The IRS also ruled that these directed rebates are deductible charitable gifts.213
In connection with another variation of these plans, the IRS ruled that an individual who purchases scrip from a charitable organization and elects to allow the charity to retain an amount of money in the nature of a rebate has made a charitable contribution of that amount. The organization purchases scrip at a discount and sells it at face value to individuals. The purchasers have the option of receiving in cash a portion of the difference between the face value of the scrip and the charity's cost for it. An individual may also elect to allow the charity to retain this amount.214
(j) Dividends Paid to Charitable Organizations
When a for-profit corporation transfers, without consideration, money or property to a charitable organization that is its sole shareholder, the transfer is treated for federal tax purposes as a distribution constituting a dividend215 and not as a charitable contribution.216
The reasoning underlying this rule of law was articulated by a federal court of appeals in 1967.217 The court observed that (1) the rationale of the unrelated business income rules is to treat, for tax purposes, tax-exempt organizations with unrelated business income the same as for-profit organizations;218 (2) to allow a subsidiary of an exempt organization a charitable deduction for amounts distributed to its exempt parent would permit the exempt organization to receive a greater return on its investment in its unrelated business (conducted indirectly by means of the subsidiary) than a nonexempt organization; and (3) it is from this competitive advantage that Congress intended to protect competing for-profit businesses not linked to an exempt organization by taxing unrelated business income of exempt organizations and by limiting an exempt organization's charitable contribution deduction from unrelated business income to grants made to other exempt organizations.219 This appellate court concluded that an ostensible contribution made by a for-profit subsidiary to its exempt parent is not a contribution considered to be made to another exempt organization, and therefore the benefits of the charitable deduction are not available to it for property transfers of this nature.220
Dividend treatment in this context can arise even when the charitable organization receiving a payment from a for-profit corporation is not a stockholder. In one case, a for-profit corporation, organized and operated for the purpose of benefiting a university, distributed funds to the university out of its earnings and profits. The university was not a stockholder of the corporation and did not exercise any control over it. Nonetheless, noting that the profits of the corporation were distributed only to the university, a court held that the university was a beneficial owner of the corporation and applied the dividend treatment rationale accordingly.221
(k) Requirement of Completion
Explicit and implicit in the foregoing discussion is the concept that, to constitute a gift, the transaction must be completed. Thus, to make a charitable gift, the donor must part with all right, title, and interest in the donated property.222
Two situations nicely illustrate the point. A court held that a bargain sale223 of real estate to a charity, in a transaction that used a contract for deed, gave rise to a charitable deduction in the year the contract was entered into, because the charity essentially received equitable title to the property.224 In 1994, a married couple signed a contract for sale of real property to a church. The purchase price was to be paid in installments, beginning January 1, 1995. Basically, a contract for deed is an arrangement under which, once a down payment is made, the buyer becomes entitled to immediate possession of the property. Legal title, however, remains in the seller until the purchase price is paid in full. In this case, the charity also agreed to insure the property, keep it in good repair and condition, and pay property taxes. The charity was prohibited from assigning, selling, pledging, or mortgaging the property without the donors' consent. Legal title was conveyed to the charity at the end of 1997.
The IRS did not contest the value of the property used to calculate the charitable deduction.225 The charity was a qualified charitable donee;226 the IRS conceded that the donors had the requisite charitable intent.227 The sole issue before the court was whether the donors' entry into the contract for deed effected a completed gift of the property during 1994. Framing the issue this way, the court had to determine (1) whether the interest conveyed was sufficient to constitute a completed gift, and (2) when the sale and gift were completed. The IRS took the position that this type of contract did not give rise to a completed gift at the time it was entered into.
State law controls the determination of the nature of the property interest conveyed by one party to another. This law usually is found in pronouncements by the state's highest court. The court in this case, following this analysis, concluded that the purchaser under a contract for deed becomes the equitable owner of the property.
The question of whether a sale of property is complete for tax purposes is one of fact, which is resolved by an examination of all the facts and circumstances. Essentially, the matter comes down to a consideration of when the “benefits and burdens” of ownership shifted. In the case of real property, a sale generally is considered to have occurred at the earlier of the transfer of legal title or the practical assumption of these benefits and burdens.
The court wrote: “A closed transaction for Federal tax purposes results from a contract of sale which is absolute and unconditional on the part of the seller to deliver to the buyer a deed upon payment of the consideration and by which the purchaser secures immediate possession and exercises all the rights of ownership.”228 Having written that, the court noted that there can be a delay in the delivery of the deed and that payment of the purchase price may be deferred by installment payments. Ownership of property, observed the court, amounts to a “bundle of rights with respect to the property.”229
In the case, the court sided with the donors. It concluded that the “bundle of rights that the [charity] received is essentially the same bundle of rights that would have been received had the church obtained legal title to the property and granted a mortgage back” to the donors.230 The gift was determined to have been made in 1994, not 1997.
The other situation concerned contributions to a donor-advised fund maintained by a charitable organization on its website.231 Donors are informed that contributions to the donor-advised fund are unconditional and irrevocable. They must affirmatively acknowledge that fact by clicking on a specific field. They are told that ultimate discretion over transfers out of the donor-advised fund lies with
