Charitable Contributions – Part 1

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

Church Law and Tax 1989-09-01 Recent Developments

Charitable Contributions

The Tax Court ruled that a church member was not entitled to a charitable contribution deduction on her income tax return for the portion of her cash contributions to her church which were not supported by cancelled checks, a receipt from the church, or other written records. The taxpayer claimed $1,150 in contributions to her church in 1983 and $1,500 in 1984, but she only had cancelled checks to prove contributions of $120 in 1983 and $472 in 1984. She did not keep any record of the balance of her alleged contributions but relied solely on her memory as to the amounts contributed. She was unable to obtain a receipt from her church because the records were not available due to a dissolution of the church. The IRS ruled that the taxpayer was entitled deductions of only $120 in 1983 and $472 in 1984—the amounts that she could document. The Tax Court agreed, relying on income tax regulations that required cash contributions to be supported by (1) a cancelled check, (2) a receipt from the church showing the name of the church and the date and amount of each contribution, or (3) in the absence of a check or receipt from the church, “other reliable written records” showing the name of the church and the date and amount of each contribution. In other words, if a donor does not have cancelled checks of a church receipt documenting contributions made to the church, then he or she must prove the contributions by using reliable written records. Oral testimony or “memory” is not enough. The regulations specify that factors indicating that written records are reliable include (1) the “contemporaneous nature of the writing evidencing the contribution” (i.e., the written evidence supporting a contribution is dated at or near the time of the contribution), and (2) the “regularity of the taxpayer’s recordkeeping procedures” (i.e., a diary entry stating the amount and date of a contribution by a taxpayer who “regularly makes such diary entries”). The Tax Court concluded that the taxpayer’s memory or oral statements regarding the amounts of her contributions to the church failed to satisfy the substantiation requirements of the income tax regulations and accordingly her claimed contributions were not deductible to the extent they were based on such evidence. McFadden v. Commissioner, 57 T.C.M. 152 (1989).

Charitable Contributions – Part 4

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

Church Law and Tax 1989-09-01 Recent Developments

Charitable Contributions

The IRS continues to express concern over abuses in charitable solicitations by churches and other tax-exempt organizations. The IRS recently disclosed that it is scrutinizing purchases at church thrift shops, sales at church art auctions, inflated appraisals of donated property, and premiums offered in exchange for donations. The IRS is revising Form 990 (an annual information return filed by most tax-exempt organizations other than churches) in order to obtain additional information about fund-raising activities. Charities whose Form 990 is audited will be asked to provide copies of their solicitation materials. The IRS stated recently that it will be examining churches for fund-raising abuses even though they are not required to file Form 990.

Related Topics:

Charitable Contributions – Part 2

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

Church Law and Tax 1989-09-01 Recent Developments

Charitable Contributions

Can parents pay a child’s travel expenses overseas for church-related activities and deduct the amount paid as a charitable contribution? That was the issue before the Tax Court in a recent case. The parents paid their son’s airfare to a Pacific island where he served as an intern of the Division of Overseas Ministries of the Christian Church (Disciples of Christ). The IRS disallowed the charitable contribution deduction, and the parents took the case to the Tax Court. The Tax Court agreed with the IRS position. It acknowledged that the Internal Revenue Code (our federal tax law) permits a deduction for certain contributions “to or for the use of” a qualified charitable organization. However, it emphasized that section 262 of the Code prohibits any deduction for “personal, living or family expenses.” The court rejected the parents’ claim that their payments were deductible as a contribution to a “missionary,” since the son was more properly characterized as a student (his internship was primarily intended to benefit his personal education) and his activities while overseas were not subject to any control or supervision by the Christian Church. The court acknowledged that some courts have permitted parents to deduct their payment of a missionary child’s travel expenses, but only if the child’s missionary activities are subject to the significant control and supervision of a church or missions agency. Such was not the case here. Cook v. Commissioner, T.C. Memo. 1989-281 (1989).

