IRS Addresses Designated Contributions

Helpful guidance for church treasurers.

Private Letter Ruling 9733015

Background. Every church has received contributions designating a specific project or use. It is important for church treasurers to understand the tax implications of such gifts. Are they tax-deductible? Should the church issue the donor a receipt acknowledging the contribution? Can the donor claim a tax deduction on his or her tax return? A recent IRS ruling addresses this important topic. While the case involved a university, it is directly relevant to churches.

Facts. A university owned several fraternity houses. Over the past several years, the physical condition of the fraternity houses declined to such an extent that student safety was jeopardized. As a result, university officials launched a fund-raising drive to help finance the cost of reconstructing and remodeling the fraternity houses. Donors were encouraged to contribute for the renovation of a specific fraternity house, and the university assured donors that it would “attempt” to honor their designations. However, the university made it clear to donors that it accepted their designated gifts with the understanding that the designations would not restrict or limit the university’s full control over the contributions, and that the university could use the designated contributions for any purpose.

What the IRS said. The IRS cautioned that for a designated gift to be a tax-deductible charitable contribution, it

must be in reality a gift to the college and not a gift to the fraternity by using the college as a conduit. The college must have the attributes of ownership in respect of the donated property, and its rights as an owner must not, as a condition of the gift, be limited by conditions or restrictions which in effect make a private group the beneficiary of the donated property. In addition … the college should, as an owner, be free to use the property acquired with the gift as its future policy suggests or requires ….

[The] university will accept gifts designated for the benefit of a particular fraternity only with the understanding that such designation will not restrict or limit university’s full ownership rights in either the donated property or property acquired by use of the donated property.

Accordingly, we conclude that contributions made to university for the purpose of reconstructing and remodeling fraternity housing will qualify for a charitable contribution deduction ….

Relevance to church treasurers. There are two major types of designated contributions—those that designate a person as the intended recipient, and those that designate a project. This ruling addresses only the second type of designated contribution. It illustrates an important point—a contribution to a church that specifies a particular project qualifies as a charitable contribution so long as

(1) the church has the “attributes of ownership” with respect to the contribution, and

(2) the church’s rights as owner of the contributed property are not “limited by conditions or restrictions which in effect make a private group the beneficiary of the donated property.”

Examples. Let’s illustrate the IRS ruling with a few examples.

Example. A church establishes a “new building” fund. Bob donates $500 to his church, with the stipulation that the money be placed in the “new building” fund. This is a valid charitable contribution, and may be treated as such by the church treasurer.

Example. Barb would like to help her church’s music director buy a new home. She contributes $10,000 to her church, with the stipulation that it be used “for a new home for our music director.” Neither the church board nor congregation has ever agreed to assist the music director in obtaining a home. Barb’s gift is not a charitable contribution. As a result, the church treasurer should not accept it. Barb should be advised to make her gift directly to the music director. Of course, such a gift will not be tax-deductible by Barb. On the other hand, the music director may be able to treat it as a tax-free gift.

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

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