Navigating Gray Areas

Trusted ministries recognize that some potential gift transactions are fraught with significant complexities and must be treated with appropriate caution.

 

by Dan Busby

 

When I am trying to connect with ministry leaders, I often tell them about my father, who pastored for 28 years. The audience will typically nod politely. Then, I tell them—that he pastored 28 years after his 65th birthday—now I have their attention. He preached a total of 73 years, planted churches across the United States, preached in some of the largest campmeetings of the day, was a denominational leader, and finished his career pastoring one of the churches he helped found 60 years earlier.

I told you that to tell you this: Dad had seen about everything. So when a family in the community approached him with a certain proposition, Dad was not flummoxed. There had been a death in a family. Even though they were not church attenders, they wanted to hold the funeral in the church where dad pastored. That would not have been a problem. But, as often happens, there was a gray area because the offer came with a twist. The family wanted the church to pay the funeral expenses of $8,000 in exchange for a gift of $10,000. At their tax rate, they would recoup about $4,000 in tax savings by taking a charitable deduction for $10,000, thus the funeral would only cost them $6,000. The church would come out ahead $2,000 ($10,000 minus $8,000). Win-win all the way around—if one ignores all the things about it that were illegal. Even though Dad wasn’t a tax expert, he knew the proposition didn’t pass the smell test. The family, their $10,000, and the funeral went down the street to another venue.

Then there was the telephone call I received from a church administrator. A caller offered a gift of $20,000 to the church if they would transfer $15,000 to a certain orphanage in Mexico. The church had never heard of the orphanage. Since they were not doing any missions work in that part of Mexico, the church did not have an effective way to ensure that the funds would be used for the intended purpose. When the church administrator turned down the gift, the caller said, “No problem. I will just keep shopping the gift until I find a church that will seize on the opportunity to make $5,000 and process the gift.” “Shop the gift” and “process the gift”—two gray-area warning signs!

Most charitable gifts—like gifts in the form of cash, check, or digital—received without any designations or restrictions are easy to administer. These gifts may be used for any purpose at any time, consistent with the ministry’s tax-exempt purposes.

When givers restrict the use of gifts, the complexity of the gift transaction becomes more challenging—in some instances, dramatically so. If restricted gifts are in a form other than cash, the complexity of handling the gifts can escalate even further.

Some of these gifts require special treatment; some should not even be accepted. Providing detailed information on these issues is beyond the scope of this book (and are covered in annual editions of the Zondervan Church and Nonprofit Tax & Financial Guide.[1]

Seven of the most sensitive issues are highlighted here:

  1. Gifts to and for individuals. There are several types of gifts in this category that can be problematic:
A giver's request to
"run money through"
the ministry for the
purpose of obtaining
a chritable tax deduction
is not appropriate. 
  • Adoption gifts. Gifts to a ministry to fund adoptions—without restricting the gifts to an adopting family—are generally eligible for a charitable gift deduction. A gift restricted for a specific adopting family crosses the line, and the gift does not qualify for a charitable gift deduction.
  • Missionary gifts. Gifts to a ministry to provide funding for mission work without restricting the gift to a particular mission’s participant—short-term or long-term—are generally eligible for a gift deduction. Gifts restricted for a specific participant do not qualify for a charitable gift deduction.
  • Benevolence gifts. Gifts to a ministry to provide benevolence funding without restricting the gifts to a particular benevolent recipient are generally tax-deductible. Gifts restricted for particular benevolent recipients do not qualify for a charitable gift deduction.

Is it possible for a giver to preference gifts (indicate a desire) for the support of an individual (adoptive family, mission participant, or benevolent recipient) without restricting gifts? Yes. And preferenced gifts generally qualify for charitable gift deductions.

A gift of the right
to use property or
the contribution of
services do not
provide a charitable
tax deduction
to the giver.
  1. Gifts with strings attached. A gift must generally be complete and irrevocable to qualify for a charitable deduction. There is usually no charitable deduction if the giver leaves “strings attached” that can be pulled later to bring the gift back to the giver or remove it from the control of the ministry.
  2. Gifts of services or the rent-free use of property. Although given in a spirit of generosity, the gift of the right to use property or the contribution of services do not provide a charitable tax deduction to the giver. A ministry may graciously express appreciation, but a charitable gift acknowledgement should never be provided.

Example: Mary is a web designer, operating as a self-proprietor. She volunteers to develop a sophisticated website for a ministry on a pro bono basis. When the work is completed, she documents that her time and out-of-pocket costs on the project have a value of $25,000. Mary asks the ministry for a charitable gift acknowledgment reflecting her gift of $25,000. If Mary claims a charitable deduction on her Form 1040, she has claimed a deduction to which she is not entitled. Plus, the ministry has issued a charitable gift acknowledgment that is not in compliance with legal requirements. If Mary had out-of-pocket expenses to enable her to develop the website, these expenses may qualify for a charitable deduction (and a charitable gift acknowledgment). However, the value of Mary’s services do not qualify for a gift deduction or a gift acknowledgment.
 

If a U.S. minisry has
no practical way to
provide due diligence
in relation to a gift
to a foreign organization,
the gift generally should
not be accepted by the charity.
  1. Gifts for foreign organizations. It may be inappropriate to accept gifts restricted for a foreign charity. For example, if a U.S. ministry has no effective way to provide due diligence in relation to a gift to a foreign organization, the gift generally should not be accepted by the U.S. charity.
  2. Receipting a taxpayer other than the giver. It is rarely appropriate to issue a gift receipt to a taxpayer other than the one making the gift. Issuing a gift acknowledgment to someone or an entity other than the one making the gift may provide the basis for inappropriately claiming a charitable gift.

Example: A ministry receives a check, and the check has the name of ABC Building Co., Inc. imprinted in the upper left-hand corner of the check—documenting that the gift is from ABC Building Co., Inc. Bill Brown, the president of ABC Building Co., Inc. requests that the gift acknowledgment be made out to him personally. The ministry should provide a gift acknowledge­ment for ABC Building Co., Inc. because the gift came from the corporation. In some situations, the corporation might not be able to obtain a tax deduction benefit from the gift, at least in the current year, but Mr. Brown could benefit from being able to claim a current charitable gift deduction. In this case, if the ministry provided the gift acknowledgment to Mr. Brown instead of the corporation, the ministry would be helping Mr. Brown improperly claim a tax deduction—this is not tax avoidance; this is tax evasion.
 

  1. Quid pro quo gifts. When a giver receives goods or services of value approximate to the amount transferred to a ministry, there is no charitable gift. This is because the person received goods or services (a “quid pro quo”) in exchange for the transfer. If the payment to a ministry exceeds the approximate value of goods or services provided to the giver, the difference may qualify as a charitable gift.
It is generally the
responsibility of a giver
to value gifts-in-kind for
the purpose of claiming
carotable deductions.

Federal law requires a ministry to provide an acknowledgment for certain quid pro quo transactions, including specific information about the transaction. Without the appropriate wording, a giver may be denied a charitable gift deduction.

  1. Gifts-in-kind. It is generally the responsibility of the giver to value gifts-in-kind for the purpose of claiming charitable deductions. However, givers often ask ministries to place a value on the charitable gift acknowledgment—an invitation to the ministry to compromise its integrity.

Conversely, it is the responsibility of the ministry to value gifts-in-kind for accounting purposes. While guidelines are often vague in this area, ministries are generally well-served to use conservative accounting valuations for gifts-in-kind.

For details on the proper handling of gifts and gift acknowledgments, see The Guide to Charitable Giving for Churches and Ministries by ECFAPress.

Follow these rules for gift acceptance and gift acknowledgments:

  • Gift acceptance. Be sure charitable gifts accepted by the ministry truly have a charitable purpose. A giver’s request to “run money through” the ministry for the purpose of obtaining a charitable tax deduction is rarely appropriate. For some potential gifts, it may be best to say, “No, thank you.”
  • Charitable gift acknowledgments. Be sure charitable gifts acknowledgements say what is required and not more than is appropriate. An inappropriately prepared gift acknowledgment may provide a giver license to try to claim an excessive or improper charitable gift deduction or cost the giver the entire deduction.

Giving the world the right impression of God includes navigating gray areas in handling charitable contributions.

 

  Questions   for reflection

 

  1. How discerning is your ministry in handling complex or troublesome gift transactions?
  2. Does the ministry have qualified advisors, internal or external or both, who provide sound advice about potential gift transactions with “gray areas”?
  3. Is your ministry appropriately cautious in considering gift transactions that could generate a lack of trust for the ministry?

 

 

[1] Busby, Martin, and Van Drunen, Church and Nonprofit Tax & Financial Guide (Grand Rapids, Mich.: Zondervan, 2015), 148–49.

 

From TRUST: The Firm Foundation for Kingdom Fruitfulness, ECFAPress, 2015, www.ECFA.org/KnowledgeCenter.


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.

Navigation


Follow @ecfa