” masses by the regulations of its parent church. All funds donated to the church as mass stipends go into the general fund of the church and are applied to church functions. No funds are paid to individual priests or anyone else for the saying of masses. In upholding the deductibility of such payments as charitable contributions, the IRS observed:

In any event, the property in question apparently has passed to the church, and has become part of the general funds of church. No part of the property has been or will be transferred to any individual member of the religious order. Therefore, the amount of the bequest is deductible from decedent’s estate as a [charitable contribution] described in section 2055(a) of the Code …. A bequest by the decedent to his church, accompanied by an instruction that masses are to be said for the benefit of the decedent and other individuals, qualifies as a deductible bequest for purposes of section 2055(a) of the Internal Revenue Code. Private Letter Ruling 9119006.

© Copyright 1991, 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 m80 c0591

Legal Developments

Avoiding Lottery Taxes

Taxes cannot be avoided by donating lottery winnings to a church.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

Can a church member avoid being taxed on lottery winnings by assigning them to his church?

A recent IRS ruling clearly indicates that the answer is no. A husband and wife won a large lottery jackpot. They then decided to transfer a substantial portion of their winnings to three other individuals.

The arrangement was to be reflected in an irrevocable written agreement requiring the husband and wife to collect the lottery proceeds and then promptly pay the "gift" portion to the three other individuals. The IRS ruled that the husband and wife would be taxed on the full amount of the lottery winnings, even the portion that they attempted to give away.

The IRS noted that the income tax regulations require income to be taxed that is either actually or constructively received. The income tax regulations specify that "income, although not actually reduced to the taxpayer's possession, is constructively received in the taxable year during which it is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time, or so that the taxpayer could have drawn upon it during the taxable year if notice of intention to withdraw had been given."

According to this language, a taxpayer who receives a lottery prize is taxable on it even if he or she attempts to assign it or give it away to another person or to a charity. This is the conclusion reached by the IRS. Since lottery winners have the right to receive the full amount of the prize at their request, they cannot avoid taxes on the prize by an attempt to transfer some or all of their prize to another person or to a charity.

Private Letter Ruling 9022015.

Legal Developments

Charities as Life Insurance Beneficiaries

Such arrangements can create difficulties.

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1991-07-01 Recent Developments

Charitable Contributions

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

• Charitable fundraisers occasionally attempt to raise funds for charity by having individuals purchase life insurance policies on their own lives naming a charity as the beneficiary. Such arrangements can create difficulties, as the IRS observed in a recent ruling. A taxpayer proposed to purchase a life insurance policy on his own life, transfer the policy to a charity, and name the charity as beneficiary. This arrangement was intended to provide the taxpayer with a charitable contribution deduction in the amount of the premiums he would pay on the policy, and in addition provide the charity with substantial insurance proceeds at his death. The IRS ruled that the taxpayer would not be allowed to deduct any portion of the insurance premiums as a charitable contribution. It noted that New York law (the taxpayer was a resident of New York) prohibits anyone without an “insurable interest” from obtaining an insurance policy on the life of another. An “insurable interest” refers to a direct financial interest in the life of the insured. The IRS concluded that since the charity did not have an insurable interest in the taxpayer’s life, the arrangement probably violated New York law. Accordingly, at the taxpayer’s death the insurance company could refuse to pay the policy limits to the charity. Further, the taxpayer’s estate could block any attempt to pay the insurance proceeds to the charity. As a result, there simply was no way to characterize the taxpayer’s payment of the insurance premiums as a charitable contribution, since there was a strong possibility that the charity would never receive any of the insurance proceeds at the taxpayer’s death. Persons considering the purchase of a life insurance policy naming a charity as the beneficiary (and who plan to assign the policy to the charity) should consider the ramifications of this ruling. First, does the charity have an insurable interest in the taxpayer’s life under applicable state law? If not, then the insurance company may never be required to pay the policy amount to the charity in the event of the taxpayer’s death. Second, the taxpayer may not be entitled to any charitable contribution deduction. Private Letter Ruling 9110016.

Charitable Contributions

© Copyright 1991, 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 m50 c0491

Legal Developments

Substantiation of Cash Donations

There is some confusion regarding this issue.

