Charitable Acknowledgments Provided to Someone Other than the Giver

Donors or prospective donors often present challenging requests to charities. Some requests relate to the receipting of a gift or potential gift.

If a donor asks a charity to issue a gift receipt to a taxpayer other than the one making the gift, what should a charity do?

  • Should the charity automatically issue the receipt as requested by the donor?
  • Should the charity ask for an explanation?
  • If the donor provides an explanation that evidences an attempt to understate income or social security taxes, what should the charity do?
  • If the charity provides a receipt to a taxpayer other than the donor, is the charity aiding tax evasion?
  • Even if the law does not cover these issues, is there a position of “high ground” for the charity?

Potential problem situations. Why would a corporation ask for a receipt to be issued to an individual? Why would an individual want a receipt to go to a second individual? At times, the donor’s motive may be pure. For example, an individual might collect cash from several friends for a certain project, deliver the cash to a charity, and ask that a receipt be issued to the individuals from whom the funds were collected.

At other times, the shifting of receipts may be desired because one taxpayer is in a higher marginal income tax bracket than another. This makes the receipt more valuable in the hands of the taxpayer with the highest marginal income tax bracket.

Here are a few examples of problematic scenarios that charities may face:

Example 1:  A charity receives a gift from ABC corporation (a "C" corporation). The charity is asked to provide a gift receipt indicating the gift came from John Brown, an individual. Typically, this is the sole shareholder of the corporation.

     If the corporation has a loss for the year, no current tax benefit is available for charitable donations (deductions are limited to 10% of net income before considering charitable contributions). John Brown is in the 35% marginal income tax bracket, so if he could claim a deduction for a charitable contribution made by ABC, he would get a tax benefit of 35%.

Example 2:  A personal check from Sam Donor is given to the charity and the charity is asked to make the receipt out to Fred Taxpayer instead.

     If Sam Donor is in the 15% marginal income tax bracket and Fred Taxpayer is in the 35% bracket, a receipt for a charitable donation is obviously more valuable to Fred than to Sam.

Importance of the receipt. IRS regulations provide that contributors seeking a federal income tax charitable contribution deduction must produce, if asked, a written receipt from the charity if a single contribution’s value is $250 or more (Section 170(f)(8)).

The IRS can fine a charity that deliberately issues a false acknowledgment to a contributor. The fine for knowingly aiding or abetting the understatement of tax is up to $1,000 if the donor is an individual, and up to $10,000 if the donor is a corporation (Section 6701).

Is a receipt from a charity all the taxpayer needs for single gifts of $250 or more? It depends. For rather superficial audits of individual taxpayers, a receipt from a charity is often sufficient. However, for most audits of corporations, and for more detailed audits of individual taxpayers, the IRS will look for corroboration of a receipt with a taxpayer’s canceled check or an entry in the corporate books. In these instances, a receipt will not be sufficient. A payment made by one taxpayer with a receipt made out to another taxpayer may provide evidence for an attempt by the taxpayer to understate tax.

Identifying the donor. In U.S. tax law, the taxpayer (individual, corporation, trust, etc.) that makes a payment is generally the taxpayer entitled to an expense or charitable deduction.

  • If an individual pays a business expense, for example, the unreimbursed expense can only be claimed on an individual’s tax return. A deduction for the payment cannot be claimed on a corporate return, unless the expense is reimbursed by the corporation.
  • If a business expense is paid by one individual, there is no justification for a second individual to claim a business deduction. Simply because the second individual has possession of a receipt or other documentation of the expense paid by the first individual does not entitle the second person to a tax-deduction.
  • A business expense paid by a corporation cannot be deducted personally by an individual, even if the individual possesses the expense documentation, unless the individual reimburses the expense to the corporation.

Tax law does not provide that charitable deductions are based on who holds a charitable receipt (although tax law does require the donor to possess a charitable receipt for single gifts over $250). Rather, charitable deductions are generally available to the taxpayer making the donation.

In Haverly v. U.S. (7th Cir. 1975), the court held that the taxpayer must have income that matched the deduction. The application of this case would be particularly important when an individual is trying to claim a deduction for a gift made by a corporation, and the amount has not been taxed to the individual as a dividend or other distribution of income.

How to avoid aiding or abetting a taxpayer in understating tax. If a charity is unaware that a taxpayer is attempting to understate tax, is the charity guilty of aiding or abetting the understatement? Probably not. 

However, is "hear no evil, see no evil" an appropriate position for charities that desire to operate with the highest integrity? Again, probably not. It seems that integrity would require a charity to have a plausible explanation from a donor before issuing a receipt to any taxpayer other than the donor.

However, charities generally should not try to determine donor intent. It may not even be possible to determine the true intent of a donor. Even if a charity feels comfortable that a donor’s intent is pure, it is difficult for a ministry to say to the prospective donor, "The proposed receipting of this gift raises the question of tax fraud. Please provide sufficient details about your tax affairs to assist us in determining the absence of tax fraud."

Adopting a proactive policy. ECFA recommends the adoption of a gift receipting policy that includes how to handle requests for receipts to be issued to a taxpayer other than the donor. The policy should provide that receipts are issued to the taxpayer making the gift.

  • For a cash gift, the policy should provide that the person or entity named on the check (or the individual delivering the cash) should be the one to whom the receipt is addressed. 
  • The person or entity transferring ownership of non-cash assets to a ministry is the donor.

The following exceptions to this policy may be permitted:

  • If the donor documents the appropriateness of issuing a receipt to a taxpayer other than the donor, the charity may make an exception to the policy.
  • To facilitate the process of modest gifts, a charity also may make exceptions for small gifts where the risk of significant fraud is diminished.

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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