Supporting Individual Missionaries through Religious Organizations
Individual taxpayers cannot take a charitable deduction for making a gift to an individual, even when channeled through a charitable institution, no matter how deserving of charity the recipient may be.
Dewey Diligence, a program officer at the Acme Community Foundation, was accustomed to having donor advisors call and request that contributions be made to churches and other religious institutions.
When Diana Donor called and asked him to send a check to an international campus ministry program for the benefit of a student named Mary Mission, however, Dewey paused. He knew that gifts to religious groups were generally charitable. He knew, too, that the Acme Community Foundation routinely made grants to individuals for scholarships and travel. But was this gift to a ministry program permissible? "I need to look into this a bit, Mrs. Donor," Dewey said. "I'll ring you back this afternoon."
"I hope you'll let me recommend the gift," said Diana. "Mary Mission is such a delightful young woman, and I'd so like to support her work over there."
Just after he got off the phone with Diana, Dewey got a call from Malcolm Moneybags, a community foundation board member as well as a donor advisor. "My son is planning to do some missionary work in the city this summer and of course, I want to be supportive," said Malcolm. "The group that organizes the project wants him to raise funds to cover his expenses," Malcolm continued. "Could you send them $1,000?"
"I'm not sure," Dewey replied, "but I'll let you know as soon as I can."
What should Dewey do?
The answer comes from some general principles of charitable giving law as well as specific guidance the IRS has provided on the practice of making gifts to religious organizations for the benefit of designated individuals. Dewey will need to understand exactly what the various ministry programs have promised Diana Donor and Malcolm Moneybags regarding how contributed funds will be spent, and he will need to determine what relationship, if any, there is between the Donor family and Mary Mission.
Gifts to religious organizations generally qualify for charitable deductions (indeed, the bulk of Americans' charitable dollars go to religious institutions). But when religious organizations or their representatives solicit funds with the promise that donations will be used for the support of specific, named individuals, a practice the IRS calls "deputized fundraising,” the deductibility of contributions gets murky.
After all, individual taxpayers cannot take a charitable deduction for making a gift to an individual, no matter how deserving of charity the recipient may be. The result does not change even if the gift is channeled through a charitable institution, so long as the gift is earmarked for a particular person ("earmarking" refers to any oral or written understanding that the money will be used in a specific way).
IRS Litmus Tests
In analyzing deputized fundraising situations, the IRS applies two tests to determine whether a gift is a contribution to a religious organization that qualifies for a charitable tax deduction or a payment to the designated individual that does not qualify as tax deductible.
The first test is whether the donee organization has discretion and control over the contribution. Do the terms of the gift require the organization to apply the donated funds to the named individual's expenses or does the charity have the ability to spend the money to support other individuals or programs? If the charity has the option of applying the donated funds to purposes other than the support of the designated individual, it will likely be seen as having discretion and control over the funds, a result that supports the charitable nature of the contribution.
The second test the IRS applies to determine whether a contribution is a charitable donation or a nondeductible payment is whether the donor intended to benefit the charitable organization or the designated individual. If the terms of the gift suggest that the donor desired to support the general activities of the group rather than underwrite the specific activities of the designated individual, the gift may qualify as a charitable one.
In No Uncertain Terms
Determining the terms of the gift for the purposes of those IRS tests can be a challenge. A written agreement between the donor and the recipient organization provides the clearest evidence of how each side understands its rights and responsibilities, but in many cases, there will be no such document. The IRS or other interested party might then look at the literature that the soliciting organization distributes to see what representations it contains about how donated funds will be used. This may be fundraising materials or, according to an FY 1999 IRS Continuing Professional Education article, a receipt that is given to contributors. "To help clarify the record of the true intentions of a donor at the time of a contribution," the article notes, "the Service has suggested that the following language be used in a receipt for the contribution:
'This contribution is made with the understanding that the donee organization has complete control and administration over the use of the donated funds.'"
A receipt containing such language could presumably be used to show that the donor did not earmark the contribution for the benefit of a particular individual and that the donation should be treated as a tax-deductible contribution to the religious organization.
Court and IRS cases in this area have often involved family members seeking to provide funds to cover relatives' living expenses while the relatives are doing missionary work. For community foundations and other public charities considering a request for support, a family tie can be an additional complication. To the extent that a person who is a community foundation "insider" (a major contributor or someone, such as a trustee, who has major influence over the community foundation's operations) reaps a benefit from the foundation's expenditure, the grant may constitute an excess benefit transaction and subject the community foundation and, in egregious cases, the community foundation's board, to fines under the intermediate sanctions rules.
In the case of a grant from a donor-advised fund where the targeted recipient is related to the fund's advisors (parents, grandparents, siblings, children, grandchildren, great-grandchildren, and all of their respective spouses), there is a distinct possibility that the IRS would argue that the grant produced a prohibited benefit that was more than incidental. While there is no official guidance yet on this point, it would be prudent to err on the side of caution and refrain from making a grant under these circumstances.
What did Dewey do?
Dewey called Diana Donor later in the day. The solicitor from the campus ministry group had not given her any literature, but she did have an Internet address and contact number for the national office of the group. Dewey looked at the website and spoke with the group's international ministry coordinator. He noted a number of statements on the website that indicated that donors could recommend that their funds be used for a particular project but that the organization retained final control over the application of funds. The coordinator in the national office noted that it was likely that Diana Donor's funds would support Mary Mission's work, but the organization would have to assess the needs of all of its current projects before disbursing any funds.
"One more question, Mrs. Donor," Dewey said when he called Diana back again. "Are you related to Mary Mission?"
"Absolutely not," she answered, "I never laid eyes on her before she spoke at church last week."
"Great," said Dewey, "I'll send out the check this week." Dewey made a note for his files about the absence of any family or other tie between Diana Donor and Mary Mission. He also made sure the letter accompanying the community foundation's check referenced his understanding that the recipient organization had discretion and control over the funds.
Dewey now turned to Malcolm Moneybags' request. Like Diana, Malcolm had no written materials. The website of the church group organizing the city missionary work described how students were responsible for raising their own support for such work. Students were supposed to develop a "giving circle" consisting of relatives, friends and churches that would provide spiritual and financial support. When Dewey called the national office of the group, the coordinator told him it was "absolutely guaranteed" that Malcolm's gift would underwrite his son's efforts.
"We just turn whatever money the kids raise right over to the project," said the coordinator. "If we tried to use those funds for something else, we'd never hear the end of it!"
"Mr. Moneybags," said Dewey nervously when he spoke with him later that day, "I'm a little worried about the organization that's coordinating your son's project. They don't seem to be following the proper procedures for raising and distributing funds like this."
"Hmm," said Malcolm, "I still want to help even if I can't direct it to Malcolm Junior's project. Would it be okay to make a general support grant?"
"Sure," replied Dewey, "and I'll be sure to secure documentation that makes it clear that these funds aren't meant for your son." Although Dewey was not enthusiastic about making a grant to the group, he was confident that providing general support would not jeopardize the Acme Community Foundation or Malcolm Moneybags.
As Dewey Diligence found, handling requests for support of missionary work can take some extra attention. But community foundation personnel who work to ensure those grants are made properly can help promote the spiritual side of their donor advisors' charitable programs.