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1991-05-01 Recent Developments

Charitable Contributions

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

• There is some confusion regarding the documentation required to substantiate a charitable contribution of cash. The confusion has been caused by an organization that is informing churches that checks and periodic church contribution summaries are not sufficient documentation to support a charitable contribution deduction. This organization is informing church leaders that cash contributions are deductible only if donors use special offering envelopes (which it will provide for a fee), and that pastors and board members face possible jail sentences for not following its advice. Such advice is reckless and irresponsible, and is needlessly causing alarm. Let’s see what the IRS itself says about the documentation needed to substantiate cash contributions. In Publication 526, the IRS states that “if you make a charitable contribution of money you must keep one of the following for each contribution you make: (1) a canceled check, or (2) a receipt (or a letter or other written communication) from the charitable organization showing the name of the organization, the date of the contribution, and the amount of the contribution, or (3) other reliable written records that include the information described in (2).” This language is taken almost word-for-word from income tax regulation 1.170A-13(a). The regulations are official interpretations of the tax law, and the IRS is bound by them. Publication 526, and the income tax regulations, clearly authorize the use of canceled checks to substantiate contributions. They also authorize the use of periodic “contribution summaries” issued by a church summarizing the contributions made by an individual donor over each 3-month (or some other) period. Neither the IRS, nor any court, has ever said that churches must use special “offering envelopes,” that such envelopes must be kept by the church for a specific length of time, or that clergy and church board members can “go to jail” for not using offering envelopes. Any information you receive to the contrary is false and should be completely disregarded. We encourage denominational and religious publications to assist us in publicizing this information, and in putting an end to this tragic rumor. Of course, many churches do use offering envelopes. They are an excellent way to substantiate contributions of coins and currency. They also reduce the risk of offering counters pocketing loose change. However, even with respect to coins and currency, offering envelopes are not required. The IRS permits donors to substantiate such contributions with any reliable written record (such as a notation on a personal calendar or in a diary). In a recent case, the Tax Court permitted a donor to substantiate cash contributions by means of notations she had made on her kitchen calendar! The points we are making are these: (1) Offering envelopes may be desirable in some cases, but they are never legally required. (2) The IRS accepts canceled checks as sufficient evidence supporting a charitable contribution, whether or not offering envelopes are used. (3) The IRS accepts a church’s “contribution summary” or report as sufficient evidence supporting a charitable contribution, whether or not offering envelopes are used. (4) If a donor contributes coins or currency, the IRS accepts any “reliable written records” as sufficient evidence supporting the contribution, whether or not offering envelopes are used. The income tax regulations specify that a written record will be considered “reliable” if it is made close to the time of the contribution, and it is part of a regular recordkeeping procedure. For example, the regulations state that “a contemporaneous diary entry stating the amount and date of the donation and the name of the donee charitable organization made by a taxpayer who regularly makes such diary entries would generally be considered reliable.” (5) No reported case has ever ruled that churches must use offering envelopes. (6) The IRS has never said, in any published ruling, that churches must use offering envelopes. (7) Pastors and church board members will not “go to jail” for following IRS Publication 526 or the income tax regulations. (8) More complex reporting requirements apply to contributions of noncash property. All that is being addressed here are contributions of cash.

© Copyright 1991, 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 c0391

Legal Developments

New IRS Regulation Could Impact Giving to Foreign Missions

The IRS explains the new rule.

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1991-05-01 Recent Developments

Charitable Contributions

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

• The IRS has proposed a new regulation that could have a significant impact on charitable giving to foreign missions. The new regulation would add paragraph (e)(12) to section 1.861-8 of the income tax regulations. The new paragraph provides that a taxpayer must “allocate” a charitable contribution deduction to “United States source income” or “foreign source income.” In explaining the new rule, the IRS has stated:

The taxpayer shall allocate a deduction for a charitable contribution solely to United States source gross income if (1) the taxpayer, at the time of the contribution, both designates the contribution for use solely in the United States and reasonably believes that the contribution will be so used, and if (2) the contribution is not allocable to foreign source gross income under the following rule. The taxpayer shall allocate a deduction for a charitable contribution to foreign source gross income if the taxpayer, at the time of the contribution, knows or has reason to know that (1) the contribution will be used solely outside the United States, or that (2) the contribution may necessarily be used only outside the United States.

