Never let it be said that you can’t reach deep within a seemingly endless stream of indistinguishable Facebook videos and extract a lesson on the tax law. Case in point: the ALS Ice Bucket Challenge, that movement of philanthropy through peer pressure that has likely taken over your various social media feeds.
It works like so—someone challenges you to dump a bucket of ice water over your head within 24 hours. Fail to do so, and you must contribute $100 to the ALS Association.
Because man’s desire to do some good in the world will always be a distant second to his desire to see himself on camera, most people opt to make a video of the dousing process in their own uniquely hilarious manner, and then challenge additional people to either do the same or contribute.
But perhaps you’ve got a heart condition. Or you’re enfeebled. Or you’re just a giant sissy. Rather than risk instant death or, even worse, a brief chill, you opt to skip the shower and write the check to ALS.
While you may come across as a bit of a buzzkill, you can feel proud that your money has gone to a great cause—rather than to those bigwigs at BIG ICE BUCKET, who are surely lighting cigars with crisp hundreds these days—and that come tax time, you’ll get a charitable contribution deduction to boot.
Or will you?
It’s a common fallacy among taxpayers that all that is needed to procure a charitable contribution deduction is to make a donation, in cash or property, to a qualified organization. But as with all things in the tax law, it’s not quite that simple.
You see, the IRS and the courts of this country often look deeper than the form of the donation, zeroing in on the mindset of the donor in making the contribution. It’s a concept called “donative intent,” and its presence is necessary in order for any contribution to rise to the level of a good tax donation.
The Tax Court elucidated the concept of donative intent in Estate of O. J. Wardwell, 35 T.C. 443, when it said of a purported donation, “If a payment proceeds primarily from the incentive of anticipated benefit to the payor beyond the satisfaction which flows from the performance of a generous act, it is not a contribution or gift.”
So let’s say you were challenged via social media to either take the Ice Bucket Challenge or contribute to ALS. Assume further that you are unable or unwilling to get cold and wet, and choose instead to donate to ALS. Do you possess the necessary donative intent if you otherwise wouldn’t have contributed to the cause, and are doing it merely to avoid being publicly chastised by your Facebook friends? Did you make the donation with the anticipation of receiving the benefit of, you know…not having to dump a freezing bucket of water on your head?
OK, rest easy; the IRS isn’t coming after your ALS donation. While the principle of donative intent is very real, in recent years, the courts have tied this principle to a “quid pro quo test,” which states that in order for a donation to lack donative intent, the donor must anticipate receiving a financial benefit from the contribution commensurate with the value the donor transferred to the charity. Because an ice bucket dodger has received no financial benefit, but rather merely a physical one, the contribution is (should be) immune to attack. Plus, I think I've read somewhere that the IRS is dealing with a bit of a public perception problem these days, so attacking contributions to a horrible disease is probably not in its best interest.
Nevertheless, in addition to raising over $12 million for ALS over the past six weeks, the Ice Bucket Challenge presents a wonderful opportunity to drive home the point that there is more to garnering a charitable contribution deduction than cutting a check to a charitable organization; you must have intended to make a contribution without the expectation of receiving a financial benefit in return.
The failure to understand that motive plays a role in charitable giving has caused more than a few taxpayers to lose deductions that, on the surface, appeared to have met all of the statutory and regulatory requirements.
The case of DeJong v. Commissioner, 36 TC 896, illustrates a rather common scenario. A father belonged to a church that operated the school his two children attended. The school explained to DeJong that the cost to educate each child throughout the year was $200 (this was 1958, after all) and encouraged him to contribute the full cost of education for his two children to the church. Any amounts contributed to the school were credited to the general operating fund of the school without any designation to a specific child.
DeJong contributed over $1,000 to the church, and claimed the full amount as a charitable contribution deduction. The IRS denied $400 of the deduction—the cost to educate DeJong’s two children—arguing that this represented “tuition” rather than a charitable contribution, and thus was a nondeductible personal expense.
The Tax Court agreed, holding that DeJong lacked donative intent, stating, “payments pledged and made by parents in the circumstances disclosed…were not voluntary and gratuitous contributions motivated merely by the satisfaction which flows from the performance of a generous act; they were induced, at least in substantial part, by the benefits which the parents sought and anticipated from the enrollment of their children as students in the society's school.”
If you found a bit far-fetched my argument that receiving the benefit of not having to dump cold water on your head could jeopardize your contribution deduction to ALS, consider the case of Singer v. U.S. for proof of just how expansive the “quid pro quo” analysis can be.
In Singer, a corporation that manufactured sewing machines sold the machines at a heavy discount to local schools. The corporation deducted the bargain element as a charitable contribution, but the IRS argued that the corporation received a quid pro quo in exchange for the contribution. What benefit did the corporation receive? The schools used the sewing machines to teach its students how to sew, and thus by contributing the machines to the schools, Singer was potentially expanding future demand for its product. Believe it or not, the Court of Claims agreed, adding, “…the plaintiff's predominant reason for granting such discounts was other than charitable. We are convinced, and so hold, that in reference to the discounts granted to the schools, plaintiff expected a return in the nature of future increased sales.”
Lastly, in Grinsdale v. Commissioner, 59 TC 566, a landowner contributed a parcel of land to a city for a minimal price and deducted as a charitable contribution the bargain element. Sounds generous enough, no? Look a little deeper, as the IRS did, however, and it turns out that in exchange for his “contribution,” the landowner received the dismissal of two condemnation suits pending against his other property, and a zoning variance to permit the development of a service station on another piece of land.
The Tax Court denied the deduction, concluding, “Petitioners and the city had reached a compromise advantageous to both—a quid pro quo. The city received land. The petitioners received…dismissal of the two condemnation suits, and the variance in zoning. They entered into the entire transaction with the expectation of financial benefits commensurate with the value of the property conveyed. Accordingly, they are not entitled to a charitable contribution.”
When a donor receives value in return from a charitable organization--a quid pro quo--it doesn’t necessarily mean that the donor isn’t entitled to any contribution deduction. Under Rev. Rul. 67-246, the donor is generally entitled to a deduction for the amount of the contribution less the FMV of any consideration received in exchange for the payment from the charitable organization.
This discussion should illustrate the scope and importance of the concept of donative intent. As mentioned, however, those who forgo the Ice Bucket Challenge and cut a check to ALS instead should not run afoul of this judicial doctrine, so sissies of the world, unite. Skip the cold shower, and donate to a great cause instead.
follow along on twitter @nittigrittytax
Also on Forbes:
