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An individual can usually deduct a contribution of money or property made to a qualified organization. The following information is not provided as advice for making charitable contributions, and only provides a general overview of this tax area. IRS Publications 526 and 561 should also be consulted.
Charitable contributions are only deductible by the donor when made to a qualified organization. As a non-profit educational organization, Baylor University is a qualified organization and is listed in the Internal Revenue Service’s Publication 78 as such. This publication can be referenced at the following site: http://apps.irs.gov/app/pub78.
A charitable contribution must in essence be a gift, and has been defined by the Supreme Court in U.S. v. American Bar Endowment as “a transfer of money or property without adequate consideration”. As a part of this definition, a contribution must be given with donative intent. Many sub-issues exist due to this “gift” requirement.
Under IRC §170, a taxpayer is entitled to a deduction for charitable contributions to or for the use of a qualified charitable organization. A gift is not considered a charitable contribution if the organization is merely a conduit to a particular person, such as when the gift is “ear-marked” for a particular individual. Rev. Ruling 62-113 stated that two factors will be used to determine the deductibility of a gift:
a. The qualified charitable organization must have full control and discretion over the contribution, and not bound by a commitment or “understanding” that the contribution will benefit a designated individual.
b. The donor’s intent must be to benefit the organization and not the individual recipient.
Rev. Ruling 79-81 provides a good example of earmarking funds. In this Ruling, a religious organization gave four year training to individuals at one of its colleges. The organization expected to be paid approximately $4,000 for each of the two years that an individual was in residence at the college and had the student solicit the sponsorship of other persons to gain the funds. The sponsor pledged his commitment by completing a form that contained the amount of the pledge, the timing of payments to be made, the name of the sponsor, and the name of the member who solicited the payment. The form stated the payments were nonrefundable and that the use of the payments was solely at the discretion of the organization’s Board of Trustees. Envelopes were provided for the payments and contained a space for the student’s name. The IRS held the $4,000 was earmarked, shown by the name of the member who solicited payment on the commitment form and on the envelope in which payment was received. This showed the intent to benefit the student rather than the organization. In addition, the money donated was almost exactly the amount needed by the student, so the only control the organization had was comparable to the control any school has over tuition payments received.
Subsequent case-law has focused on this control test, defined as whether the organization has full control of donated funds and full discretion as to their use. If a donation has been earmarked for a particular individual, or there is a commitment or understanding that the donation will only be used for a designated beneficiary, or if the intent of the donor is to benefit himself and not the organization, then the organization lacks the control and discretion needed. In this situation, the donor will not be allowed a charitable deduction by the IRS. (Top)
The IRS will allow individuals to take deductions for certain charitable contributions that flow through third parties, depending on whether the third party is the designated agent of the qualified organization. In Rev. Ruling 55-192, membership dues for a club were paid by the members to the treasurer of the club, who was authorized by both the club and the donee organization to act as its agent. Part of the club dues constituted contributions. The IRS allowed the contributions, as long as the treasurer was designated as the agent of the organization. This scenario was broadened in Rev. Ruling 85-184, in which a local chapter of a national charitable organization entered into an agreement with the local utility company to collect charitable contributions made by customers of the utility. The local chapter designated the utility as its agent to collect contributions on its behalf on the customer’s monthly bills. The IRS held since the funds were segregated by the utility and the utility did not exercise any domination or control over the funds, nor draw upon them to cover expenses incurred in the program, deductions were allowed for the charitable contributions. Allowance of charitable contributions through third parties was further broadened in Rev. Ruling. 2002-67. In this Ruling, a charitable organization entered into a written agreement with a for-profit entity located and licensed to sell cars for the for-profit entity to act as the organization’s agent in administering a fund-raising program. The program consisted of the for-profit entity soliciting donations of used cars, accepting, processing and selling the cars, and transferring the proceeds, less a fee, to the charitable organization. The IRS held since the agreement created an agency relationship under state law, and the donations were then in essence made to the charitable organization, the donors were entitled to a deduction for their donations. (Top)
A charitable deduction may be allowed for expenses incurred in donating services to a qualified organization. Such a deduction will only be allowed if the expenses are unreimbursed, directly connected with the donated services, expenses that existed only because of the services, and not personal, living, or family expenses. Allowable expenses include out-of-pocket car expenses, such as the cost of gas and oil, and parking fees and tolls. If the actual cost of gas is not used, the donor can use a standard rate of 14 cents per mile to calculate his/her donation. General repair and maintenance expenses, depreciation, registration fees or tires or insurance costs are not allowed. The donor must keep reliable written records of his/her car expenses. Allowance expenses also include travel expenses necessarily incurred while the donor is away from home performing services, but only if the donor does not engage in significant personal pleasure, recreation, or vacation. Such travel expenses include air, rail, or bus transportation, out-of-pocket car expenses, taxi fares, lodging costs, and meal costs.