It is not clear at this time what this language means. For example, will United States citizens be denied charitable contribution deductions for donations they make to foreign missions if they have no foreign income against which the contribution can be “allocated?” Further, what does the IRS mean by a contribution that “will be used solely outside the United States”? Many denominations operate foreign missions programs that deduct a small percentage of foreign missions contributions for the administrative expenses of the missions agency (located in the United States). Are contributions to such foreign missions programs “used solely outside the United States”? It would seem that they would not. This is an important point that needs clarification. The IRS has invited comments on the new regulation, and especially “comments on the effects of the proposed rules on United States charities with significant international activities.” Persons wishing to seek clarification of the new regulation, or express their opposition, should send a signed original letter (plus 8 copies) to: Internal Revenue Service, P.O. Box 2604, Ben Franklin Station, Attn: CC:CORP:T:R (INTL-116-90), Room 4429, Washington, DC 20044. Be sure to refer to proposed regulation § 1.861-8(e)(12). Comments must be received by the IRS no later than May 13, 1991. So, if you plan to send comments, you must do so immediately. Church Law & Tax Report will be sending comments and seeking clarification. We will publish any further information as soon as it is available. IRS Proposed Regulation § 1.861-8(e)(12).

© Copyright 1991, 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 c0391

Legal Developments

Benefits Received for Contributions

Donations made in exchange for benefits are not tax-deductible.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Charitable Contributions

Church Law and Tax 1991-05-01 Recent Developments

Charitable Contributions

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

• A federal district court rejected the claim of a member of the Church of Scientology that “contributions” to his church were tax-deductible. The member conceded that the United States Supreme Court ruled in 1989 that contributions to the church were not tax-deductible, since they consist of specified payments in exchange for specified benefits. The member claimed that the IRS routinely permits members of conventional churches to deduct their contributions though benefits are received in exchange. As a result, the member insisted that the government was discriminating against him. In rejecting this claim, the court observed that “it is well-established that a taxpayer has no right to insist upon the same erroneous treatment afforded a similarly situated taxpayer in the past.” Powell v. United States, 91-1 U.S.T.C. ¶ 50,117 (S.D. Fla. 1990).

© Copyright 1991, 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 c0391

Legal Developments

Charitable Contributions for a Specific Purpose

Court rules that donors may sue organization.

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Charitable Contributions

Church Law and Tax 1991-03-01 Recent Developments

Charitable Contributions

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

• Can a charity that raises funds for a specified purpose be sued by donors if the funds are not spent for that purpose? Yes, concluded a New York court in an important decision. A group of donors to the Jewish National Fund (JNF) alleged that for 20 years the JNF had misrepresented in its advertisements that it allocated donated funds to projects in both Israel and the territories acquired during the Six Day War (including the West Bank and Gaza Strip), when in fact no contributions were ever allocated to the territories. The donors sued the JNF for fraud, misrepresentation, and false advertising, and also sought a court order permanently barring JNF from any further misrepresentations. A trial court awarded the donors part of the relief they requested, and the JNF appealed. A state appeals court ruled that the JNF could be sued by the donors. It began its opinion by noting that no law “insulates the fund raising activities of nonprofit organizations from the same prohibitions against committing dishonest or fraudulent acts that are applicable [to other groups].” On the contrary, as the United States Supreme Court recently observed, the “[states] need not sit idly by and allow their citizens to be defrauded.” The court concluded that “certainly, a donor to a charity should be fully informed with respect to the use to which the contribution is being put and should not be misled into believing that the funds will be applied for one purpose when, in reality, they are being utilized somewhere else.” Consequently, the donors, “having adequately established that JNF’s advertisements and brochures may be deceptive in some material respect, and as persons who have been misled by these practices, are authorized to maintain this lawsuit.” A dissenting judge argued that a charity “has no obligation to use its funds other than in accordance with its charter. There is no contention that the funds are not used for a purpose for which the [JNF] is organized.” This eccentric view was rejected by all of the other judges on the appeals court. Marcus v. Jewish National Fund, 557 N.Y.S.2d 886 (A.D. 1990).

© Copyright 1991, 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 c0291

Legal Developments

Charitable Contributions

Church Law and Tax 1990-07-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1990-07-01 Recent Developments

Charitable Contributions

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

• Efforts are underway in both houses of Congress to resurrect the charitable contribution deduction for “nonitemizers.” Until 1982, charitable contributions could be deducted only as itemized expenses on Schedule A. This meant that taxpayers who did not have sufficient itemized expenses to use Schedule A received no tax deduction or benefit from their charitable contributions. However, from 1982 through 1986, Congress permitted “nonitemizers” to deduct at least some of their charitable contributions. For 1982 and 1983, they could deduct up to $25 of their contributions. This amount increased to $75 in 1984. In 1985, nonitemizers were permitted to deduct 50 percent of their total contributions (without any dollar limit), and in 1986 they were permitted to deduct all of their contributions to charity (subject to the same limitations that applied to itemizers). The law authorizing charitable contribution deductions for nonitemizers expired at the end of 1986, and was not renewed by Congress. Accordingly, since 1987, taxpayers who are not able to use Schedule A have received no tax benefit from making charitable contributions. This has meant that most taxpayers are prevented from deducting any portion of their charitable contributions, since it is estimated that about 85% of all taxpayers have insufficient deductions to use Schedule A (due to the substantial increase in the standard deduction). In recent weeks, bills have been introduced in both houses of Congress that would reinstate the charitable contribution for nonitemizers. Representative Byron Dorgan (D-ND), in explaining his bill, observed: “Under current law, only those taxpayers who itemize deductions receive tax incentives for charitable giving. Consequently, only upper-income taxpayers, who generally itemize, are encouraged by the tax laws to make charitable contributions. It makes no sense to me that those with low to moderate incomes, who generally are unable to itemize, do not receive the same encouragement to make charitable contributions …. The consideration of restoring the charitable deduction for the many Americans of modest incomes who do not itemize is now particularly timely, in light of recent studies confirming that tax incentives for nonitemizers would stimulate their charitable giving. More than 77 million taxpayers who do not itemize their returns are not told by our tax code that their charitable giving is going to be treated less generously than the charitable giving by upper income folks. That doesn’t make sense to me. I believe a nonitemizer who contributes $500 to charity should receive the same tax benefit as the itemizer who contributes $500 to charity. The rationale underlying the deduction applies to all taxpayers, that is—all individuals should be encouraged to make donations by excluding from taxation the income they contribute for a public purpose. Allowing a deduction for nonitemizers will stimulate more charitable giving which will provide more funding for worthwhile nonprofit organizations …. Studies demonstrate that lower income households—nonitemizers—have historically contributed a higher percentage of household income to charity than higher income households.”

© Copyright 1990, 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 c0590

Legal Developments

Tax Seminars

Church Law and Tax 1990-07-01 Recent Developments Tax Seminars Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1990-07-01 Recent Developments

Tax Seminars

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

• Ministers and church leaders continue to be misled and confused by false information shared by a few self-proclaimed clergy tax “experts.” Here are three of the current scams. 1. The IRS requires that churches use a specific “chart of accounts.” The IRS has never required churches to use a specific “chart of accounts” in their accounting systems. We do not believe that the IRS will ever do so. 2. The IRS no longer will accept canceled checks as evidence of charitable contributions. Nothing could be further from the truth. The income tax regulations specifically permit the use of canceled checks as evidence of charitable contributions. 3. Churches must file annual “1097 forms” with the IRS beginning next year. The “1097 forms” allegedly report the social security numbers of all contributors. Again, this information is completely false. There is no such thing as a “1097 form.” In some cases, false information is shared innocently by persons who are simply uninformed. But in other cases we suspect that the false information is communicated in order to frighten church leaders into attending seminars and purchasing questionable (and expensive) accounting and consulting services that will help them “comply” with the “new requirements.” Please assist us in sharing this important information with other churches and clergy.

© Copyright 1990, 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: m74 c0590

Legal Developments

Charitable Contributions – Part 2

Church Law and Tax 1990-05-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1990-05-01 Recent Developments

Charitable Contributions

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

• The IRS has issued further guidance on the deductibility of contributions to charities that provide token “premiums” to donors. Over the past few years, Congress has expressed concern that charities do not accurately inform donors of the extent to which contributions are deductible. Specifically, charities have not been advising donors that their contributions are deductible only to the extent that they exceed the fair market value of any premium received in exchange. In response, the IRS sent “Publication 1391” to over 400,000 charities in 1988. Publication 1391 asks charities for help in informing contributors more accurately about the deductibility of contributions made in connection with fund-raising events and programs. Specifically, it asks charities to determine the fair market value of the benefits offered for contributions in advance of a solicitation and to state in the solicitation (and in any receipt issued in connection with a contribution) how much is deductible and how much is not. Over the past few years, several charities have complained that these requirements are overly burdensome, especially for premiums of token value. In a recent revenue procedure, the IRS agreed with some of these concerns, noting that “a benefit may be so inconsequential or insubstantial that the full amount of the contribution is deductible,” and accordingly “charities offering certain small items or other benefits of token value may treat the benefits as having insubstantial value so that they may advise contributors that contributions are fully deductible.” Under new guidelines published by the IRS, a premium is considered “insubstantial” if (1) its fair market value is not more than 2% of the contribution or $50, whichever is, less or (2) the contribution is $25 or more (adjusted annually for inflation—the 1990 figure is $27.26) and the only premium received in exchange is a “token item” (i.e., bookmark, calendar, key chain, mug, poster, tee shirt) bearing the charity’s name or logo. The cost (not fair market value) of all premiums received during the year by a donor must not exceed $5 (adjusted annually for inflation—the 1990 amount is $5.45). If either of these two “safe harbors” exists, the charity can advise the donor that the full value of his or her contribution is deductible. If a charity offers only “insubstantial” benefits in return for donations, fund-raising literature should include a statement to the effect that “under Internal Revenue Service guidelines the estimated value of the benefits received is not substantial; therefore the full amount of your payment is a deductible contribution [if you itemize your deductions on Schedule A].” The guidelines emphasize that these safe harbor rules apply only in the context of fund-raising campaigns in which a charity advises donors (who do not qualify for either safe harbor exception) of the fair market value of premiums and the deductible portion of their contributions. Revenue Procedure 90-12.

© Copyright 1990, 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 c0390

Legal Developments

Charitable Contributions – Part 1

Church Law and Tax 1990-05-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: New York
Categories: Charitable Contributions

Church Law and Tax 1990-05-01 Recent Developments

Charitable Contributions

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

• A New York state appeals court addressed the subject of “benevolence funds” in an important ruling. Here are the facts. An 8-year-old girl was reported missing by her parents, and a massive search for the girl was conducted. Four days later, the girl’s body was found in a wooded area 200 yards from her home. She had been sexually assaulted and murdered. The crime received extensive media coverage. Shortly after the body was found, various newspapers, television and radio stations reported that neighbors of the victim’s family had started a memorial fund at local bank because they were concerned that the family did not have sufficient funds for funeral and burial expenses. The response of the public was overwhelming, and in a short time some 742 donors contributed a total of $12,428. The funds were deposited in a bank account in the names of the victim’s parents. The funeral expenses and burial plot were donated, and miscellaneous expenses of $2,039 were paid out of the fund leaving a balance of $10,389. Concerned about the disposition of the balance remaining in the memorial fund, the bank asked a state court to determine how the funds should be distributed. The court promptly sent a questionnaire to every known donor, and published a notice in local newspapers in an attempt to reach anonymous donors. The questionnaire sought the suggestions of the donors themselves regarding disposition of the funds. Of the 45 donors who responded, 23 wanted the funds to go to the victim’s family, 3 wanted a permanent memorial fund established, 11 wanted the funds to go to other charities, 2 suggested that a reward fund be created to find the murderer, 4 wanted the money to go the victim’s sisters, and 2 wanted their money back. The court began its opinion by noting that the donors’ intention was controlling. If the donors intended to make gifts “to a needy family which had suffered a tragic loss,” then the surplus belonged to the family “for whatever private purpose they deem appropriate.” If, on the other hand, the donors intended “to establish a private trust fund for the funeral and burial of [the victim],” then the memorial fund “had exhausted its purpose” and the court was “obligated to disburse the surplus to most effectively accomplish the general charitable purposes intended by the contributors.” The court readily acknowledged that there was “scant evidence of what specific plea the 742 donors heeded when they generously opened their hearts and purses to the fund.” It concluded, based on the small sample of 45 donors, that persons contributed to the memorial fund for variety of reasons. Accordingly, it issued an order disposing of the funds as follows: (1) refund the contributions of the two donors who requested a refund; (2) half of the balance was paid to the victim’s parents “to reflect the donative intent of many contributors that contributions were made to assist the family without restriction”; and (3) the other half was paid to a local nonprofit organization that assisted abused youth and victims of domestic violence. The court lamented the fact that “only three reported opinions in the whole United States have been found which discuss situations at all similar” to this one. It urged the state legislature to “consider enactment of some rules to follow in cases of public solicitation and collection of funds so that fund founders, fund contributors and fund administrators … will be afforded future guidance.” The court expressed the hope that any state regulations, if adopted, would “not dampen the great public spirit and sense of compassion which underlie such efforts.” This case will be of interest to churches that solicit funds for benevolent and charitable purposes. Application of Troy Savings Bank, 549 N.Y.S.2d 910 (1989).

