observing that this is a “particularly confused issue of federal taxation.”49 Not content with that, this appellate court went on to portray the existing Internal Revenue Code structure on this subject as being “cryptic,” with the indictment that “neither Congress nor the courts have offered any very satisfactory definition” of the terms gift or contribution.50
Charity's Standpoint. The foregoing analysis reviewed the treatment of a payment as a gift from the standpoint of the (ostensible) contributor. On occasion, however, the issue can arise from the perspective of the recipient. In one such instance, a court ruled that contributions made by members of a church congregation to its pastor on “special occasions” were taxable income, rather than tax-free gifts, to the pastor and his spouse.51 Cash gifts were collected in the sanctuary; the funds were not recorded in the church's records. The court observed that the cash transfers “were facilitated by and through church personnel, and would not have [arisen] absent the . . . [pastor's and his spouse's] relationship with the church.”52 Rejecting the contention that the transfers were merely gifts from individuals, the court found that the transfers were “initiated, sponsored, collected and distributed by the congregation as an aggregate body”; the funds were held to be “processed” through the congregation.53 Concluded the court: “The transfers to the [pastor and his spouse] were not detached or disinterested in the same way as an individual who chooses to send the pastor and his wife ten dollars on a birthday or during the Christmas season.”54
This characterization of contributions poses problems for churches, schools, and other such organizations when the constituency, or a portion of it, wants to provide assistance to an individual (member of the clergy, teacher, coach, and the like) with some additional financial support in the form of “gifts.” One can still make gifts to others without the funds being income to the recipient. When the effort is orchestrated through the offices of the organization, however, at some point through some alchemy the funds become transformed into income taxable to the organization.
As to the tax treatment, contributions to a church or similar entity used for salaries are deductible by the donors as charitable gifts, and, of course, the salaries are taxable to those who receive them. Gifts made individually are not deductible by the contributor and are not taxable income to the donee. It is not purely idle speculation to think that some members of the congregation of the church in this case deducted their special-occasion gifts.55
(b) Availability of Charitable Deduction
The federal tax law provides for an income tax charitable contribution deduction for “any charitable contribution” made by a donor to or for the use of56 a charitable organization.57 Amounts paid to a charitable entity for the benefit of a specified individual are generally not deductible as charitable contributions.58 Charitable deductions are also available in the gift tax context59 and the estate tax context.60
In a sense, every charitable contribution made by a donor who itemizes tax deductions gives rise to a quid pro quo because of the economic value (reduction in tax owed) of the resulting charitable contribution deduction. Yet, the jurisprudence is clear that the tax benefit resulting from a federal or state charitable deduction is not regarded as a type of return benefit that negates donative intent, thus reducing or eliminating the deduction.61 Similarly, when the contribution is made with appreciated property, the value of the deduction has not been treated as an item of gross income in the form of an amount realized on the transfer.62
Thus, generally, a government-provided tax benefit resulting from a charitable gift is treated for federal tax purposes as a reduction or potential reduction in tax liability. As such, it is reflected in a reduced deduction for the payment of state or local tax,63 not as consideration that might constitute a quid pro quo for purposes of the federal income tax charitable contribution deduction or an amount realized includible in income.64
The IRS's Office of Chief Counsel concluded that there is no reason, in this regard, given this body of law, to distinguish between the value of a state tax deduction and the value of a state tax credit, including a transferable state tax credit. Thus, it was held that donors may take a federal income tax charitable deduction for the full amount of their charitable gifts of money or appreciated property when they receive a state tax credit.65
(c) Quid Pro Quo Situations
As noted, when a transaction involves consideration, so that the erstwhile donor receives something of value approximate to the amount transferred, there is no gift. This is because the person received a quid pro quo in exchange for the transfer, and thus there is no true gift at all. (There are several sets of circumstances in which a transfer is partially a gift and partially a sale or exchange;66 these circumstances are discussed elsewhere.67)
In one case, a manufacturer of sewing machines sold the machines on a discounted basis (bargain sales) to schools and other charitable organizations. The issue was whether the company was entitled to a charitable deduction for the gift element in the transactions. The court formulated the appropriate test as follows:
[I]f the benefits received, or expected to be received, are substantial, and meaning by that, benefits greater than those that inure to the general public from transfers for charitable purposes (which benefits are merely incidental to the transfer), then in such case we feel the transferor has received, or expects to receive, a quid pro quo sufficient to remove the transfer from the realm of deductibility [as a charitable gift].68
In application of this standard, the court differentiated between the discounts allowed to schools and those for other charities. As to the former, the court concluded that the discounts were offered “for the predominant purpose of encouraging those institutions to interest and train young women in the art of machine sewing; thereby enlarging the future potential market by developing prospective purchasers of home sewing machines and, more particularly [the company's] machines—the brand on which the future buyers learned to sew.”69 Thus, these discounts were held not to be of a charitable nature, with the court convinced that the company's “predominant reason for granting such discounts was other than charitable” in that it “expected a return in the nature of future increased sales.”70 By contrast, as to the bargain sales