Charitable Contributions

Church Law and Tax 1989-05-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1989-05-01 Recent Developments

Charitable Contributions

The IRS is becoming increasingly concerned about donors who claim charitable contribution deductions for “gifts” to charity for which they receive a “premium” in return. IRS Commissioner Lawrence Gibbs recently warned that if charities do not begin properly notifying donors that such “contributions” are not fully deductible, then Congress may be forced to enact legislation requiring that such notice be given. Gibbs cited an “alarming number” of misleading solicitations. No charity has yet lost its tax-exempt status because of a failure to properly notify donors that contributions for which a premium are received are not fully deductible, but Gibbs did suggest that the IRS might apply section 6701 of the Internal Revenue Code to such charities. Section 6701 imposes a penalty of $1,000 upon a person or organization that “aids and abets” in the understatement of another’s tax liability. The $1,000 penalty may be assessed against a charitable organization for every donor’s tax return that understates tax liability because a full charitable contribution deduction was claimed despite the donor’s receipt of a premium from the charity. This issue was discussed fully in a feature article in the November-December 1988 issue of Church Law & Tax Report.

Audits

Churches

Church Law and Tax 1989-03-01 Recent Developments

Audits – Churches

A recent federal court ruling addressed the issue of IRS audits of churches. The IRS issued a summons to a bank requesting the disclosure of “all items relating to all accounts” of a church because of a concern that the church was involved in an “abusive tax shelter.” The alleged scheme involved suspicious loans from an investment company to individuals who then made “charitable contributions” of the funds to a church. The IRS suspected that the church then returned the “contributions” to the investment company or the individual donors, thereby closing the “loop”. The church opposed the IRS summons, arguing that the IRS was engaged in an “audit” that had not complied with the provisions of the Church Audit Procedures Act, and that the summons sought information that was not relevant to the IRS inquiry. Both of the church’s contentions were rejected by the court. It noted that the Church Audit Procedures Act applies “only when the government is investigating the tax liability of a church,” and accordingly that it did not apply in this case since the church’s tax liability was in no way being questioned. Further, the court rejected the church’s claim that the IRS summons was overly broad, noting that federal law gives the IRS the authority to summon “any books, papers, records, or other data which may be relevant” to a particular tax inquiry. In other words, the IRS has the authority to obtain “items of even potential relevance to an ongoing investigation.” This standard was clearly satisfied, concluded the court, since information concerning the church’s bank accounts was directly relevant in proving whether or not the alleged “charitable contributions” were in fact deductible. Holy Temple Church of God in Christ, Inc. v. United States, 89-1 U.S.T.C. para. 9107 (C.D. Cal. 1988).

Related Topics:

Church Funds

Can church funds earmarked by a donor for a specific purpose ever be used by

Can church funds earmarked by a donor for a specific purpose ever be used by the church for other purposes?

A recent New Jersey state court decision addresses this important issue. In 1911, a Quaker church established a fund for the care and maintenance of its graveyard, and began soliciting contributions for the fund. By 1988, the fund had increased to nearly $200,000, and had annual income far in excess of expenses. In 1985, the church discussed the possibility of using the excess income for purposes other than graveyard maintenance, and ultimately expressed a desire to use excess income from the fund for general church purposes (including upkeep and maintenance of church properties). A church trustee who administered the fund took an unbending position that the fund could not be used for any purpose other than graveyard maintenance.

The church and trustee thereupon sought an opinion ("declaratory judgment") from a local court as to the use of the fund for other purposes. The trial court ruled that the excess income could be used for general church purposes other than graveyard maintenance, and the trustee appealed the case to a state appeals court on the ground that the trial court's decision "conflicts with the express intent of the donors." The appeals court agreed with the trial court on the basis of the "cy pres" doctrine. Under the cy pres doctrine, if the specific purpose of a charitable trust is frustrated or becomes impossible, then a court can apply the trust fund to a charitable purpose similar to the original purpose if the donor "manifested an intent to devote the trust to a charitable purpose more general than the frustrated purpose." The cy pres doctrine was created "for the preservation of a charitable trust when accomplishment of the particular purpose of the trust becomes impossible, impractical, or illegal."

