Gifts Designated to Benevolence

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 needy person as the intended recipient.

Many churches have established benevolence funds to assist needy persons. Typical beneficiaries of such funds include the unemployed, persons with a catastrophic illness, accident victims, and the aged. There is no question that churches may establish benevolence funds. This is both a religious and a charitable function. But, the tax consequences of such funds depend on the circumstances. Consider the following three scenarios.

Contributions made directly to individuals

Contributions made directly to individuals are not deductible, no matter how needy the recipient may be. For example, the courts have repeatedly denied deductions for contributions made directly to relatives, ministers, students, military personnel, and needy persons. The reason is that a charitable contribution must be "to or for the use of " a qualified charitable organization. Gifts to individuals, no matter how needy, are not deductible as charitable contributions. They are perfectly legal, just not deductible.

Undesignated contributions made directly to a church benevolence fund

Contributions made directly to a church benevolence fund, and that do not designate a recipient or beneficiary, can be treated as charitable contributions by the church and donor. To illustrate, assume that a church establishes a benevolence fund, and that a church member contributes $250 to the fund but does not designate the intended recipient. Such a contribution ordinarily can be treated as a charitable contribution since it was made "to or for the use of" the church.

Contributions designating a specific beneficiary

The most difficult kind of benevolence fund contribution to evaluate (but by far the most common) is a contribution that designates a desired recipient. The designation may be written on the face of the check, on an envelope accompanying the contribution, in a letter, or it may be oral. To illustrate, a member contributes a check in the amount of $500 to a church’s benevolence fund, and inserts a note requesting that a designated individual receive the proceeds. Can such a contribution be treated as a charitable contribution by the church and donor? Ordinarily, such designated contributions to a benevolence fund are not deductible, since the intent of the donor is to make a transfer of funds directly to a particular individual rather than to a charitable organization. This does not make them illegal; it simply makes them non-deductible by the donor. On the other hand, the recipient does not have to report the transfer as taxable income since it is excludable as a gift. Further, the church ordinarily would hold such funds as the trustee of an implied trust, and accordingly could not divert them to any other purpose or use.

The IRS has stated, "If contributions to the fund are earmarked by the donor for a particular individual, they are treated, in effect, as being gifts to the designated individual and are not deductible. However, a deduction will be allowable where it is established that a gift is intended by a donor for the use of the organization and not as a gift to an individual. The test in each case is whether the organization has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes."

This test suggests that in some cases it may be possible for a donor to deduct a designated contribution to a church benevolence fund if the circumstances clearly demonstrate that the donor’s designation was a mere suggestion or recommendation and that the donor intended the contribution to be "to or for the use of" the church and subject to its control rather than to the designated individual. The IRS has occasionally ruled that mere "expressions of interest" accompanying an otherwise undesignated gift do not prevent it from being treated as a charitable contribution. On the other hand, if there is a "commitment or understanding" that the church will distribute a donation to a person designated by the donor, then the donation cannot be treated as a charitable contribution since the church lacks sufficient control over the funds.

In summary, there is support for the conclusion that contributions to a church benevolence fund can be deductible even if the donor mentions a beneficiary, if the facts demonstrate that

• The donor’s recommendation is advisory only
• The church retains full control of the donated funds, and discretion as to their use, and
• The donor understands that his or her recommendation is advisory only and that the church retains full control over the donated funds, including the authority to accept or reject the donor’s recommendations

How can these facts be established? One possible way would be for a church to adopt a benevolence fund policy making all distributions from a benevolence fund subject to the unrestricted control and discretion of the church board, and to communicate such a policy to all prospective donors. It can be argued that donors willing to make a designated contribution to a church benevolence fund under these conditions are manifesting an intent to make a contribution to the church rather than to the designated individual. Churches adopting such a policy should make copies available to any person wanting to make a designated contribution to the church benevolence fund. There is no guaranty that such a policy will render a designated contribution deductible. Obviously, a church can administer a program in such a way as to jeopardize the deductibility of contributions. For example, a church can adopt a benevolence fund policy but honor every recommendation made by donors. Clearly, if this practice were made known to the IRS, no contribution would be deductible since the church’s alleged control over the donated funds does not in fact exist.

Special appeals

There is one other possible exception to the general rule of non-deductibility of designated contributions to church benevolence funds. Many churches have made special appeals to raise funds for a particular benevolence need. For example, an offering is collected to assist a family with a child who has incurred substantial medical expenses. Are contributions made to such an offering tax-deductible? Unfortunately, neither the IRS nor any federal court has addressed this issue directly. However, it is possible that such contributions would be tax-deductible if the following conditions are met: (1) the offering was preauthorized by the church board; (2) the recipient (or his or her family) is financially needy, and the uninsured medical expenses are substantial; (3) the offering is used exclusively to pay a portion of the medical expenses; (4) immediate family members are not the primary contributors; and (5) no more than one or two such offerings are collected for the same individual. Even if these conditions are satisfied, treating the donations as charitable contributions represents an aggressive position that is subject to challenge in an audit.