Also, if a donor is providing services for a qualified charitable organization and receives a daily allowance to cover allowable costs, the donor can receive a charitable deduction for travel expenses that exceed this allowance. If the allowance received is greater than the expenses incurred, the donor must include the excess in his/her income.
To sustain a charitable deduction for such unreimbursed expenses, the donor must keep reliable records of all claimed expenses and a written acknowledgement from the charitable organization, discussed under Contributions of $250 or More. (Top)
A “quid pro quo” contribution is a donation that is comprised of both a payment in consideration for goods or services provided to the donor by the donee and also a charitable contribution. An essential element of such is proof that some part of the payment represents an amount in excess of the fair market value of the goods or services received. If tickets or other privileges are purchased but not used, the donor may be able to deduct the full purchase price, as long as the intent existed to make a contribution to the organization at the time of purchase.
Because of the difficulty in assigning value to certain items, the IRS has issued safe harbor rules for qualified fundraising campaigns. Under these rules, certain benefits are treated as having insignificant value and are therefore ignored in determining the amount of a charitable contribution. These benefits are given such treatment if the requirements found in the following paragraph are satisfied and if either (1) the fair market value of all the benefits received by the donor does not exceed the lesser of 2% of the payment or $86 (for 2006) or (2) the payment equals or exceeds $43 (for 2006), and the only benefits received by the donor are token items bearing the organization’s name or logo, i.e. bookmarks, calendars, keychains, mugs, posters, t-shirts, etc. In addition, the cost of the benefits received by the donor to the organization must be $8.60 or less (for 2006).
To be a qualified fundraising campaign, the campaign must be one formulated to raise tax-deductible contributions and one that during which the organization must provide a written statement to the donor: (1) stating the amount of the contribution that is deductible is limited to the excess of the amount contributed over the value of the goods or services received by the donor, and (2) providing a good-faith estimate of the value of goods or services furnished to the donor by the charitable organization. (Top)
Membership dues paid to a charitable organization are not deductible as contributions if the donor receives benefits or privileges, with two exceptions. First, if a charitable organization solicits “sustaining” or similar memberships that consist of much higher dues for the privilege of acknowledgement as a benefactor of the organization, the IRS will allow possible separation of the amount paid into an amount for the benefits received and an amount for a charitable contribution. Such separation must be conducted on a uniform basis among members. Second, certain goods or services may be disregarded in the determination of a charitable deduction. These benefits include the following:
a. annual membership benefits attained for payment of $75 or less annually that the donor can exercise frequently during the membership period; i.e. free/discounted admission to organization events, free/discounted parking, discounts on the purchases of goods/services from the organization, etc.
b. Discounts offered by the organization for purchases from retailers working with the organization, if they can be exercised frequently during the membership period.
c. annual membership benefits attained for payment of $75 or less annually consisting of admission to organization events open only to organization members when the organization reasonably calculates the direct cost per person is within the limits set by the IRS for low-cost articles. Currently, for 2006 this limit is $8.60. (Top)