The court concluded that "if income from a charitable trust exceeds that which is necessary to achieve the donor's charitable objective, cy pres may be applied to the surplus income 'since there is an impossibility of using the income to advance any of the charitable purposes of the [donor]." Therefore, to the extent that the graveyard fund in question "exceeds maintenance and preservation costs, application of cy pres is appropriate since there is an impossibility of using the excess income to advance the particular purpose expressed by the donors." The only remaining question was whether or not the donors manifested an intention to devote excess income to a charitable purpose more general than graveyard maintenance.

The court concluded that the donors to the graveyard fund in fact manifested such an intent: "Since the donations were made for the perpetual maintenance of a graveyard, it is logical to assume conclude that the donors expected excess income would be used … 'to strengthen the very institution to which [they] entrusted their money' to permit it to survive in perpetuity in order to carry out the donors' intent. A contrary result, that the income be held in the trust and accumulate in perpetuity for maintenance of the graveyard, is both illogical and contrary to the probable intent of the donors. The only sensible conclusion to be reached is that the donors did not intend that the trusts would grow while the [church] itself may cease to exist because of lack of funds. We are also convinced that use of the funds for general meeting purposes is sufficiently similar to the particular purpose of the [donors] to apply the cy pres doctrine."

Finally, the court emphasized that only trust income in excess of graveyard expenses could be applied for general church purposes, and that the church's bylaws required an annual audit of the fund by certified public accountants. Sharpless v. Medford Monthly Meeting of the Religious Society of Friends, 548 A.2d 1157 (N.J. Super. 1988).

Charitable Contributions – Part 3

Church Law and Tax 1989-03-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1989-03-01 Recent Developments

Charitable Contributions

Can a parent deduct payments made to support a volunteer missionary son? That was the question before a federal appeals court in a recent case. Here are the facts. The parents of two Mormon missionaries transferred several thousand dollars to the missionaries’ personal checking accounts, and then attempted to deduct the transfers as charitable contributions. The missionaries used the funds for travel and living expenses. The Internal Revenue Code permits taxpayers (who itemize deductions) to claim a deduction for (1) contributions of cash or property made directly “to or for the use of” a tax-exempt organization, or (2) unreimbursed expenditures incurred while performing services on behalf of a tax-exempt organization. The parents argued that their transfers of money to their missionary-sons’ personal checking accounts constituted a deductible contribution under either of these two theories. The federal appeals court rejected the parents’ claims, and denied a deduction under both theories. In rejecting the contention that the parents’ transfers constituted deductible charitable contributions of cash or property, the court applied a “control” test: “In situations where a taxpayer has claimed a charitable contribution for funds that have been earmarked for a specific individual, courts have applied an objective ‘control’ test that considers whether the charity or the recipient exercises control over the use of the funds …. The better reasoned approach, we feel, is to require that the recipient charity have full control over the donated funds. This will show a manifested intent to benefit the charity and preserve the indefiniteness of the ultimate beneficiary of the gift—an essential element of a charitable contribution. Here the charity lacked actual control over the funds. Contributions were deposited directly into the personal checking accounts of the taxpayers’ sons. While the Church admonished the missionaries to spend their money wisely, the particular use to which the funds were put was solely within the control of the missionaries. Any surplus received by the missionaries was theirs to keep, and other than requiring the missionaries to submit weekly reports of their expenses, the Church had no discretion over the disposition of the funds.” The court also denied the parents a deduction for the unreimbursed travel and living expenses incurred by their sons in the course of performing their volunteer missionary services. The court emphasized that only the person who incurs unreimbursed expenses in the course of charitable services is eligible to deduct them, and accordingly that the parents could not claim a deduction for their children’s unreimbursed expenses. It observed that “it is a fundamental principle of tax law that assignments of deductions are prohibited.” Finally, the court noted that travel expenses (including meals and lodging) incurred while performing charitable services are deductible only if incurred while away from home. The court observed that whether a missionary is “away from home” depends on the following rules: (1) if the missionary assignment is less than one year, all the facts and circumstances must be considered in reaching a conclusion; (2) if the assignment is more than one year but less than two years in length, then there is a presumption that the missionary is not away from home (and accordingly cannot deduct travel expenses); and (3) if the assignment is two years or longer, then the missionary is not considered to be away from home regardless of the facts and circumstances (i.e., his or her home has become the place of missionary service, and thus no travel expenses are deductible). While the court was not required to decide the issue, it suggested that missionaries who serve two year terms (or longer) are not eligible for any deduction of their unreimbursed travel expenses incurred during the course of their charitable services. The court rejected a more liberal ruling of another federal appeals court, in which parents of a Mormon missionary were allowed a deduction for payments they made to support their missionary son. White v. United States, 725 F.2d 1269 (10th Cir. 1984). The White decision is relevant only in the tenth federal circuit (which includes the states of Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming). The present ruling is applicable in the ninth federal circuit (which includes the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Oregon, Nevada, and Washington). Parents in these states who wish to support the missionary activities of their children are free to do so, but to ensure the deductibility of their support they will need to direct their support to a missions agency rather than directly to their children. Davis v. United States, 88-2 USTC para. 9490 (9th Cir. 1988).

Charitable Contributions – Part 2

Church Law and Tax 1989-03-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1989-03-01 Recent Developments

Charitable Contributions

Will notations made on a kitchen calendar support a taxpayer’s alleged contributions to her church? Yes, concluded the Tax Court in a recent decision. The donor attended a Baptist church, and regularly made cash contributions (of both checks and currency) to the church. In addition, she loaned the church $1,600 for the purchase of a bus (and later forgave the debt), and purchased gas for the church bus on several occasions. The church maintained no formal record of the nature or amount of contributions made by any of its members, and accordingly the taxpayer in question received no receipts for her contributions (of cash, checks, gas, or debt forgiveness). She did, however, maintain a kitchen calendar on which she made notations regarding her contributions to the church. The calendar notations reflected regular Sunday contributions to the church as well as the purchase of gas for the church bus. The taxpayer’s 1984 income tax return was audited, and the IRS questioned the $3,462 that the taxpayer claimed as charitable contributions. The Tax Court ruled that the taxpayer was “entitled to deduct the amounts she recorded on her church calendar.” It observed that “in addition to being documented on her calendar, [the taxpayer’s] contributions to the church are substantiated by her own testimony, the testimony of the church’s pastor, and records from another church verifying contributions of comparable amounts in subsequent years [the taxpayer changed churches in 1985]. We find [the taxpayer’s] testimony to have been candid and credible and we believe that she contributed cash, loan repayment checks, and gas purchases to the church during 1984.” The court cautioned that the recordkeeping requirements of income tax regulation 1.170A-13 “appear to require documentation different than that provided by [the taxpayers’s] calendar notations.” However, the IRS never made compliance with the regulations an issue, and accordingly the court concluded that it did not have to determine “whether, in the absence of cancelled checks or receipts from the donee, [the taxpayer’s] calendar notations constitute ‘reliable written records'” as required by the regulations. Specifically, regulation 1.170A-13 requires that a contribution of money made in 1983 or later years be supported by (1) a cancelled check, (2) a receipt from the donee charitable organization, or (3) in the absence of a cancelled check or written receipt from the charity, “other reliable written records showing the name of the donee, the date of the contribution, and the amount of the contribution.” The regulation further specifies that “factors indicating that written records are reliable include, but are not limited to, (a) the contemporaneous nature of the writing evidencing the contribution, (b) the regularity of the taxpayer’s recordkeeping procedures; for example, 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, and (c) in the case of a contribution of a small amount, the existence of any written or other evidence from the donee charitable organization evidencing receipt of a donation that would not otherwise constitute a receipt under … this section.” It is entirely possible that the taxpayer’s entries on her kitchen calendar would constitute “other reliable written records” under this standard. Burns v. Commissioner, T.C.Memo. 1988-536.

