FundSvcs Community

Hi Diana,

If you're an aasp member, there's a best practice document entirely devoted to partial interests gifts you may be interested in.  It may help you relay the concept to your Athletics Dept.

https://connect.advserv.org/viewdocument/best-practice-in-partial-interest-c

Best,

Eric

I have found it helpful to note that when the tax code talks about charitable contributions, it uses language like "cash and property other than cash."

In IRS Publication 526, the reference is in this language:

Generally, you can deduct contributions of money or property you make to, or for the use of, a qualified organization.

In the case at hand, since the donor did not give you the airplane, there is no gift of money or property, and therefore no tax-deductible charitable contribution (and, as a result, no gift that can be counted for CASE-standard reporting).

Alan is right, and there is a bigger issue at hand to which I believe Diana alludes to which is how to best convey to the layperson that somethings that have value in the business world, when given to a charity, do not qualify as a tax deductible gift.

From the layperson's logic:  Orphans have to pay to fly on an airplane, so if someone lets orphans fly for free, that's a gift to orphans, so why isn't it tax-deductible?

There are multiple reasons for why the IRS has chosen not to allow such "gifts" but I'll just mention two big ones:

First – Accountability.  When donating a plane or tangible property.  You can see it, smell it, touch it, and many times it comes with paperwork and other registration that says you owned it, and that now the charity owns it.  Try doing that with time.  How could the IRS oversee the donation of time.  In theory, in one year an airplane or helicopter company could give out 8,760 hours of travel (assuming no time for take offs, landings, refueling, or maintenance).  A limousine service could give 8,760 hours of rides.  A commercial space landlord could provide office space for 8,760 hours – and to multiple tenants.  And imagine attempting to calculate the proper FMV depending upon the quality of the experience, season of the year, etc. and multiplying this by the tens of thousands of companies doing this.  How could the IRS possibly track all of this to ensure that the donor was truly forfeiting potential profit and donating it to a qualified charity altruistically?  It would just open the door to monumental abuse.

Second – Protecting charities.  For example, what if the operator of limousine service pledged the charity 4 hours of driving time in one of their limos for which they would charge a paying customer $400.  They show a photo of a shiny new Lincoln and give the impression that it will be a newer clean car with no mechanical problems.  Instead, on the day of the drive the car is a 1986 Cadillac with ripped seats, a bad smell and bumpy ride?  Is it still worth $400?  Too late, because the receipt has already gone out.  And, if they get audited, how can the auditor determine what was actually donated?  The company will claim that it was a top notch ride, and the charity will claim it wasn't.  Who's telling the truth?  There's no limousine parked outside to look at, there's no registration documents or bill of sale.  So, by making sure that only tangible personal property is donated greatly reduces the risk of charities being given something (and the donor getting a deduction) that does not accurately reflect the market value of the donation at the time of transfer.

Hopefully, this explanation helps.

-Eric

Eric Valdescaro

Senior Director, Advancement Services

University Advancement

The University of Memphis

It may also be helpful to reflect on these issues from the primary purpose of the tax code, which is collecting taxes in as fair a method as possible.

In the canonical case, the taxpayer earns income and incurs an income tax liability.  If, then, the taxpayer donates a portion of their funds to a qualified organization, the tax code says that the taxpayer doesn't need to pay taxes on a portion of their income corresponding to their gift (their gift of taxed income).

If the taxpayer contributes property, in the canonical case the taxpayer would have purchased that property using a portion of their income, on which they would have paid income tax, so the tax code says that they can exempt a corresponding part of their income when they donate the property.  Of course, the taxpayer could have acquired property other ways, but, tellingly, there are Revenue Rulings that apply the tax code to just such circumstances.  If, for example, a taxpayer traded services for the property, the taxpayer cannot claim a charitable deduction for contributing the property unless the taxpayer included the value of the property received in their taxable income.  That is, if they included the property in their taxable income, they have contributed something underwritten by taxed income, so they qualify for an offsetting deduction.

The basic structure is:

• earn income,
• incur a tax liability on the income,
• fund a contribution from taxed income,
• don't pay income tax on the portion of your income that corresponds to the contribution.

In the gift-of-services case, if, say, the taxpayer contributes an hour of professional services, that contribution doesn't engage any of their taxable income.  They're not contributing any money on which they paid tax, or any property paid for in turn by taxable income.  Since no taxable income was involved, the tax code doesn't allow them to exempt a portion of their taxable income that corresponds to the "gift."  (Or, technically I guess, they can reduce their taxable income by the amount of taxable income that was involved, which is zero?)  True, if they hadn't performed the service, they might have performed an additional hour of paid service, upon which they would have been taxed.  But they didn't.  Their transaction did not involve any income on which the taxpayer paid income tax, so they are not permitted to reduce their income for tax purposes.

It's worth noting that if I have out-of-pocket expenses that I incurred solely because I provided charitable service, those expenses are deductible.  Contributed expenses->paid with income subject to tax->taxable income reduced by a corresponding amount.

The partial-interest case is similar.  If the taxpayer lets the charity use their plane/car/hotel room, they are not contributing the proceeds of any income on which they have paid income tax.  If the owner hadn't let the charity use the property, they might otherwise have charged for its use, but that income is hypothetical, not taxed!

Looking at this another way, suppose the donor charged you for an hour of their time, say $500, and then gave that money back to you as a gift.  They have the payment for an hour's time as income, subject to tax, and they have an offsetting deduction for the amount of the gift, so it's a wash. (Well, under the most recent tax code revision, they might not be in a position to itemize deductions, but that's a different issue!)

If gifts of services were deductible (which they are not!), and the donor contributed that same hour for free and received a reduction in income for what they would otherwise have charged you, they would have had no additional taxable income, and then on top of that they would have been able to reduce their taxable income by $500.  So they're $500 to the good, with respect to their taxable income. 

The logic of the tax code maintains the equivalence of those cases-either the donor pays taxes on income and gets an offsetting deduction for contributing part of that income, or the donor contributes something that isn't derived from taxable income and doesn't get a reduction in their taxable income.

Don't know if that helps anyone else, but that's how I understand the logic of the non-deductibility of gifts of services and of gifts of partial interests.

It also occurs to me that the same logic that I have described can also be seen in the tax code provisions related to IRA distributions that are given to charity.

In the usual distribution from a charitable IRA, the amount withdrawn is taxable income, and, if the donor then contributes the funds to a charity, the donor qualifies for a corresponding deduction that reduces their taxable income.  Contribution of taxable income-> charitable deduction.

In the case of the Qualified Charitable Distributions (QCDs) first authorized by the Pension Protection Act of 2006, the distribution is excluded from taxable income, and the donor cannot take a charitable deduction for the amount of the distribution.  No contribution of taxable income->no charitable deduction.

Thank you so much for the explanations.