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.
My US$0.02 worth; the usual disclaimers apply.
Good luck!
Alan
Alan S. Hejnal
Data Quality Manager
Smithsonian Institution - Office of Advancement
600 Maryland Ave SW Ste 600E
PO Box 37012, MRC 527
Washington, DC 20013-7012
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