This Insights article was contributed by Sandy Crumrine, CPA, CIA, an audit partner at Earney & Company, L.L.P.
Every year, our not-for-profit audit clients raise questions about fund-raising practices and their reporting obligations on the annual IRS form 990 – Return of Organization Exempt from Income Tax. These practices involve the deductibility, as charitable contributions, of payments in connection with admission to - or other participation - in fundraising events, such as charity galas, dinners, shows and the ever-popular golf outings.
The IRS has expressed concerns about charity-event literature leading taxpayers to conclude that a payment to attend such an event is fully deductible for tax purposes, when in fact it is a purchase and not a contribution. Of more importance, the IRS is concerned that the fair market value of the “return benefit” is not being properly reported to event participants.
Code Section 170 allows for a charitable contribution in cases where there is a gift to or for the use of a charitable organization. By definition, a gift is a gratuitous transfer without an anticipation of return benefit, other than assisting the organization in carrying out its mission. As a general rule, where a transaction involving a payment is in the form of a purchase of an item of value - whether it be tangible, such as merchandise, or intangible, such as the right to attend a charity event - the IRS presumes that no gift has been made for charitable contribution purposes. Instead, the payment in such case is the purchase price and not a gift.
In showing a gift has been made in relation to tickets or other form of admission purchased for a charity event, the purchaser must have proof that the payment, or a portion of the payment, represents the excess of the total amount paid over the fair market value of the benefit received in exchange. That proof needs to come from the charity for which the event was organized, and this is where charitable organizations may fall short.
Compliance with IRS Code Section 170 requires that charitable organizations make a determination of the value of the return benefit in relation to the price of a fundraising event’s admission and clearly state those respective amounts in any event-related literature.
For example, assume Charity XYZ decides to hold a fundraising dinner in support of its mission. Admission tickets are sold to the general public for $150 each, and the per-person cost of the dinner - based on the fair market value of the food and service - is $75. Charity XYZ has an obligation to notify ticket purchasers that $75 of their ticket price ($150 less the $75 value of the meal) is a qualified charitable deduction.
The mere fact that tickets are not used does not entitle the purchaser to any greater charitable contribution than would otherwise be allowable. The test of deductibility is not whether the right to admission is exercised but whether the right was accepted or rejected by the taxpayer. If a person desires to support a charity event, but does not intend to use the tickets or exercise the other privileges being extended with the event, they should make an outright gift, in which case they would not accept the tickets and receive a full deduction for any payment made.
In conclusion, it is important that charitable organizations very clearly enumerate and communicate the return benefit to event patrons in instances where there is a combination donation-purchase with the same event. The respective donation-purchase amounts should be specified in event related literature. The IRS has made it very clear in recent rulings and special emphasis projects that this is currently an area of interest.
Chad Wouters, CPA joined Earney & Company in December 2006 and became the tax partner in November 2013. With an emphasis on strategy and planning, Chad works with his clients all year to ensure the most efficient tax strategies are put into place. Earney & Company, L.L.P. is a CPA firm that handles tax compliance, consulting and planning as well as audit and other assurance services. For more information please visit www.earneynet.com or call (910) 256-9995. Chad can also be reached at [email protected].
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