Charitable Contributions – Part 1

Church Law and Tax 1989-03-01 Recent Developments Charitable Contributions Richard R. Hammar, J.D., LL.M., CPA

Church Law and Tax 1989-03-01 Recent Developments

Charitable Contributions

Whenever January 1st falls on a Sunday, as it did this year, problems arise regarding the correct receipting of charitable contributions. Specifically, can a member who contributed a personal check to your church on Sunday, January 1, 1989, deduct the check on his or her 1988 federal tax return if the check is dated December 31, 1988? Many churches advised their congregations during worship services conducted on January 1st that their contributions could be credited to 1988 if checks were dated December 31, 1988. Is this true? Unfortunately, the answer is no. Section 1.170A-1(b) of the income tax regulations specifies that “ordinarily, a contribution is made at the time delivery is effected. The unconditional delivery or mailing of a check which subsequently clears in due course will constitute an effective contribution on the date of delivery or mailing.” According to this language, a check dated December 31, 1988 but physically delivered on January 1, 1989, is deductible only on the donor’s 1989 federal tax return. This is so whether a donor “predated” a check to read “December 31, 1988” during church services conducted on January 1, 1989, or in fact completed and dated the check on December 31, 1988 but deposited it on January 1, 1989. The only exception to this rule is in the case of a check that is dated and mailed (and postmarked) in December of 1988. The fact that the church does not receive the check until January of 1989 does not prevent the donor from deducting it on his or her 1988 federal tax return.

Court Ruled Church Members Had Authority to Obtain a Court Order Requiring an Accounting of Church Funds

Court stated that when the members of the church decided to incorporate, they submitted themselves to the jurisdiction of the state courts in all matters of a corporate nature, such as accounting for funds.

A group of church members who had contributed funds to their church demanded that the church give an "accounting" of the use of the contributed funds. When the church refused, the members turned to the courts for relief.

A trial judge ordered an immediate accounting, as well as annual audits "forever," and required the church to disclose the contents of a church safety deposit box to the complaining members. The church appealed, arguing that the civil courts had no jurisdiction over a church, and even if they did, they had no authority to order accountings or annual audits.

A state appeals court, in upholding the trial judge's ruling regarding an accounting and inspection of the church's safety deposit box, observed that "we are of the opinion that this is not an improper interference by the government into a church, or ecclesiastical, matter. When the members of the church decided to incorporate their body under the laws of the state of Florida, they submitted themselves to the jurisdiction of the state courts in all matters of a corporate nature, such as accounting for funds." However, the court reversed the trial judge's order requiring annual audits forever, since "we cannot agree it is proper to order annual, ad infinitum, audits of the books" of a church. Matthews v. Adams, 520 So.2d 334 (Fl. App. 5th Dist. 1988)

Charitable Contributions

Another federal appeals court has ruled that payments made to the Church of Scientology for “auditing” and “training” services were properly deductible as charitable contributions.

Another federal appeals court has ruled that payments made to the Church of Scientology for "auditing" and "training" services were properly deductible as charitable contributions.

The IRS had argued that the payments were not deductible contributions since the donors had received a benefit in return for their payments. The appeals court agreed with the IRS that "a payment of money generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return."

However, it specifically held that "a strictly spiritual or religious return is simply not enough" to make a contribution nondeductible. To hold otherwise would "present not only the problem of determining value but also the problem of excessive entanglement in the affairs of a religious institution," since courts would be required to monitor church records and activities in an attempt "to place a monetary value on the benefit of church services, group programs, and pastoral counseling."

The court observed that "any other conclusion has ominous implications for all religious institutions." Does this ruling lend support to the deductibility of "contributions" made to churches by persons who receive professional counseling from a staff counselor?

A growing number of churches are hiring staff counselors, and many of these churches require counselees to pay an hourly "contribution" for the counseling provided. Could not the Scientology case be cited as precedent in support of the deductibility of these payments? The answer is probably no, since it is likely (though not certain) that a court would conclude that counseling services provided by a staff counselor (particularly one with formal training in psychology) are not "spiritual" or "religious" benefits received in exchange for payments.

The court based its opinion in part on the fact that the "auditing" and "training" services provided by the Church of Scientology were not available from private businesses. If they had been available outside of the Church, the court observed, then it is difficult to characterize the services as "spiritual or religious" in nature. Similarly, it is entirely possible that a civil court would conclude that counseling services provided by a staff counselor in a church are services that could be obtained outside of the church.

If so, such services cannot be characterized as spiritual or religious, and therefore payments made in exchange for such services are not deductible as charitable contributions. The United States Supreme Court has agreed to determine whether payments made to the Church of Scientology for auditing and training services are deductible as charitable contributions. A decision is expected later this year. Neher v. Commissioner, 88-2 U.S.T.C. para. 9430 (6th Cir. 1988).

