Hubert v. Commissioner, T.C. Memo. 1993-482 (1993)
Background. How should church treasurers handle contributions that are made to the church for specific missionaries? For example, John issues a check in the amount of $500 to First Church with the stipulation that it be used for a named missionary. Should this contribution be treated as tax-deductible? Or, should it be returned to the donor as non-deductible? This was the issue addressed by the Tax Court in a recent case.
Facts of the case. A member attended an inner-city Baptist church for many years. Due to a lack of funds, the church asked the member to sponsor two missionaries from the church. The member did so for a number of years. One of the missionaries worked in Peru, and was responsible for beginning 15 Baptist churches there. The other missionary worked in a variety of assignments overseas in missionary radio. The member was not related to either missionary or personally associated with them in any way other than the fact that he had taught one of them in his Sunday School class many years before.
In 1982 the member executed a last will and testament that created two trusts funded with $100,000 each. The income of each trust was to be paid to two missions organizations for the missionary work of the two missionaries during their lives, including support during retirement. The member died in 1986, and his estate claimed a charitable contribution deduction for the two $100,000 trusts. The IRS denied a deduction, arguing that the member intended to benefit the missionaries personally and that the missions organizations lacked full control over the use of the funds. The IRS relied in part on a Supreme Court decision denying a charitable contribution deduction to Mormon parents for contributions made directly to their missionary sons.
The court's ruling. The court ruled that the estate could claim a charitable contribution deduction for the money placed in the two trusts despite the fact that the church member specified that the trusts were for the benefit of the two missionaries. The court noted that a charitable contribution, to be deductible, must be "to or for the use of" a charity. A contribution is "for the use of" a charity if it is transferred to a legally enforceable trust for the charity:
Under [the Supreme Court's decision in the Mormon missionary case] the test is not whether the charitable organization has full control of the funds, but rather is whether the charitable organization has a legally enforceable right to the funds. In [the Mormon missionary case] the charitable organization [did not] actually receive the funds, either directly or in trust. In the case before us, the income and later the principal are held in a legally enforceable trust for [the two missions] organizations which have control over the funds.
The court rejected the IRS argument that the charitable purpose failed because the intent and the actual effect of the gifts was to benefit the two missionaries rather than the church. The court acknowledged that the trusts focused on two specific missionaries. However, it concluded that "we are satisfied, on the facts before us, that decedent intended the bequests to be used to implement the missionary work of the [missions organizations] through the named missionaries, as well as through the building of foreign mission field medical clinics." The court explained:
The charities have complete discretion to use the funds in any manner which fits the stated purpose, including choosing the amounts of the funds to be used and the methods of using those funds …. On these facts, we conclude that decedent intended to benefit the general public, not the two named missionaries. Moreover, we find that the charitable organizations have substantial control over the use of the funds and were not meant to be mere conduits to funnel money to the missionaries. The fact that decedent directed the [missions organizations] to use the funds for specific purposes does not defeat the charitable nature of the bequests. Under general trust principles, the [missions organizations] have a fiduciary duty to use the funds as directed; however, they have complete discretion to determine the most appropriate ways to implement the directed purposes. We conclude that the charitable organizations had sufficient control and enforceable rights over the bequests to ensure that the funds were used for charitable purposes, as is required by [law]. The charitable nature of the bequests is further protected by the Attorneys General of Georgia and the State or States in which the charitable organizations are located. The Attorneys General are charged with ensuring that the charitable purposes of the trust are carried out.
The fact that the trusts were to continue distributing funds to the two missionaries following their retirements did not matter to the court. It observed:
The retirement provisions further decedent's charitable purpose by ensuring that the missionaries will be able to continue their work without concern for what will happen to them when the time comes to retire. During the retirement period, the [missions organizations] will continue to control the funds and may provide for the retirement of the missionaries as they see fit. Under the provisions of the will, upon retirement of the missionaries, the income and principal of the trusts are to be given to the charities "to provide for" the retirement of the missionaries and their wives.
The court did caution that "on different facts we might conclude that the charitable organization was a mere conduit to funnel money to an individual and, therefore, lacked sufficient control over the funds. In such a circumstance, because the bequest was intended to benefit one individual rather than the general public, the bequest would not qualify for a charitable deduction."
Relevance of this decision to church treasurers.
What is the relevance of this ruling to church treasurers? Consider the following:
- Contributions made directly to a church or missions organization without any designation of a specific recipient are tax-deductible.
- Contributions made directly to a missionary are not tax-deductible. This was the conclusion of the Supreme Court in the Mormon missionary case. The reason is that a deductible contribution must be "to or for the use of" a charitable organization, not directly to an individual.
- Contributions to a church or missions organization may be tax-deductible even though they designate a specific missionary in either of two situations:
Situation 1. In 1962, the IRS ruled that contributions to a church or missions organization are tax-deductible even though they designate a particular missionary so long as the church or missions organization "has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes." In other words, if a donor contributes funds to a church missions board and designates a particular missionary, the contribution will be deductible so long as the church or missions board retains full administrative and accounting control over the funds.
Situation 2. Contributions "for the use of" a church or missions organization are tax-deductible even though they designate a particular missionary. The phrase "for the use of" means that a contribution is given to a trustee pursuant to a trust or similar legal arrangement for the benefit of a charitable organization. If this test is met, it does not matter that the trustee is directed to distribute funds to a church or missions organization for a specified individual. A contribution is deductible under these circumstances because the trustee has a legal duty to ensure that trust funds are used by the named beneficiary for religious or charitable purposes. This conclusion is reinforced by two additional considerations: (1) Churches and missions organizations have a "fiduciary duty" to distribute funds only for religious or charitable purposes. As a result, if a trust distributes funds to a church or missions organization for the missionary work of a specified individual, the church or missions organization has a fiduciary duty to ensure that trust distributions are used by the missionary for such purposes. Accordingly, such contributions are "for the use of" the church or missions organization even though they designate a specific recipient. (2) State attorneys general are empowered to ensure that the charitable purposes of charitable trusts are carried out.
- Persons may still make direct contributions to individual missionaries or religious workers. Such contributions are not "illegal"—they merely are not tax deductible as charitable contributions.
Tip. For more information on designated contributions (including contributions designating specific projects, students, pastors, missionaries, and benevolence fund recipients) see chapter 7 of Richard Hammar's Church and Clergy Tax Guide.