Fund-Raising -- Tax-Deductible Gifts for a Named Recipient's Personal Benefit

Most leaders of Christian organizations would say their organizations receive gifts from donors who are led by the Lord and who give out of their desire to support the ministry. While this is certainly a primary motivation, many donors are also influenced by the fact that gifts to most charities are deductible on their federal income tax returns—gifts to organizations listed in Section 170(c) of the Internal Revenue Code. In some cases, this deductibility results in substantial tax savings to the donor. This tax benefit is at once a significant support to Christian organizations and a potential source of problems.

Despite considerable ambiguity surrounding the application of the tax laws to "pass-through" gifts, ECFA members are expected to strive for tax law compliance. While Romans 13 provides sufficient basis to support this standard, compliance with this law helps protect the donor from trouble with the IRS. It also helps to preserve the tax benefit, which many believe is crucial to the continued support of charitable causes. Many Christian leaders believe that organizations have an ethical responsibility to avoid transactions in which they know a donor is attempting to gain a tax benefit that would otherwise be disallowed if the gifts went directly to the intended recipient.

Raising money for workers under a deputized fund-raising concept.  Many ministries practice deputized fundraising, particularly mission agencies and evangelistically oriented ministries. This practice is sometimes referred to as "self-supported," "deputational," or "staff support-raising."

Under the deputized fundraising concept, the ministry generally records amounts raised in support accounts for each worker. Charges are made against the support account to fund the staff member’s particular sphere of the organization’s ministry. These support account charges may include amounts for the charity’s overhead expenses.

The IRS acknowledges deputized fundraising as a widespread and legitimate practice. While contributions properly raised by this method are tax-deductible, it is clear the IRS feels that some deputized gifts are non-deductible, pass-through gifts to the individuals who ultimately benefit from the contribution.

The IRS has proposed two general tests to determine whether a tax-deductible contribution was made to or for the use of a charitable organization, or whether a gift was a non-deductible, pass-through gift to a particular individual who ultimately benefited from the contribution:

1. The intended benefit test. The purpose of this test is to determine whether the contributor’s intent in making the donation was to benefit the organization or the individual. 
   
   The IRS has formally indicated that organizations are to both avoid the use of conflicting language in their solicitations for contributions, and avoid conflicting understandings between the parties. This is to ensure: 1) that the qualified donee has exercised the necessary control over contributions; 2) that the donor has reason to know that the qualified donee has the necessary control and discretion over contributions; and 3) that the donor intends for the qualified donee to be the actual recipient of the contributions.
   
   The following statement should be used in solicitations for contributions:

   Contributions are solicited with the understanding that the donee organization has complete discretion and control over the use of all donated funds.

2. The control test. The IRS uses the phrase "discretion and control" to indicate a charity’s obligation regarding deputized funds. The IRS has stated that charities receiving revenues from deputized fundraising—through individual missionaries, staff members, or volunteers conducting grass-roots fundraising to support the organization—can demonstrate control and discretion in the following ways:

   •   The governing body exercises control of donated funds through a budgetary process.

   •   The organization’s governing body consistently establishes, reviews, and monitors the programs and policies of the organization.

   •   The organization sets staff salaries according to a salary schedule approved by the governing body. Salaries must be set by considerations other than the amount of money a deputized fundraiser collects. There can be no commitments that contributions will be paid as salary or expenses to a particular person.

   •   Amounts paid as salary, to the extent required by the Internal Revenue Code, are reported as compensation on Form W-2 or Form 1099-MISC.

   •   Reimbursements of legitimate ministry expenses are approved by the organization, pursuant to the governing body’s guidelines. Reimbursement must be set by considerations other than the amount of money a deputized fund-raiser collects.

   •   Potential staff members are thoroughly screened according to qualifications established by the organization. These are related to the organization’s exempt purposes and not principally related to the amount of funds the staff members may raise.

   •   Staff members are given meaningful training, development, and supervision.

   •   The organization assigns staff members to programs and project locations based upon its assessment of each staff member’s skills and training, and the specific needs of the organization.

   •   Regular communication through such means as newsletters, solicitation literature, and donor receipts informs donors of the organization’s full control and discretion over its programs and funds.
   

   •   The organization’s financial policies and practices are annually reviewed by an audit committee, a majority of whose members are not employees of the organization.

Additionally, ECFA members should consider the following issues when using the deputized fundraising approach:

1. Be sure your organization consistently communicates with your donors. Carefully review current documents, such as solicitation letters (including "prayer" letters), donor response forms, deputized worker training materials, receipts, and other related documents, to eliminate conflicts or contradictions. It is also important to establish procedures to insure that such reviews are ongoing. The more daunting task is to properly train deputized fundraisers and continually reinforce their need to clearly and consistently communicate the discretion and control concept to donors.
2. Use appropriate terminology when communicating with donors. Since the organization should not commit contributions (to be paid as salary or expenses) to a particular person, deputized fundraisers should never imply the opposite, verbally or in writing. A donor may indicate a preference that the charity use a gift to support the ministry of a certain individual, and the charity may track the dollars based on that preference. But the organization and the deputized worker should refrain from any inference that the contributions will be paid as salary or expenses to the worker. Although this is a fine line, it is one that should be carefully observed.
3. Avoid paying amounts raised by a particular worker to that worker. Since the organization should not commit contributions raised by a particular worker to be paid to the worker as salary, fringe benefits, or expense reimbursements, it is important that the organization’s practices match their commitments. If every dollar raised by a worker for the organization were spent on the worker, this would indicate the organization’s lack of discretion and control over the funds.
   
