The Tax Law of Charitable Giving. Bruce R. Hopkins
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transferred.
The element that is critical to the passage of title in an item of property is delivery, for delivery is the way title in property is actually transferred from one person to another.5 Consequently, a charitable contribution deduction generally comes into being on the date the gift property is delivered by the donor to the charitable donee.6 This general rule assumes a number of elements, including:
The absence of a condition (to occur either before or after the transfer) that defeats, or will defeat, the clear passage of title to the donee,7 unless:The condition is so remote as to be negligible,8 orThe condition is one that entails a legitimate restriction on the donee's use of the gift property (such as a confining of the use of the gift for scholarship purposes or for the acquisition of a building for use by the charitable donee in its charitable activities).
Compliance with the substantiation requirements.9
When the mails are used, the United States Postal Service is considered the agent of the recipient. Thus, when a contribution is mailed, the date of gift is usually the date the item is placed in the U.S. mail system.
The concept of delivery, however, does not necessarily mean that the donee must take actual physical possession of the property before a gift of the property becomes deductible. Title may pass when the charitable donee has the right or entitlement to possession of the property. One court wrote that the “donee simply must have the right to interrupt the donor's possession and the right to have physical possession of the property during each year following the donation.”10 This can involve forms of constructive delivery, but the donor must give up custody, control, and management of the property; otherwise, the gift transaction is not “complete.”11
§ 4.2 CONTRIBUTIONS OF MONEY IN GENERAL
A charitable contribution of U.S. currency is deductible for the year in which the money is mailed or otherwise delivered to the charitable donee. This rule pertains to situations in which the gift is made in cash, rather than by check. Of course, the title to the money passes at the time the ownership of the currency changes hands. Actions indicating intent to make a gift of money, such as instructions to a bookkeeper, are insufficient; the deduction arises in the year of actual payment.12
§ 4.3 CONTRIBUTIONS OF MONEY BY CHECK
Gifts of money are usually made by means of a check, if only as a matter of record keeping. In this context, the general rules cited previously apply. That is, title to the funds passes, and thus a charitable gift is made, at the time the check is mailed or otherwise delivered to the charitable donee.13 This rule also applies when the gift is made using a third-party check. In addition to these assumptions, however, this rule assumes that the check evidencing the contribution clears the bank involved in due course.14 Thus, a “gift” of a bad check is no gift at all.
Therefore, charitable gifts by check made at year-end may be deductible for the year in which the check was written, even though the check evidencing the gift does not clear the account involved until early in the subsequent year. This rule is reflected in the relation-back doctrine.
The relation-back doctrine is usually not applied in cases involving noncharitable gifts. A court, however, decided a case pertaining to the timing of a noncharitable gift; some aspects of the opinion relate to the timing—for deductibility purposes—of the making of charitable gifts.15
The case concerned an individual who died in 1987. He intended to make gifts to his heirs and their spouses during his lifetime. He executed a wide-ranging power of attorney making his son his attorney-in-fact for a variety of purposes, including the making of gifts. On December 14, 1985, the son drew four checks against his father's savings account in the amount of $10,000 each, including one check for himself and one for his wife. These two checks were deposited on December 31, 1985; the checks cleared the drawee bank on January 2, 1986. There were sufficient funds in the account to allow these checks to clear. In 1986, the son drew another set of checks payable to the same four donees in the same amounts. These checks were cashed in 1986. When the Internal Revenue Service (IRS) audited the estate, it took the position that both sets of gifts were made in 1986. Although it was, of course, the intent of the donor to make gifts qualifying for the annual per-donee gift tax exclusion16 in both years, the consequence was—from the IRS's viewpoint—the making of gifts of $20,000 to each donee in 1986. The IRS sought to impose the gift tax on these gifts.
As noted at the outset, the general rule is that a gift is complete when the donor has so parted with dominion and control as to leave him or her with no power to change its disposition. This determination is generally a matter of state law. The personal representative argued, on the basis of language in the power of attorney, that the gifts were perfected in 1985, when the checks were delivered to the donees and deposited in their accounts. The IRS contended that, under the law of the state, a gift by check is complete only after the check is presented for payment and accepted by the drawee bank; its position was that the gifts could have been revoked. On this point, the court initially followed state law. Because the drawee bank did not accept the first group of checks for payment until January 2, 1986, the court found that the gift was incomplete as of the close of 1985. That is, the court held that the donor retained dominion and control over the checks until they were accepted by the bank in 1986.
The court then considered the applicability of the relation-back doctrine. Under this doctrine, the payment of the checks in one year (here, 1986) relates back to the delivery and deposit of the checks in the previous year (here, 1985). The IRS argued that this doctrine should not be applied in cases other than those involving charitable gifts. The court reviewed the various cases on the point and concluded that there is “no reason for refusing to apply the relation-back doctrine to noncharitable gifts where the taxpayer is able to establish: (1) The donor's intent to make a gift, (2) unconditional delivery of the check, and (3) presentment of the check within the year for which favorable tax treatment is sought and within a reasonable time of issuance.”17
The court wrote that the “practical realities of everyday commerce” warrant this result.18
Thus, because the court was willing to apply the relation-back doctrine in connection with these facts, and because the checks were presented for payment in 1985 and they were promptly paid, the acceptance of the checks by the drawee bank in 1986 related back to the deposit of them in 1985. Therefore, the first set of gifts was treated as annual exclusion gifts for 1985, so that no taxes were due with respect to them.
Nonetheless, the general rules concerning gifts apply. Thus, the IRS declared that “a gift is not consummated by the mere delivery of the donor's own check or note. The gift of a check does not become complete until it is paid, certified, or accepted by the drawee, or is negotiated for value to a third person.”19