href="#ulink_1ea4910c-d397-59f0-8c9e-08bef38ad6c7">5 Thus, the income tax regulations (promulgated in amplification of the business expense deduction rules) state that a transfer is not a contribution when it is made “with a reasonable expectation of financial return commensurate with the amount of the donation.”6 Instead, this type of payment is a purchase (of a product and/or a service). Thus, the IRS states that a contribution is:
A voluntary transfer of money or property that is made with no expectation of procuring financial benefit commensurate with the amount of the transfer.7
The IRS follows another principle of law:
Where consideration in the form of substantial privileges or benefits is received in connection with payments by patrons of fund-raising activities, there is a presumption that the payments are not gifts.8
A corollary of these seemingly simple rules is that, as these guidelines reflect, a single transaction can be partially a gift and partially a purchase, so that when a charitable organization is the payee, only the gift portion is deductible.9
In an oft-quoted passage, the Supreme Court observed that a gift is a transfer motivated by “detached or disinterested generosity.”10 Along this same line, the Court referred to a gift as a transfer made “out of affection, respect, admiration, charity or like impulses.”11 A third element that is sometimes invoked in this context is donative intent.12 This component of the definition is inconsistently applied.13 It is the most problematic of the three, inasmuch as it is usually difficult to ascertain what was transpiring in the mind of a donor at the time of a gift (if, in fact, that is what the transaction was); some courts struggle in an effort to determine the subjective intent of a transferor.14 The other two factors focus on the external circumstances surrounding the transaction, with emphasis on whether the putative donor received anything of value as a consequence of the putative gift.15
In one donative-intent case, a partnership was formed to assist a religious center, which was deeply in debt, by borrowing funds and purchasing the center and then leasing it back. Subsequently, the partnership transferred the center to a church after the center defaulted on the lease; a court ruled that the transfer to the church did not give rise to a charitable deduction because the partners' intent was to generate funds to satisfy the mortgage, rather than to benefit the church.16 By contrast, a court held that donors of a 20 percent interest in a parcel of real estate to a church had the requisite donative intent, even though they agreed to purchase the property and lease it back to the church.17 Also, donors were found to have donative intent in connection with a contribution of a scenic easement over a portion of their residential estate, even though they pursued a reconveyance of the easement following disallowance of a significant portion of the charitable deduction.18
Some aspects of the state of the law on this point, as reflected in another view of the Supreme Court, are that a “payment of money [or transfer of property] generally cannot constitute a charitable contribution if the contributor expects a substantial benefit in return.”19 This observation was made in the context of an opinion concerning a charitable organization that raised funds for its programs by providing group life, health, accident, and disability insurance policies, underwritten by insurance companies, to its members. Because the members had favorable mortality and morbidity rates, experience rating resulted in substantially lower insurance costs than if the insurance were purchased individually. Because the insurance companies' costs of providing insurance to the group were uniformly lower than the annual premiums paid, the companies paid refunds of the excess (dividends) to the organization; the dividends were used for its charitable purposes. Critical to the organization's fundraising efforts was the fact that it required its members to assign it all dividends as a condition of participating in the insurance program. The organization advised its insured members that each member's share of the dividends, less its administrative costs, constituted a tax-deductible contribution.
The Supreme Court, however, disagreed with that conclusion. It found that none of the “donors” knew that they could have purchased comparable insurance for a lower cost; the Court thus assumed that the value of the insurance provided by the organization at least equaled the members' premium payments. The Court concluded that these individuals failed to demonstrate that they intentionally gave away more than they received. The Court wrote: “The sine qua non of a charitable contribution is a transfer of money or property without adequate consideration. The taxpayer, therefore, must at a minimum demonstrate that he [or she] purposefully contributed money or property in excess of the value of any benefit he [or she] received in return.”20 Thus, by comparing the cost of similar insurance policies, the Court reached the conclusion that the members had received full value for what they paid in the form of insurance premiums.
Essentially the same rule was subsequently articulated by the Court when it ruled that an exchange having an “inherently reciprocal nature” was not a gift and thus could not be a charitable gift, even though the recipient was a charity.21 In this case, the Court considered the character of payments to the Church of Scientology, which provides “auditing” sessions designed to increase members' spiritual awareness and training courses at which participants study the tenets of the faith and seek to attain the qualifications necessary to conduct auditing sessions. The church, following a “doctrine of exchange,” set forth schedules of mandatory fixed prices for auditing and training sessions, although the prices varied according to a session's length and level of sophistication.
The payors contended that the payments were charitable contributions. The Court disagreed, holding that the payments were made with an expectation of a quid pro quo in terms of goods or services, which are not deductible. The Court focused on the fact that the church established fixed prices for the auditing and training sessions, calibrated particular prices to sessions of particular lengths and sophistication levels, returned a refund if services went unperformed, distributed “account cards” for monitoring prepaid but as-yet-unclaimed services, and categorically barred the provision of free services.
Reviewing the legislative history of the charitable contribution deduction, the Court found that “Congress intended to differentiate between unrequited payments to qualified recipients and payments made to such recipients in return for goods or services. Only the former were deemed deductible.”22 In this case, charitable deductions were not allowed because the payments “were part of a quintessential quid pro quo exchange.”23 In so holding, the Court rejected the argument that payments to religious organizations should be given special preference in this regard.24 Several years before, the IRS had published its position on the point,