   Clear communication with donors about the discretion and control issue not only places the donor on notice, it serves to reinforce this concept in the mind of the deputized worker. Too often, deputized fundraisers assume an element of personal ownership over the funds they raise for the charity. For example, when a worker leaves the employment of charity A, that worker may mistakenly believe that the balance in his or her account will be transferred to charity B, where the worker will be employed. While a transfer to charity B may be appropriate, it is not required.

Benevolence programs.  Many churches and some parachurch organizations have established benevolence programs to assist needy persons. Typical beneficiaries of such funds include children, the aged, the unemployed, persons with a catastrophic illness, and accident victims. That Christian charities may establish benevolence funds goes without question. This is both a religious and a charitable function.

Whether a benevolence contribution qualifies for tax deductibility depends on the following two considerations:

1. Contributions "to or for the use of" a qualified charity. Section 170 of the tax code allows a charitable contribution only with respect to donations "to or for the use of" charitable organizations. Contributions for an individual, however needy, are not deductible, since they can never (unlike certain contributions made to deputized fundraisers) be said to be "to or for the use of" a charitable organization.
2. The donor’s intent. The donor’s intent ordinarily determines whether the transfer should be characterized as a tax-deductible contribution to a ministry or a nondeductible transfer to an individual. The key question is whether the donor intended to make a contribution to the ministry or only to benefit the designated individual (using the ministry as an intermediary in order to obtain a tax deduction for an otherwise nondeductible gift). The fact that the payment was made to a tax-exempt organization does not determine a proper intent, since taxpayers can obtain a deduction merely by funneling a payment through a charity. As the IRS often asserts, it is the substance, not the form of a transaction that determines intent.

These rules are applied to the following situations:

1. Child sponsorship. Some child sponsorship organizations solicit and accept gifts for specific children. Others solicit or accept gifts for children, in general, without identifying the children. The IRS has not challenged the deductibility of gifts for child sponsorship, even when specific children have been identified as the beneficiaries. It may be significant that:
   

   •   Children are generally selected by the organization as qualifying for support, even though the child may later be identified as the beneficiary of gifts from a particular donor. 
   
   •   Child sponsorship organizations have significant control over the programs and expenditure of funds. 
   
   •   Child sponsorship programs often pass a relatively small portion of the donation directly to the child. A significant part of the gift may be spent for community development that benefits needy persons in addition to the child named as a beneficiary.

2. Contributions made directly to individuals. Contributions made directly to individuals are not deductible, no matter how needy the recipient may be. The courts have repeatedly denied deductions for contributions made directly to relatives, clergy, students, and needy persons.
3. Undesignated contributions made directly to a ministry. Contributions to a charity and designated for benevolence purposes are deductible by donors who do not designate a recipient or beneficiary of their contribution. In Notice 94-15, the IRS noted that contributions earmarked for Los Angeles Earthquake Relief, but without specifying the gift for a particular individual or family, were gifts made to the charity and the contributions were fully deductible. By implication, if a donor contributes funds to a ministry for earthquake relief, but specifies that a particular individual or family is to receive the contributed funds, then this contribution is not tax-deductible. In this case, the charity does not maintain full control of the donated funds and discretion as to their use, so as to insure that they would be used to carry out the charity’s functions and purposes.

Scholarship gifts.  The IRS has stated that a charitable contribution is "a voluntary transfer of money or property that is made with no expectation of procuring a financial benefit commensurate with the amount of the transfer." Therefore, payments made by a taxpayer on behalf of a child attending an educational institution are not deductible as contributions to the tax-exempt organization, if the payments are earmarked in any way for the child.

The same tax rules apply to gifts to fund theological or other education of students attending school outside the U.S. However, gifts restricted for education in a certain country or area of the world should qualify for tax deductibility if the charity has full control over the selection of the student.

Additionally, the IRS has stated that the presence of one or more of the following factors creates a presumption that the payment is not a charitable contribution:

The existence of a contract under which a taxpayer agrees to make a

• "contribution" and which contains provisions insuring the admission of the taxpayer’s child
•  plan allowing taxpayers either to pay tuition or to make "contributions" in exchange for schooling
• earmarking a contribution for the direct benefit of a particular individual

Payments to support national workers.  Many principles included in the intended benefit and control tests relating to deputized fundraising seem to apply to gifts received for the support of national workers. When a charity solicits and receives gifts for specific national workers: 1) the workers are named in the gift transmittal and receipt device; 2) a specific project is established for them on the books of the charity; and 3) the funds are passed through to the national worker, perhaps after deducting an administrative fee, it may be considered a "pass-through" transaction by the Internal Revenue Service.

Gifts received for the support of national workers in a particular country or area of the world will generally qualify as charitable gifts if the organization has full control over the selection of the national worker.  

Payments to retired missionaries.  Missionary-sending organizations occasionally raise gifts to provide or supplement retirement income for missionaries who have previously served with the organization. These payments to retired missionaries generally constitute taxable income as payments in respect of past service.

To avoid classifying payments to retired missionaries as "pass-through" transactions, the organization would be wise to raise gifts for retirees in general (a "pooled" concept) rather than for a specific retired missionary. 

Contributions to support short-term mission trips.  It is a common practice for churches and other organizations to raise funds to send volunteers on short-term mission trips. A participant often raises funds for his or her own expenses, as opposed to raising funds for the project or trip as a whole.

Tax-deductible contributions for short-term missionary trips must be made "to or for the use of" the charity. They are subject to the same principles described above for deputized fundraising.

If the donor only intends to benefit the person—using the charity as an intermediary in order to obtain a tax deduction for an otherwise nondeductible gift—the contribution will not be tax-deductible.

Promising a refund to the donor if the person decides not to go on the trip or raises more money than he or she needs only reinforces the donor intent to benefit the person and not the organization.