Gifts Designated for Scholarships

Designated contributions are those that are made to a church with the stipulation that they be used for a specified purpose. If the purpose is an approved project or program of the church, the designation will not affect the deductibility of the contribution. However, if a donor stipulates that a contribution be spent on a designated individual, no deduction ordinarily is allowed unless the church exercises full administrative control over the donated funds to ensure that they are being spent in furtherance of the church’s exempt purposes. Contributions to a church that designate an individual recipient can arise in several ways, such as those that designate a student as the intended recipient.

Many taxpayers have attempted to claim charitable contribution deductions for payments made to a church-operated private school (or to the church that operates the school) in which the taxpayer’s child is enrolled. The IRS has emphasized that a charitable contribution is a voluntary transfer of money or property that is made with no expectation of procuring a financial benefit commensurate with the amount of the transfer. Therefore, payments made by a taxpayer on behalf of a child attending a church-operated school are not deductible as contributions either to the school or to the church if the payments are earmarked in any way for the child.

The fact that payments are not earmarked for a particular child does not necessarily mean that they are deductible. The IRS has held that the deductibility of undesignated payments by a taxpayer to a private school in which his child is enrolled depends upon whether a reasonable person, taking all the facts and circumstances of the case in due account, would conclude that enrollment in the school was in no manner contingent upon making the payment, that the payment was not made pursuant to a plan (whether express or implied) to convert nondeductible tuition into charitable contributions, and that receipt of the benefit was not otherwise dependent upon the making of the payment.

In resolving this question, the IRS has stated that the presence of one or more of the following four factors creates a presumption that the payment is not a charitable contribution:

• the existence of a contract under which a taxpayer agrees to make a contribution and which contains provisions ensuring the admission of the taxpayer’s child
• a plan allowing taxpayers either to pay tuition or to make contributions in exchange for schooling
• the earmarking of a contribution for the direct benefit of a particular individual, or
• the otherwise unexplained denial of admission or readmission to a school of children of taxpayers who are financially able, but who do not contribute.

The IRS has observed that if none of these factors is determinative, a combination of several additional factors may indicate that a payment is not a charitable contribution. Such additional factors include but are not limited to the following: (1) the absence of a significant tuition charge; (2) substantial or unusual pressure to contribute applied to parents of children attending a school; (3) contribution appeals made as part of the admissions or enrollment process; (4) the absence of significant potential sources of revenue for operating the school other than contributions by parents of children attending the school; and (5) other factors suggesting that a contribution policy has been created as a means of avoiding the characterization of payments as tuition. If a combination of such factors is not present, payments by a parent will normally constitute deductible contributions, even if the actual cost of educating the child exceeds the amount of any tuition charged for the child’s education.