Charities sometimes give back something of economic value to donors. Do these transactions qualify as gifts?
In one line of cases and rulings, the IRS has held that if a donor receives some economic or other material benefit as a consequence of making a transfer to charity (i.e., something in the nature of a quid pro quo, such as, in the case of a transfer to a local government, a favorable zoning decision) he will be found to have lacked a requisite donative intent and will be denied a charitable deduction unless the benefits flowing to him are insubstantial compared with those inuring to the charitable organization [Rev. Rul. 76-257, 1976-2 C.B. 52; Scharf, 32 TCM 1247 (1973)].
In another line of rulings, the IRS has simply said that the amount of the donor’s contribution must be reduced by the value of any benefit given to the donor in return (PLR 7930101). Note that under current gift substantiation rules, donors must obtain receipts for all gifts over $250, and receipts must state whether any goods or services were provided in connection with the gift and estimate the value of those benefits.
Certain nominal items may be given to a donor without jeopardizing the charitable deduction. The IRS has issued “safe harbor” guidelines for charities in determining whether the value of mugs, keychains, newsletters and other token premiums are to be considered when claiming the deduction [Rev. Proc. 90-12, 1990-1 C.B. 471]. Benefits will be considered insubstantial (and therefore the full fair market value of the gift will be deductible) if the gift is part of a fundraising campaign in which donors are told how much of their payments are deductible. Additionally, either of these two situations must exist: (1) the fair market value of all benefits received by the donor is not more than 2% of the payment or $96, whichever is less, or (2) the contribution is $48 (inflation-adjusted for 2010) or more and the only benefits received in return are token items, such as bookmarks, calendars, key chains, mugs, posters, tee shirts, etc., bearing the organization’s name and logo.
Providing for Charity and a Family Member . . . in Privacy
Mrs. H is planning her estate and wants to provide for a charitable organization and also create some financial security for her wayward son, Eddie, who has a history of drug and alcohol problems. The challenge: She doesn’t want her other children to find out that she’s doing anything for Eddie. She feels she can’t help him through a will or living trust because the family surely would learn of it. What can we suggest to Mrs. H?
Life income gift arrangements may help in families where certain relatives are considered outcasts or lack the ability to manage money. Charitable organizations that offer charitable gift annuities generally will preserve confidentiality regarding any gift. Mrs. H could provide Eddie with either an immediate or deferred payment annuity, and no one has to know. If the value of her son’s life annuity is less than $13,000, Mrs. H need not file a gift tax return (for an immediate payment gift annuity). A gift tax return would be required for a deferred payment annuity, which is a future interest that does not qualify for the gift tax annual exclusion, but this may not be an issue if Mrs. H won’t owe estate taxes.
Could she establish a “testamentary” gift annuity for Eddie outside her will? She might be able to arrange a deferred annuity for Eddie with a starting date likely to occur after her death. The contract would provide that the start of annuity payments will be moved up to the year of her death, but with reduced annual payments (that are set out in a schedule that preserves actuarial values reflecting the original transfer).
Copyright © by R&R Newkirk. All rights reserved.
Please note: Case studies are fictional and do not reflect DJCF donors, situations or opinions.