Court ruled a Bank Account Established by a Religious Leader to Assist the Poor Belonged to the Organization He Founded

Years ago, $3 million was placed in a bank account entitled "The Honorable Elijah Muhammad's

Years ago, $3 million was placed in a bank account entitled "The Honorable Elijah Muhammad's Poor Fund Account." Elijah Muhammad was the leader of a religious organization known as the Nation of Islam. Following his death in 1975, the bank transferred the funds to a new account in the name of the Nation of Islam, thinking that the poor fund account belonged to the religious organization rather than to Elijah Muhammad personally.

Several years later, the estate of Elijah Muhammad sought to recover the funds from the bank on the theory that the account had been the personal property of Elijah Muhammad rather than of the religious organization. The court concluded that the account belonged to the religious organization rather than to Elijah Muhammad personally, since (1) donations from members of the Nation of Islam constituted an overwhelming portion of the money deposited in the poor fund account, and (2) donors to the poor fund account were informed that their donations would be used primarily to "see to it that the poor and needy of our nation are looked after." Donors were also advised that contributions to the poor fund account were "income tax deductible."

Under these facts, the court concluded that "the funds in the poor fund account were solicited upon the representations that the money would be used to benefit the [religious organization] and that the believers, in making donations, intended their money to be used for that purpose." Under these circumstances, Elijah Muhammad could not be deemed "the equitable owner of the poor fund account."

The court further observed that "where funds are solicited to benefit a religious organization, we believe that basic principles of equity and fair dealing should preclude the use of those funds to benefit the personal estate of the religious leader." This is so even if some donors made contributions to benefit Elijah Muhammad personally, since "contributions to religious leaders for their support are considered contributions for the benefit of the religious organization and may qualify for a charitable deduction." In re Estate of Muhammad, 520 N.E.2d 795 (Ill. App. 1987)

A Federal Appeals Court Addressed the Significant Issue of IRS Authority to Demand Disclosure of Church Records

An IRS agent became convinced that a church official was soliciting donations of depressed real

An IRS agent became convinced that a church official was soliciting donations of depressed real estate to his church at grossly inflated values, with the church thereafter selling the properties at their substantially lower market values. For example, one property donated to the church and valued at $2.3 million was later sold by the church for only $250,000. Another property valued at $622,500 was sold for $50,000. An advertisement in the Wall Street Journal and New York Times read: "Hard to sell, distressed and other real estate accepted by religious corporation. Will structure contribution of real estate to meet need of donor."

The IRS, convinced that "the administration of the income tax laws regarding charitable contributions" was being impeded, served summons on church attorneys demanding production of all church records associated with real estate transactions. The church claimed that the IRS summonses were invalid since they violated both the constitutional guaranty of religious freedom and the "Church Audit Procedures Act." With regard to its constitutional claim, the church contended that the IRS summonses would dissuade donors from making contributions to the church, thereby restricting the church's exercise of its religion.

A federal district court rejected the church's arguments and ruled in favor of the IRS. A federal appeals court affirmed this decision. The appeals court denied that the Church Audit Procedures Act applied in this case, since that Act was not intended to apply to IRS investigations of donor contributions.

With regard to the church's claim that the IRS summonses violated its constitutional right of religious freedom, the court observed: "Even assuming, however, that the IRS investigation has dissuaded some donors from contributing property to [the church], due to their fears that their names will be publicized or they will face potential investigation by the IRS … the claimed impact on free exercise is incidental; contribution to the church is not forbidden, and the summonses do not directly impinge upon any practice central to the religious beliefs of church contributors or members.

To the extent that some donors may be dissuaded from donating property appraised at unjustifiably inflated values and from taking corresponding charitable deductions, we need simply note that such action … is not immunized from governmental investigation."

