The Tax Law of Charitable Giving. Bruce R. Hopkins
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As noted, when a transaction involves consideration, so that the erstwhile donor receives something of value approximate to the amount transferred, there is no gift. This is because the person received a quid pro quo in exchange for the transfer, and thus there is no true gift at all. (There are several sets of circumstances in which a transfer is partially a gift and partially a sale or exchange;66 these circumstances are discussed elsewhere.67)
In one case, a manufacturer of sewing machines sold the machines on a discounted basis (bargain sales) to schools and other charitable organizations. The issue was whether the company was entitled to a charitable deduction for the gift element in the transactions. The court formulated the appropriate test as follows:
[I]f the benefits received, or expected to be received, are substantial, and meaning by that, benefits greater than those that inure to the general public from transfers for charitable purposes (which benefits are merely incidental to the transfer), then in such case we feel the transferor has received, or expects to receive, a quid pro quo sufficient to remove the transfer from the realm of deductibility [as a charitable gift].68
In application of this standard, the court differentiated between the discounts allowed to schools and those for other charities. As to the former, the court concluded that the discounts were offered “for the predominant purpose of encouraging those institutions to interest and train young women in the art of machine sewing; thereby enlarging the future potential market by developing prospective purchasers of home sewing machines and, more particularly [the company's] machines—the brand on which the future buyers learned to sew.”69 Thus, these discounts were held not to be of a charitable nature, with the court convinced that the company's “predominant reason for granting such discounts was other than charitable” in that it “expected a return in the nature of future increased sales.”70 By contrast, as to the bargain sales of sewing machines to charitable organizations other than schools, the court was of the view that “any benefits to be derived from such discounts were merely incidental to the charitable nature of the transfer and, therefore, do not destroy the claimed charitable contribution deduction.”71 The incidental effect of this giving policy was the “development and maintenance of a favorable public image for [the company] in the eyes of those [charitable] organizations and their members.”72
In another case, a company was denied a charitable contribution deduction for the transfer of land to a high school district, on the ground that the conveyance was made with the expectation that, as a consequence of the construction of public access roads through the property, it would receive substantial benefits in return.73 Indeed, that is what occurred. The court wrote that the “receipt or expected receipt of substantial benefits in return for a conveyance precludes a charitable contribution [deduction].”74 The court found that the company “knew that the construction of a school and the attendant roads on its property would substantially benefit the surrounding land, that it made the conveyance expecting its remaining property to increase in value, and that the expected receipt of these benefits at least partially prompted [the company] to make the conveyance.”75 The court concluded that “this is more than adequate reason to deny [the company] a charitable contribution for its conveyance.”76
In a similar circumstance, two property owners conveyed a parcel of real estate to a corporation, taking back a note secured by a deed of trust on the property. The next year, these individuals delivered a quitclaim deed for a one-half interest in the note and deed of trust to a school and claimed a charitable deduction for the value of the transfer. Two years later, as part of a settlement, the individuals assigned the note to a creditor. They advised the school of the situation, causing the school to quitclaim its interest in the note and trust to the creditor. The next year, these individuals made a cash payment to the school and claimed a charitable deduction for that payment. The court held that the portion of the gift of money equal to the value of the interest in the note and trust that the school quitclaimed to the creditor was not a gift and thus was not deductible; the excess was found to be a charitable gift.77 This was the outcome because, had the school not executed the quitclaim, the individuals would have been obligated to pay an additional and comparable sum of money to the creditor. “Under such circumstances,” wrote the court, “it can only be concluded that [the individuals] received a benefit of equal value when [the school] executed the quitclaim.”78
In another instance, an individual canceled certain property interests and a purchase option in a manner that favored a university. A charitable deduction was claimed for the transfer of this benefit for charitable purposes. The court, however, refused to view that transaction in isolation, or as occurring in advance of other related transactions, but instead regarded it as an integral part of a series of transactions in which the individual benefited. Indeed, the court valued the interests passing to the university at $276,500. At the same time, however, the court found that the individual received a quid pro quo from the transaction in the amount of $295,963.79
Likewise, a court held that a contribution of a house to a volunteer fire department, for firefighter and police training exercises and eventual demolition, did not give rise to a charitable contribution deduction, inasmuch as the donors received a substantial return benefit and failed to show that the fair market value of the property contributed, encumbered with restrictions and conditions,80 exceeded the value of the benefit they received.81
Several other court opinions contain applications of the quid pro quo rationale in this setting.82 This rationale is, of course, that the transferor is receiving goods, services, and/or other benefits of value comparable to the money and/or property transferred, and thus the transaction is a purchase rather than a gift.83
This rationale is followed by the Internal Revenue Service.84 An illustration of the IRS's application of these rules appears in its guidance concerning the deductibility of payments to a private school when the “donor” is a parent of a child attending the school.85 Basically, payments of tuition to a school are not deductible as charitable gifts.86 The general standard in this context is this:
Whether a transfer of money by a parent to an organization that operates a school is a voluntary transfer that is made with no expectation of obtaining a commensurate benefit depends upon whether a reasonable person, taking all the facts and circumstances of the case into account, would conclude that enrollment in the school was in no manner contingent upon making the payment, that the payment was not made pursuant to a plan (whether