6 Weird Donations and How to Handle Them
By Raul Rivera
Giving to churches transpires in many ways. What do you do if a donation comes to your church that is weird or unusual? What if someone donates a wedding ring, property with a restricted deed, a promissory note, or an incorrectly dated check? Handling it correctly really matters. I will also share what you should do if you ever find yourself refunding a donation that the giver has already written off in a previous tax return. What does section 6701 have to say about that? Let me go over six unusual donation scenarios and show you how to handle them.
1. Wedding ring and other personal assets: Having counted numerous offerings for both small and large churches, I have seen quite a number of weird things dropped in the offering. Whether it is a wedding ring, bracelets, car titles, eggs, or animals, I have seen them all. What does a church do? How do you give receipts for these? Let's take a look at the following example. A church in Florida received a $12,000.00 wedding ring in the offering. The ring was placed in an envelope with the name of the giver, who was a recent divorcee and saw it as an opportunity to lay on the altar a part of her past. What should the church do? Any time the church receives a donation of personal property, section 170(f)(8) prohibits the church from estimating its fair market value and writing a receipt for it. In order to comply with the law, the church can only give the donor a letter acknowledging the gift, fully describing it, and stating how the gift will help the church fulfill its mission and purpose. Page 164 of the Ultimate Church Conference manual has a sample copy of letter you may use.
2. Donations to a terminated project: A church in Boston decided to terminate its Nigerian foreign missions fund because it was going to focus on a local community food bank. Several months after publishing in its bulletin and publicly announcing in its services that the community food bank had been terminated, a donation of $10,000.00 came in for the foreign mission fund. What should the church do? In a situation like this, the church has the responsibility of informing the donor that the fund no longer exists and offering to the donor one of two options.
a. Offer to redirect: The first thing the church needs to do is inform the donor that the fund was terminated and ask him/her if he/she would like to redirect the money to the general fund or some other program
b. Offer a refund: If the donor does not want to redirect the funds, the church is under legal obligation to offer a refund because it is a program that the church set up and asked people to support. These funds are restricted and can only be used for their intended purpose.
If the donor wants a refund for the donation it is important for the church to send the refund with a letter explaining that if the taxpayer claimed tax deduction on his/her tax return that he/she may need to amend the tax return using form 1040x. The reason for this is to ensure that the church does not land in the pitfall of aiding and abetting a taxpayer to underreport income under section 6701. This is a due diligence matter and should be a policy of the church when refunding a donation.
3. Remainder interest donation: Knowing that he only had a couple of years to live, an elderly man donated to the church his home, which sat on 12 acres of land. The only catch was that he wanted to live in it until his death. This is called a donation of remainder interest while the donor keeps what is called a life estate interest. The church receives the property but it does not take possession during the lifetime of the donor. Upon receiving such donation title work is done by an attorney and the church sends a letter to the donor thanking him/her for the donation. The letter needs to describe the actual property that was donated. Page 164 of the Ultimate Church Conference manual has a sample copy of the letter. To determine how much of a tax deduction the donor gets to take is the responsibility of the church. The sample letter reminds the donor to get with his/her tax preparer to discuss the tax benefit he/she will receive. The IRS publishes life estate tables under section 7520 that make it easy for the donor to determine what his/her deduction will be.
4. Unreimbursed expenses for services: Treasury regulation 1.170A-1(g) allows a tax deduction for expenses incurred to anyone who is donating a service to the church. The IRS allows a donor to deduct out-of-pocket transportation expenses necessarily incurred in performing donated services, and reasonable expenditures for meals and lodging necessarily incurred while away from home. For example: Attorney John Doe does pro bono title work for the church's purchase of the new building. In donating the work, the firm incurred travel expenses of $175.00, plus recording and copy fees of $650.00. The attorney wanted to bless his church and absorbed the costs, bust also wanted to be a good steward and write if off on his taxes. What should the church do? Using the sample letter on page 164 of the Ultimate Church Conference manual, take a few minutes and make some edits to the letter by thanking the attorney for donating the $175.00 in travel expenses, and for the recording and copy fees of $650.00. Keep in mind that because the attorney's donation exceeded $250.00, you must also follow the $250.00 receipt rules we give you on page 165.
5. Checks with wrong date: A common happening that occurs every New Year is that the church receives tithes and offerings on the first Sunday of the year with checks dated for sometime in December. Many churches incorrectly allow the date on the check to determine the date for which the donor gets credit. However, Treasury regulation § 1.170A-1(b) says, "A contribution is made at the time delivery is effected." The regulation also allows for the date it was mailed. In order to conclude the date it was mailed, the church can guide itself by relying on the date of the postmark.
6. Promissory note: There are two types of promissory notes that I will cover. For example: last year, a couple in Phoenix donated a promissory note for a business they sold in 2008. The balance due to the couple was $375,000.00. The promissory note had 6 years and would yield the church monthly payments of $5,866.94. This means that over the next 6 years the church would receive a total of $422,419.68. Is this type of donation tax deductible and if so, how much of a tax deduction does the couple get to claim? Do they get to claim it all in the year they gave it or do they get partial deductions for the 6 years of the promissory note? The best short answer is that the couple gets to write off the fair market value of the note, which in this case is $375,000.00. Obviously the note has to be tied to a lien on some assets worth at least that much. Another type of promissory note is a pledge. For example, a church in Las Vegas starts a building campaign. The goal is to raise $75,000.00 in three years to build a new children's hall. A member of the church makes a pledge of $27,000.00. He wonders if he will be able to write off the entire amount of his pledge in this tax year. Going back to the tax regulation found in § 1.170A-1(a) only the amount " . . . actually paid during the taxable year is allowable as a deduction . . . " The church can only give the donor a receipt for the actual amount of money he donated to the church, not how much he pledged.