Furthermore, the court observed that "any incidental burden on the free exercise rights of the church … must be balanced against the government's interest in enforcing the summonses …. A compelling governmental interest exists here—that of enforcing the tax laws." St. German of Alaska Eastern Orthodox Catholic Church v. United States, 840 F.2d 1087 (2nd Cir. 1988)

Donor Cannot “Assign” Income Prior to Receipt to a Church and Thereby Avoid Including It In Gross Income

Attempts by lottery and sweepstakes winners to assign their earnings to churches present legal as

Attempts by lottery and sweepstakes winners to assign their earnings to churches present legal as well as ethical issues. To illustrate, the Tax Court was asked to determine whether the winner of a $50,000 sweepstakes prize could claim a charitable contribution deduction for his assignment of the prize to a church. The taxpayer had attempted to donate the $50,000 to his church prior to receiving it by instructing the sweepstakes sponsor to pay the prize directly to the church.

In denying a charitable contribution deduction, the court noted that the $50,000 had not yet been distributed. And, even if the $50,000 had been distributed directly to the church pursuant to the taxpayer's instructions, the taxpayer "would be required to report that amount as income before claiming a charitable contribution …. A subsequent attempt to assign the winnings to his church would not avoid taxation of the proceeds to him."

Further, the court pointed out that if the taxpayer had received and reported the $50,000 as income and then donated it to his church," his deduction for the year would still be limited in accordance with section 170(b) [of the Internal Revenue Code] to 50% of his adjusted gross income."

In summary, it is not possible for a donor to "assign" income prior to receipt and thereby avoid including it in gross income. This is so even if the attempted assignment is to a church. Taxpayers who assign earned but undistributed income to a church (or any other charity) must include the assigned income in their gross income. Only then are they eligible to claim a charitable contribution deduction (assuming that they otherwise qualify). Neal v. Commissioner, 55 T.C.M. 532 (1988)

Estates Are Permitted to Claim Charitable Contribution Deductions Under Certain Conditions

Section 2055 of the Internal Revenue Code provides that no charitable contribution is deductible (with

Section 2055 of the Internal Revenue Code provides that no charitable contribution is deductible (with a few exceptions) if an interest in property passes from a decedent to a charity and a partial interest in the same property passes to a noncharitable beneficiary for less than fair value.

In a private letter ruling, the IRS held that the estate of a deceased farmer, which left an entire farm to a charitable organization, was entitled to a charitable contribution deduction despite the fact that the will also required the charity to lease the farm to two of the farmer's relatives for a period of five years at which time they would have an option to purchase the land.

The IRS ruling was conditioned on the assumption that the annual rental payments (and option purchase price) would be fair and reasonable. In determining whether the annual lease payments are fair and reasonable, they must be compared with "rentals paid for comparable properties." Similarly, the reasonableness of the option purchase price would be based on an evaluation of purchase prices of comparable properties in the same area. IRS Letter Ruling 8812003.

Court Ruled Taxpayer Could Not Deduct a Charitable Contribution Made to His Local Branch of the “Universal Life Church”

The Tax Court ruled that a taxpayer could not deduct an alleged charitable contribution made

The Tax Court ruled that a taxpayer could not deduct an alleged charitable contribution made to his local branch of the "Universal Life Church."

The taxpayer, an airline pilot, established a local "chapter" of the Universal Life Church in his home, and established a church "checking account" at a local bank. The taxpayer and his family apparently were the only members of the church, and a number of checks were drawn on the church's account to pay for personal expenses of members of the taxpayer's family.

In denying a deduction for contributions made to the "church," the court observed that the taxpayer had failed to establish that his church qualified as a tax-exempt organization under federal law, and that he never parted with control over the alleged contributions.

Labeling the taxpayer's allegations "ludicrous" and "frivolous," the court awarded the government $5,000 in damages besides the additions to tax. Dunn v. Commissioner, T.C. Memo. 1988-45 (1988)

A Donor Who Contributes Property Valued at More than $5,000 to a Church Could Be Selected for Examination by the IRS If No Form 8282 is Filed by the Church

Donors who make contributions of noncash property valued at more than $500 to churches (or

Donors who make contributions of noncash property valued at more than $500 to churches (or other charities) must attach a Form 8283 to their federal income tax return (Form 1040) on which the charitable contribution deduction is claimed.

