Donors Can Lose Their Deductions

Attorney Erik Dryburgh devotes a portion of his practice to “extricating charities from gifts that aren’t working.” Donors have been known to make all sorts of “unique” gifts.

Dryburgh, of the law firm Adler & Colvin in San Francisco, Calif., cited examples of gifts gone awry during his presentation at the National Conference on Philanthropic Planning, held in San Antonio, Texas. Donors have been known to:

• Give a parcel of land, but retain the mineral rights. This is considered a gift of a partial interest and is non-deductible.
• Make a gift but maintain control over the purpose of the gift. Without relinquishing control, the gift is incomplete and is non-deductible.
• Donate a patent with the condition that a particular faculty member remains on the staff. This is a contingent gift and is non-deductible.
• Earmark a gift for a particular person. The Internal Revenue Service (IRS) treats this as a gift to that person and considers it non-deductible.

Partial interest, incomplete, contingent and gifts to a particular person are all issues that can easily haunt donors when seeking to claim their deduction. “Donors are always trying to control this stuff,” Dryburgh said, adding that their lawyers might not understand the applicable rules and regulations well enough to keep the clients out of trouble. The basic rule to follow is to ensure that a donor conveys the entire interest in the gift to the charity, he said.

Another area of concern for donors, Dryburgh explained, occurs when gifts are appraised, especially when certain restrictions can impact the valuation. For example, a donor who gives real estate to a charity but requires the charity to use the land for agricultural purposes when there is a “higher and better” use available might face a reduced deduction. Although appraisers are required to describe any restrictions placed on the gift and the impact on the valuation, Dryburgh said he has never seen this addressed in an appraisal.

To avoid problems, charities should help donors understand their administrative policies and procedures and ensure that gifts are consistent with the charity’s mission and fiduciary responsibilities.

Gift terms should also be fully documented in a “gift instrument” that spells out in writing any purpose or spending restrictions. “Not surprisingly,” he said, “it can be very difficult to determine the terms of a gift if there is no clear gift instrument.”

A charity must accurately describe the property received when it issues a receipt. If a donor receives any “return benefits,” the charity must also describe the goods or services provided, a good faith estimate of their value, and disclose to the donor that the deduction is limited to the value contributed over the value of the goods and services provided.

Even naming opportunities carry a risk, Dryburgh said. Charities should consider adding provisions to gift policies that contain an “un-naming” provision in case the person honored becomes embroiled in an untoward event.

Finally, donors can release or modify restrictions if they become unworkable or impractical. If the donor is deceased, however, release of restrictions could likely require court action.