© Copyright 1990, 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 c0390

Legal Developments

Schools – Part 1

Church Law and Tax 1990-05-01 Recent Developments Schools Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1990-05-01 Recent Developments

Schools

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

• Can parents deduct contributions made to a church that pays the tuition of their children at a church-operated school? No, concluded the IRS in a recent private letter ruling. The church had a membership of about 70 families, about one-fourth of whom had children enrolled in a private elementary school operated by another church (affiliated with the same denomination) in a nearby community. In 1987, the church announced that it would pay the tuition of all members’ children enrolled in the school, and it requested that families with children in the school increase their tuition by the amount that they would otherwise have paid as tuition. With only a few exceptions, members with children in the school allowed the church to pay their tuition obligation. While only one-fourth of church members had children in the school, these same persons contributed about half of the church’s total offerings. The IRS further observed that the contributions of several families “increased or decreased markedly as the number of their children enrolled in the school changed,” and “the contributions of parents of students drop off significantly in the summer months when the school is not in session.” Under these circumstances, the IRS ruled that “to the extent that a parent’s tuition liabilities are paid by the church, the contributions of the parent are not deductible charitable contributions.” In explaining its decision, the IRS emphasized that a deductible charitable contribution “is a voluntary transfer of money or property that is made with no expectation of procuring a financial benefit commensurate with the amount of the transfer.” In concluding that this test was not satisfied, the IRS noted the following factors: “The parents are entirely relieved of paying tuition out of their own pockets. Parents are aware that [their] church would be unable to continue paying tuition expenses without continued large contributions from parents. Also, one purpose of the plan was to enable parents to have additional contributions deductions approximately equivalent to their previously nondeductible tuition payments.” Further, “parent-members contribute approximately three times as much as other members, on a family-by-family basis. Moreover, this enlarged giving falls off in summer months, when no tuition bills are due. This, coupled with the awareness of the members that the free tuition program could not continue unless the parents, as a group, sustain their pattern of increased giving, leads to the conclusion that the contributions of school parents are made with the expectation of receiving back benefits in the form of church-paid tuition for their children.” In summary, “contributions” to the church were not deductible to the extent that a parent’s tuition liability was paid by the church, since the parent had an expectation of receiving a return benefit in the form of tuition payments. Such an expectation prevents the parents’ payments from being characterized as deductible contributions. IRS Private Letter Ruling 9004030.

© Copyright 1990, 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: m65 m08 c0390

Legal Developments

Bankruptcy

Church Law and Tax 1990-05-01 Recent Developments Bankruptcy Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: New Mexico
Categories: Bankruptcy, Charitable Contributions

Church Law and Tax 1990-05-01 Recent Developments

Bankruptcy

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

• Can a bankruptcy court reject a debtor’s bankruptcy petition on the ground that it calls for monthly contributions of $100 to the debtor’s church? Yes, concluded a bankruptcy court in New Mexico. The debtor filed a “Chapter 13” (wage-earner’s) bankruptcy petition that listed $22,000 in debts. The plan called for only 2% of unsecured debts to be satisfied over the next four years. The largest unsecured creditor (a local bank) objected to the petition on the ground that the plan did not provide for the payment of all of the debtor’s disposable income to the bankruptcy trustee. Among other things, the bank pointed out that the debtor’s plan called for monthly contributions of $100 to the debtor’s church. The court noted that the right of a bankruptcy debtor to make charitable contributions has been addressed in several decisions. Nearly all courts have concluded that debtors can make no contributions whatever, or very minimal ones (i.e., $1.50 per week in one case). The court agreed with these prior rulings. It observed: “By allowing a debtor to deduct contributions to any organization, the court necessarily is forcing the debtor’s creditors to contribute to the debtor’s church or favorite charity. Congress could have intended no such result.” Accordingly, the court rejected the debtor’s bankruptcy petition. In re Tucker, 102 B.R. 219 (D.N.M. 1989).

© Copyright 1990, 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: m05 m08 c0390

Legal Developments

Charitable Contributions – Part 2

Church Law and Tax 1989-11-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: Massachusetts
Categories: Charitable Contributions