In addition, if the claimed charitable contribution deduction is for more than $5,000, the donor must obtain a "qualified appraisal" and complete the appraisal summary portion of the Form 8283. A church must file a Form 8282 (donee information return) with the IRS and with the donor if it sells or otherwise disposes of donated property valued by the donor at more than $5,000 within two years of the date of the contribution.

A new provision in the Internal Revenue Manual (section 4175.2) states that the tax return of any donor who contributes property valued at more than $5,000 to a church should be selected for examination by the IRS if no Form 8282 is filed by the church.

Obviously, it is now more important than ever for churches to comply with this important reporting obligation. If your church receives donated property that may have a fair market value in excess of $5,000, be sure to apprise the donor of the qualified appraisal requirement and the need to attach a qualified appraisal summary (Form 8283) to the tax return on which the deduction is claimed.

Then, if the church sells or in any manner disposes of the donated property within two years of the date of contribution, be certain that a Form 8282 is submitted to the IRS (within 90 days of the disposition) and a copy is provided to the donor. This will reduce the likelihood that the donor's tax return will be selected for examination by the IRS. For a complete discussion of these requirements, see Chapter 5 of Richard Hammar's Church & Clergy Tax Guide.

Source: CLTR, Marc/April 1988

Charitable Contribution Deductions Were Disallowed in Two Tax Court Decisions

Charitable contribution deductions were disallowed in two recent Tax Court decisions for funds deposited in

Charitable contribution deductions were disallowed in two recent Tax Court decisions for funds deposited in a bank account in the name of a church founded by the donor, and over which the donor retained dominion and control. Conklin v. Commissioner, T.C.Memo. 1987-411 (1987); Randolph v. Commissioner, T.C.Memo. 1987-432 (1987).

Related Topics:

Charitable Contribution Deduction for Tuition Payments Denied

A taxpayer was denied a charitable contribution deduction for tuition payments made on behalf of

A taxpayer was denied a charitable contribution deduction for tuition payments made on behalf of his daughter. Guenther v. Commissioner, T.C. Memo. 1987-440 (1987).

Related Topics:

No Deduction Is Available for a Charitable Contribution of Services

An attorney performed legal services (that he valued at $7,000) for a charitable organization and

An attorney performed legal services (that he valued at $7,000) for a charitable organization and then claimed a charitable contribution deduction for the value of his services.

The Tax Court, in denying the deduction, reaffirmed the principle that no deduction is available for a charitable contribution of services. Levine v. Commissioner, T.C.Memo. 1987-413 (1987).

Related Topics:
ajax-loader-largecaret-downcloseHamburger Menuicon_amazonApple PodcastsBio Iconicon_cards_grid_caretChild Abuse Reporting Laws by State IconChurchSalary Iconicon_facebookGoogle Podcastsicon_instagramLegal Library IconLegal Library Iconicon_linkedinLock IconMegaphone IconOnline Learning IconPodcast IconRecent Legal Developments IconRecommended Reading IconRSS IconSubmiticon_select-arrowSpotify IconAlaska State MapAlabama State MapArkansas State MapArizona State MapCalifornia State MapColorado State MapConnecticut State MapWashington DC State MapDelaware State MapFederal MapFlorida State MapGeorgia State MapHawaii State MapIowa State MapIdaho State MapIllinois State MapIndiana State MapKansas State MapKentucky State MapLouisiana State MapMassachusetts State MapMaryland State MapMaine State MapMichigan State MapMinnesota State MapMissouri State MapMississippi State MapMontana State MapMulti State MapNorth Carolina State MapNorth Dakota State MapNebraska State MapNew Hampshire State MapNew Jersey State MapNew Mexico IconNevada State MapNew York State MapOhio State MapOklahoma State MapOregon State MapPennsylvania State MapRhode Island State MapSouth Carolina State MapSouth Dakota State MapTennessee State MapTexas State MapUtah State MapVirginia State MapVermont State MapWashington State MapWisconsin State MapWest Virginia State MapWyoming State IconShopping Cart IconTax Calendar Iconicon_twitteryoutubepauseplay
caret-downclosefacebook-squarehamburgerinstagram-squarelinkedin-squarepauseplaytwitter-square