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DONOR RESTRICTIONS:
WHAT WILL THEY THINK OF NEXT?

BY Erik Dryburgh

Since the beginning of charitable giving, donors have imposed restrictions on a charity’s use of their gifts.  These restrictions often fall into several categories:

  • purpose of the gift
  • amount of the gift the charity can use (e.g., an endowment)
  • investment or administration of the gift by the charity
  • type of “benefits” the donor will receive in exchange for the gift 

While many restrictions are permitted, an advisor must be careful. Too many restrictions can negatively impact a donor’s contribution deduction or create an unworkable gift from the charity’s perspective. This article focuses on six types of restrictions that can pose a problem for the donor.

  1. Partial interest:  A gift of a “partial interest” in an asset (i.e., something less than the entire “bundle of sticks” comprising the asset) is generally non-deductible, unless it is within one of the statutory exceptions – for example, an undivided interest in the entire asset, or a remainder interest in the form of a charitable remainder trust or pooled income fund. A gift of a partial interest can result in the donor losing the charitable contribution deduction for gift tax purposes as well as for income tax purposes.
  1. Incomplete gift:  While purpose restrictions may be imposed at the time the gift is made, a donor who retains continuing authority to change the purpose of the contribution may have made an incomplete gift due to his or her retention of the power to direct the disposition or enjoyment of the property (see Pauley, 459 F.2d 624 (1972)).
  1. Condition subsequent:  If the donor conditions the gift so that it can be “defeated” upon some subsequent event that is not “so remote as to be negligible," no deduction is allowable (Reg. Sec. 1.170A-1(e), 20.2055-2(b)). For example, a gift of a patent subject to a condition that a particular faculty member remain on staff for 15 years, with a reversion back to the donor if he or she does not, is not deductible (Rev. Rul. 2003-28).
  1. Valuation:  Certain restrictions (especially those affecting the charity’s ability to sell the gift asset) can have an impact on valuation.  For example, a gift of a patent, subject to a condition that the university could not sell the patent for three years, is deductible – but the prohibition reduces the [fair market value?]of the gift (Rev. Rul. 2003-28).  On the other hand, a gift of art to a museum, subject to restrictions regarding the continuous display of the works as a group and the re-investment of sale proceeds in other works of art, does not reduce the deduction amount (PLRs 200202032, 200203013, and 200203014).  The appraisal rules require that the appraiser describe any restrictions imposed on the gift and consider if they have an impact on valuation.
  1. Earmarking:  A gift to a charity that is “earmarked” for a particular person is treated as a gift to that person (Thomason, 2 TC 441 (1943)).  The charity must exercise control and discretion over the use of the funds.  The IRS has suggested the following language: “this contribution is made with the understanding that the donee organization has complete control and administration over the use of the donated funds” (CPE Text for 1999). One couple was successful in deducting a gift after “expressing interest” that the charity support the composition of a work by a particular composer, because the charity did not commit to commission such a work, and the charity and donors agreed that the gift would be used at the discretion of the charity (PLR 200250029).
  1. Return benefits:  A gift is not deductible as a charitable contribution if the donor expects to receive “substantial return benefits."  See Ottowa Silica v. US,699 F.2d 699 (1983) (gift of land to a school district would lead to construction of roads, increasing the value of retained land).  On the other hand, when the return benefit is nominal, a deduction is available because the payment has a dual character (part purchase, part gift). A dual character payment is deductible only to the extent the payment exceeds the benefits received and only if the payor can demonstrate that he or she knowingly and purposefully paid more than the value of the benefit received (United States v. American Bar Endowment, 477 US 105 (1986)).

Donors are certainly entitled to place restrictions on their charitable gifts; our job as advisors is to ensure that those restrictions do not backfire.

About Erik Dryburgh

Erik Dryburgh is a principal in Silk, Adler & Colvin, a law firm that specializes in representing nonprofit organizations and their donors.  Erik leads the firm’s charitable gift planning practice.  He has a complete picture of the charitable giving process and the issues that arise throughout the life of a charitable gift.

Erik has authored numerous articles, is a frequent speaker, and is a co-editor of The Charitable Gift Planning News.  He is a member of the Board of Directors of the National Committee on Planned Giving and the San Francisco Estate Planning Council, a past Board member of the Northern California Planned Giving Council, and is a fellow of the American College of Trust and Estate Counsel (ACTEC).