Church Law and Tax 1989-11-01 Recent Developments

Charitable Contributions

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

• Can a donor revoke a contribution to a church on the basis of “undue influence”? Yes, concluded a federal appeals court. An heiress to a large family fortune began attending a church in Massachusetts. Over the next few years, she became intimately involved with the church and many of its related ministries, and made three large contributions to the church. The first contribution (stock in the family business worth $1 million) was made because of her belief that the gift would “cure” the severe headaches experienced by the pastor’s wife. After making the gift, the pastor allegedly informed the donor that his wife had been “cured” when in fact she continued to suffer from migraine headaches. Because of this event, the donor came to believe that large gifts could “affect events on earth.” Later, when advised by church officials that a particular missionary was being kept a prisoner in Rumania and that “they’re probably pulling out his fingernails by now,” the donor informed the pastor that she intended to make a $5 million gift to the church to bring about the missionary’s release. In fact, church officials knew that the missionary had been released several days earlier, but this information was not disclosed to the donor. She was simply told that her gift had “worked a miracle.” The donor also made a $500,000 gift to the church in an attempt to resolve her marital difficulties. Eventually, the donor was taken by concerned family members to religious “deprogrammers” who persuaded her to terminate her association with the church. She then sued the church, demanding a return of her gifts on the ground that they had all been the product of “undue influence” and accordingly were void. The federal appeals court, applying Massachusetts law, observed that gifts to charity can be revoked on the basis of undue influence, and that undue influence involves three elements: (1) a person who is susceptible to being influenced, (2) deception or improper influence is exerted, and (3) submission to the “overmastering effect of such unlawful conduct.” The court stressed that “it generally takes less to establish undue influence when a confidential relation exists between the parties.” Such a confidential relationship, the court concluded, existed between the donor and the pastor. The court found the following factors to be relevant in determining whether undue influence occurred: (1) the donor’s age, and mental and physical health; (2) “disproportionate gifts made under unusual circumstances”; (3) inexperience with financial matters; (4) attempts by the recipient of the funds to “isolate the donor from her former friends and relatives”; (5) whether or not the donor acted with or without “independent and disinterested advice.” The court rejected the donor’s claim that the $1 million gift had been the result of undue influence, since general statements by the pastor and other church officials that large gifts would “do great works” were “too amorphous to show undue influence.” However, the court found that the $5 million and $500,000 gifts were the result of undue influence and ordered them cancelled. The court observed that all three elements of undue influence were present. First, the donor was susceptible to undue influence. Second, the pastor had knowingly deceived her into believing that the missionary was in great danger when he knew that the missionary had been released from Rumania several days earlier. Third, the donor clearly “submitted” to the pastor’s misrepresentation. The court also noted that had the donor had been told that her $1 million gift had not cured the headaches of the pastor’s wife, she “might not have made the second gift at all.” Further, the $5 million and $500,000 gifts were not based on any independent advice, and had been concealed from family members (because the donor had been advised by church officials that her family was “evil and was to be trusted”). Finally, the court rejected the church’s claim that the constitutional guaranty of religious freedom “shields the solicitation of funds by a religious organization from attack since the gifts are sacrosanct.” The court quoted with approval the United States Supreme Court’s admonition that “nothing we have said is intended even remotely to imply that under the cloak of religion persons may, with impunity, commit frauds upon the public.” The court noted that the guaranty of religious freedom “does not allow purely secular statements of fact to be shielded from legal action merely because they are made by officials of a religious organization.” It concluded that “those who run [the church] may freely exercise their religion, but they cannot use the cloak of religion to exert undue influence of a non-religious nature with impunity. The $5 million gift and $500,000 gift might have had their seeds in the religious beliefs of [the church] but they were both nurtured and brought to fruition by misstatements and distortions of facts that had no basis either in the religious tenets of [the church] or [its] religious beliefs.” In re The Bible Speaks, 869 F.2d 628 (1st Cir. 1989).

