Donor Restrictions on Gifts of Property

IRS clarifies eligibility of restricted gifts for tax deductions.

Church Finance Today

Donor Restrictions on Gifts of Property

IRS clarifies eligibility of restricted gifts for tax deductions.

IRS Letter Ruling 9443004

Background. Many churches are given some or all of the land upon which they build their facilities. In some cases, donors impose restrictions on such gifts. For example, some donors specify that the contributed property “reverts” to them (or their heirs) in the event the property ever ceases to be used for church purposes. There are two important issues here:

  • Can churches that own property subject to such a reverter clause inadvertently lose their property if they later sell it? Unfortunately, the answer to this question can be yes.

Key point. This is one reason why it is important to be familiar with the wording of your church deed. Does it contain a reverter clause? If so, what triggers it?

  • Can a donor who gives property to a charity with this kind of “reverter clause” claim a charitable contribution deduction? This second issue was addressed recently by the IRS in a private ruling.

Facts of the case. A deceased person left a will giving $50,000 to a school to establish a scholarship fund for needy students attending the school (to be selected by the school). The will specified that in the event the school “ceases to exist as a school or ceases to be accredited by the state” the balance in the fund would revert to the deceased’s heirs. The question was whether the deceased’s estate could claim a charitable contribution deduction for the scholarship gift despite the possibility that the fund could one day revert to the donor’s heirs.

What the IRS said. The IRS ruled that the estate was entitled to a charitable contribution deduction—because the likelihood that the school would “cease to exist” was so remote as to be negligible. The IRS noted that “[the tax regulations specify] that if an interest passes to charity at the time of a decedent’s death and the interest would be defeated by … some act or the happening of some event, the possibility of occurrence of which appears at the time of the decedent’s death to be so remote as to be negligible, the deduction is allowable.”

The IRS also noted that the tax regulations contain an example in which a decedent dies leaving a will which donates land to a city government “for as long as the land is used by the city for a public park.” The example concludes that “a deduction is allowable if, on the date of the decedent’s death, the possibility that the city will not use the land for a public park is so remote as to be negligible.”

Recommendation. Check the deed or deeds to your church property to determine if any conditions exist. If they do, it is possible in some cases to have them “released” by the previous owner (if he or she is willing to do so). Often this is done by having the previous owner execute a quitclaim deed. If the previous owner is no longer living (a fairly common circumstance) then the condition can be released only by all of the legal heirs of the deceased owner. This can be a very cumbersome process.

This article originally appeared in Church Treasurer Alert, April 1995.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold 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. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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