Tax Court Rules Contribution to Foreign Charity Was Not Deductible

Contributions must go to U.S. charity organizations.

Church Finance Today

Tax Court Rules Contribution to Foreign Charity Was Not Deductible

Contributions must go to U.S. charity organizations.

Alisobhani v. Commissioner, T.C. Memo. 1994-629 (1994)

Background. Church members sometimes make contributions directly to religious organizations or ministries overseas. Or, they make contributions to a United States religious organization for distribution to a foreign organization. Are these contributions tax-deductible? That was the issue addressed by the Tax Court in a recent ruling.

The Tax Court ruled that a taxpayer who sent contributions to a mosque in his family’s home town in Iran was not entitled to a charitable contribution deduction. The Court noted that to be deductible a charitable contribution must go to a charity organized in the United States.

Importance to church treasurers. Federal law specifies that a charitable contribution, to be tax-deductible, must go to an organization “created or organized in the United States or in any possession thereof.” In addition, the organization must be organized and operated exclusively for religious or other charitable purposes. This means that contributions made directly by church members to a foreign church or ministry are not tax-deductible in this country.

A related question, not addressed by the Court but addressed by the IRS in a 1963 ruling, is whether a donor can make a tax-deductible contribution to an American charity with the stipulation that it be transferred directly to a foreign charity. The IRS ruled that such a contribution is not deductible since it in effect is directly to the foreign charity. Revenue Ruling 63-252.

Key point. In its 1963 ruling, the IRS did concede that contributions to a United States charity are deductible even though they are earmarked for distribution to a foreign charity, so long as the foreign charity “was formed for purposes of administrative convenience and the [United States charity] controls every facet of its operations.” The IRS concluded: “Since the foreign organization is merely an administrative arm of the [United States] organization, the fact that contributions are ultimately paid over to the foreign organization does not require a conclusion that the [United States] organization is not the real recipient of those contributions.”

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

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

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