© Copyright 1989, 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 c0689

Legal Developments

Charitable Contributions – Part 1

Church Law and Tax 1989-11-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

State: New Jersey
Categories: Charitable Contributions

Church Law and Tax 1989-11-01 Recent Developments

Charitable Contributions

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

• Is a “pledge” legally enforceable? That was the issue before a New Jersey state appeals court in an important case. An individual pledged to give a specified amount of money to a religious organization, but later changes his mind. The organization filed a lawsuit seeking a court order compelling the individual to honor the pledge. A trial court ruled in favor of the organization, and the individual appealed. The state appeals court began its opinion by noting that “the great bulk of [states], including New Jersey, hold that a charitable pledge constitutes an enforceable contract.” This rule admittedly has created some confusion, since an enforceable contract generally consists of an exchange (each party gives and receives something of value). But what benefit does the donor receive in exchange for his or her pledge? Why should a pledge be viewed as an enforceable contract rather than as an unenforceable statement of intent to make a gift? The court reviewed a number of theories that have been used to support the characterization of pledges as enforceable contracts, but found none of them satisfactory. It candidly observed that “the real basis for enforcing a charitable [pledge] is one of public policy—enforcement of a charitable pledge is a desirable social goal.” The court continued: “Lightly to withhold judicial sanction from such obligations would be to destroy millions of assets of the most beneficent institutions in our land, and to render such institutions helpless to carry out the purposes of their organization.” In conclusion, most courts view the enforceability of charitable pledges as socially desirable, and accordingly they characterize them as “contracts” in order to ensure their enforceability even though it is doubtful that they qualify as valid contracts. The New Jersey court correctly observed that charitable pledges are “disguised as a contract in order to effectuate a public policy.” Whether based on contract law or public policy, most courts view charitable pledges as legally enforceable commitments. Obviously, few religious organizations would consider suing a donor to enforce a pledge. On the other hand, religious organizations often incur sizable obligations (buildings, missions commitments, etc.) in reliance upon pledges, and they may be able to persuade reluctant donors to recognize their moral obligation to honor their pledges if they realize that the courts view pledges as binding legal commitments. Jewish Federation v. Barondess, 560 A.2d 1353 (N.J. Super. 1989).

© Copyright 1989, 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 c0689

Legal Developments

Bankruptcy

Church Law and Tax 1989-11-01 Recent Developments Bankruptcy Richard R. Hammar, J.D., LL.M., CPA •

Richard R. Hammar, Attorney, CPA

Bio

State: Florida
Categories: Bankruptcy, Charitable Contributions

Church Law and Tax 1989-11-01 Recent Developments

Bankruptcy

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

• Can a debtor who files a “Chapter 13” bankruptcy plan continue to make monthly contributions to his church? No, concluded a federal district court in Florida. The debtor filed a plan under which he proposed to pay only $50 per month for three years (a total of $1,800) against $90,000 in unsecured debts. The plan reflected monthly take-home pay of $1,150 out of which the debtor donated $160 to his church. Under federal law, a bankruptcy court need not confirm a Chapter 13 plan over the objection of the bankruptcy trustee unless the plan provides that all of the debtor’s “projected disposable income” over the next three years “will be applied to make payments under the plan.” The bankruptcy trustee objected to the debtor’s plan, arguing that by making the monthly contributions of $160 to his church the debtor was not applying all of his “disposable income” toward the payment of his debts. The issue, as stated by the court, was whether “the court, over the objection of the trustee, can confirm a plan which pays only a minimal dividend to unsecured creditors while the debtor continues to devote substantial amounts of his income to the support of his church.” The court concluded that the trustee was correct in objecting to the plan, and accordingly it denied the debtor’s bankruptcy petition. The court observed: “[We] reject the proposition … that the constitutional separation of church and state protects debtors who with the ability to make payments to their creditors choose instead to donate those funds to their church. While church donations may be a source of inner strength and comfort to those who feel compelled to make them, they are not necessary for the maintenance or support of the debtor or a dependent of the debtor” and accordingly the debtor failed to meet the “disposable income test required for confirmation of the plan.” In re Miles, 20 Collier Bankruptcy Cases 912 (N.D. Fl. 1989).

© Copyright 1989, 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: m05 m08 c0689

Legal Developments

Charitable Contributions – Part 3

Church Law and Tax 1989-09-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Richard R. Hammar, Attorney, CPA

Bio

Church Law and Tax 1989-09-01 Recent Developments

Charitable Contributions

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

• The IRS ruled that a donor can deduct contributions to a charitable organization on behalf of needy persons in a foreign country. The charitable organization obtained a list of 5,000 needy families in the foreign country from a social welfare agency located in the country. From this list 25 families were randomly selected who were given $50 per month in support payments. The IRS stated the general rule that “contributions by an individual to a charitable organization that are for the benefit of a designated individual are not deductible under [federal tax law] even though the designated individual may be an appropriate beneficiary for a charitable organization. A gift for the benefit of a specific individual is a private gift, not a charitable gift.” However, the IRS concluded that individual donors could deduct their contributions to the relief fund since the organization’s “selection of beneficiaries is done in a way to assure objectivity and to preclude any influence by individual donors in the selection. Therefore, [the charity] is not acting as a conduit for private gifts from its contributors to other individuals. Accordingly, contributions to [the charity] for the relief of needy families in a foreign country will be deductible by donors under the provisions of section 170 of the Code.” Private Letter Ruling 8916041.

© Copyright 1989, 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 c0589