Is a Mandated Gift Deductible as a Charitable Contribution? A Review of The Meaning of “Gift” in IRC 170.
For over 15 years, I have represented tax-exempt charitable entities—mega, large, medium, small, and everything in between. Through that experience, I have seen the best of times and the worst of times (and everything in between) within the nonprofit industry.
This Insights blog reviews the hypothetical scenario or issue of whether, under section 170, Title 26 of the Internal Revenue Code, a director on a nonprofit board of directors may deduct as a charitable contribution, an amount the director gives to the organization when the organization–by policy, bylaw, or other mandate–required the contribution as a condition for service on the organization’s board of directors?
Are contributions made under such prescription or mandate deductible as a charitable contribution by the contributing director?
If that director’s return is audited, is the amount contributed deductible as a charitable contribution under section 170, or might the IRS deny the charitable deduction, assess penalties, or make other adverse determinations against the individual director/taxpayer?
Short Answer. Maybe, or maybe not, but that is not this tax practitioner’s prerogative to decide on that brief set of facts…
Counsel’s Position. Pursuant to IRS Regulations, I am not supposed to (and strive to not) give tax-related counsel based on the likelihood of audit or potential adverse determination by IRS. See IRS Circular 203 § 10.37(a)(2)(vi) (providing that a tax practitioner must “Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.”).
What is a “gift” for income tax purposes? 26 U.S.C. § 102(a) provides: “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” In Comm’r v. Duberstein, 363 U.S. 278 (1960), the U.S. Supreme Court defined a gift under IRC section 102 as a transfer that proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses. The donor’s intent is controlling, rather than donor characterization of the transaction. The IRS and the courts examine objectively whether a gift occurs based on the facts and if those facts support a donor that intended a transfer based on affection. Detached and disinterested generosity is critical. If a transfer is made out of an expectation (or even a moral duty) on the recipient’s part, the transfer may not be qualified as a gift under IRS section 102 because the “gift” did not arise out of a detached and disinterred generosity.
What is a “charitable contribution” under IRS section 170? Pursuant to 26 U.S.C. § 170(a)(1) “[t]here shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.” As used in section 170(a), the term “charitable contribution” is synonymous with the word “gift,” being a voluntary transfer of property by the owner to another without consideration–a detached and disinterested generosity, motivated by affection, respect, admiration, charity, or like impulses. See Commissioner v. LoBue, 351 U.S. 243, 246 (1956); Robertson v. United States, 343 U.S. 711, 714 (1952); DeJong v. Commissioner, 36 T.C. 896, 899 (1961), affd. 309 F.2d 373 (9th Cir. 1962); Consolidated Investors Group v. Comm’r, T.C. Memo 2009-290, at 48-49 (2009). A gift is not compelled by the constraining force of any moral or legal duty. Bogardus v. Commissioner, 302 U.S. 34, 41 (1937).
Fifth Circuit, as an Example. According to the Fifth Circuit, a contribution is a gift only if it is “not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection or regard or pity, or from general motives of philanthropy or charity.” Schall v. Comm’r, 174 F.2d 893, 894 (5th Cir. 1949) (emphasis added) (quoting Bass v. Hawley, 62 F.2d 721, 723 (5th Cir. 1933)) (honorarium gift because no future services promised or provided), rev’g 11 T.C. 111 (1948). “A gift can be made only out of “personal affection or regard or pity, or from general motives of philanthropy or charity.”” Brown v. Comm’r, T.C. Memo 2019-69 (U.S. Tax Court 2019) (quoting Schall, 174 F2d. at 894).
Contemporaneous Written Acknowledgement. Pursuant to 26 U.S.C. § 170(f)(8)(B), contemporaneous written acknowledgements must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the recipient provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any such goods or services. Can the organization honestly acknowledge as such if the gift in question was compelled by the organization in exchange for a seat at the board table? Can or must the organization qualify the acknowledgement based on the quid pro quo nature of the “gift”?
Joint Committee on Taxation’s Perspective. In the Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions (March 11, 2022), the Committee guidance or committee comments included the following:
- Page 8 of 51 of PDF Report – “To be deductible, a charitable contribution generally must meet several threshold requirements. The recipient organization must be eligible to receive deductible charitable contributions. The transfer must be made with gratuitous intent and without the expectation of a benefit of substantial economic value in return.”
- Page 12 of 51 of PDF Report – “The term “contribution or gift” is generally interpreted to mean a voluntary transfer of money or other property without receipt of adequate consideration and with donative intent. A payment or other transfer to a charity (regardless of whether it is called a “contribution”) is not deductible if it is made in exchange or in return for an economic benefit.”
- Footnote 50 on Page 13 of 51 of PDF Report – “Intangible return benefits and certain low-cost items given in exchange for a contribution do not reduce the value of the charitable deduction.” [But see Brown v. Comm’r, T.C. Memo 2019-69 (U.S. Tax Court 2019) (addressing gifts made by congregants for benefit of pastor and finding that the expectation of giving rendered the “gifts” not so to the recipient pastor; “But in the profane world of tax law, a payment can still be for services rendered even if the payor does not receive an economic benefit from it.”).]
Insights: Ultimately, this is a business decision for the organization, and the deductibility of such mandated contributions depends on many factors, including the donor’s intent. If the organization mandates giving in exchange for permitted board service, the organization should consider whether and how it may disclose the potential tax consequences to the donating directors. For contributions over $250, the donor must receive a contemporaneous written acknowledgement as required by IRC section 170, including a statement that no goods or services were provided in exchange of the gift. The organization may disclose to each director that they should consult with their tax consultant as to the deductibility of the contributions made in compliance with the organization’s mandate. Or, the organization may decide that the return benefit of being allowed to serve is intangible and not the type of return consideration that disqualifies the giving as a charitable contribution, and thus, the organization may decide to issue unqualified written acknowledgments of gift.
If the IRS audits the director’s tax return and determines that the contribution to the organization was given as an expectation or legal or moral obligation to the organization and not by detached generosity or philanthropic motive, the contribution may not be deductible as a charitable contribution. Penalties could be assessed against and other adverse consequences could befall upon the individual director.
With careful counsel and guidance, the organization my appropriately “soften” the mandate so that the organization substantially avoids all these potential adverse consequences to donating directors. The organization can “educate” those serving as to what is meant by the “expectation”, and that could serve to fill any gap-of-concern among those who believe a written mandate for giving is necessary. And, the organization may monitor expected director giving to see if corrective action or further encouragement is needed to spur a director to meet the organization’s expectation of director-giving. Upon audit, all of those efforts, actions, factors, and circumstances will likely be evaluated in the analysis of whether an individual’s gift was, indeed, a charitable contribution as defined by the Internal Revenue Code.
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