B.6. Quid Pro Quo Gifts January 1989 Development Policy and Administration Manual Chapter I. Soliciting and Accepting Private Funds Section B. Soliciting, Accepting, and Acknowledging Gifts ************************************************************* QUID PRO QUO GIFTS A quid pro quo gift is a gift for which a donor receives some- thing in return (e.g., in exchange for a donation, the donor receives a ticket for admission to a concert). The circumstances under which such donations are tax-deductible charitable con- tributions vary; the basic principle is that the payment, or a portion of the payment, is tax deductible only if the donor intended to make a gift and contributed more than the value received in return. Information is provided here that may be useful in determining whether a quid pro quo gift is tax-deductible; if there is any doubt about the tax-deductibility of a specific quid pro quo gift, Development Policy and Administration, Office of the Presi- dent, will assist in making a determination. The Theory: What is the Donor's Intent? One of the criteria used by the Internal Revenue Service (IRS) in determining whether a quid pro quo gift constitutes a tax-deductible charitable contribution is the principle of "detached and disinterested generosity": the donor's primary intent must be to make a gift, not to receive a benefit. If a donor receives something in return for a gift, it may cast doubt upon the donor's charitable intentions. As an extension of this principle, the IRS focusses on the fair market value (FMV) of the item or privilege that the donor re- ceives in exchange for a gift. The cost of the item to the charity is not an issue in determining the tax-deductibility of the contribution. For example, if a benefit concert is performed for which all goods and services were donated, and the ticket price is equal to the "going rate" for such functions, a donor would not be allowed a tax deduction for the cost of the ticket, despite the fact that presenting the concert cost the charity nothing. If the fair market value is greater than or equal to the amount of the gift, the IRS holds that the transaction is a purchase, not a gift. Partial Deductibility. There are cases in which gifts may be partially tax-deductible. For example, if donors receive an item as a gratuity that is otherwise available for purchase, and the amount of the gift exceeds the fair market value of the item, that portion of the payment in excess of the FMV will usually constitute a tax-deductible gift (e.g., in exchange for a member- ship payment of $50, donors receive a T-shirt that sells in the campus bookstore for $10; $40 of their membership would be tax- deductible). In showing that a gift has been made, an essential element is proof that the portion of the payment claimed as a gift represents the excess paid over the value of the item re- ceived. If, however, a donor declines the item that is offered in return for the gift (e.g., the donor refuses the T-shirt), the full amount of the donation would be tax-deductible. The 1988 Technical and Miscellaneous Revenue Act further defined another area of partial deductibility -- donations securing eligibility to purchase athletic tickets. The Act provides that, when a donor makes a contribution that would be deductible except that the donor receives in return the right to purchase tickets for athletic events in University facilities, only 80% of the contribution is deductible. This regulation applies whether or not the tickets would have been available to the donor without the contribution. As under current law, no amount paid for athletic tickets is deductible. The new regulations are unclear regarding the tax implications if a donor received from the institution a gift of tickets or seats, rather than the right to purchase them. When clarification is available, this chapter will be updated. Raffles. The IRS holds that amounts paid for chances to par- ticipate in raffles, lotteries, or similar drawings, or to parti- cipate in puzzle or other contests for valuable prizes, are not gifts and therefore not tax deductible. Caution must be exercised in any drawing involving prizes so that it does not fall within the definition of a lottery prohibited under Section 319 of the California Penal Code, as follows: . . . any scheme for the disposal or distribution of property by chance, among persons who have paid or promised to pay any valuable consideration for the chance of obtaining such property or a portion of it, or for any share or any interest in such property, upon any agreement, understanding, or expectation that it is to be distributed or disposed of by lot or chance, whether called a lottery, raffle, or gift enterprise, or by whatever name the same may be known. In other words, if (1) a prize is given by a method involving (2) chance for a (3) consideration paid by the participant, the award of that prize would be considered an unlawful lottery. If, however, prize tickets used in a raffle are available free upon request to the public, the element of consideration would be lacking and the distribution of prizes would not then constitute a lottery. The fact that a purchase is not necessary would have to be printed on all promotional materials and on the tickets themselves. A Case of Special Interest to UC: Memberships. Basic membership fees paid to support groups may or may not be deductible for income tax purposes. The question of deductibility hinges upon the value of the benefits derived (or potentially derivable) from the membership or subscription. Several considerations come into play. Do members receive an item or privilege that is not available to the general public? The IRS holds that if the benefit is "reasonably commensurate" with the amount of the membership payment, then the donor has received a quid pro quo and the membership is not tax deductible. In applying this principle, the IRS has found that rights and privileges that are only incidental to making the organization function (e.g., receiving a newsletter; voting rights) or that are not of "substantial benefit" (e.g., the privilege of being known as a benefactor) do not affect the tax deductibility of the contribution. When a support group has several classes of membership, payments in excess of the basic membership rate may constitute tax-deduc- tible gifts to the organization. For example, if a $250 member receives the identical items and privileges as one who pays the basic membership fee, the excess amount would be a tax-deductible contribution. If, however, the member receives additional items or benefits for the larger payment, a determination of the tax deductibility of the additional payment would have to be made using the same criteria that apply to all quid pro quo gifts. Soliciting and Acknowledging Quid Pro Quo Gifts. The California Business and Professions Code Section 17510.3 requires that donors be furnished at the point-of-solicitation with information about the percentage of the total gift or purchase price that may be deducted as a charitable contribution under both federal and State law, although it is silent on the matter of acknowledg- ments. Although the IRS ultimately places the burden of proof on the donor to establish that a payment was a charitable contribution, it holds that charities can greatly assist their donors by making explicit in both solicitations and acknowledgments the demarca- tion between gift and payment, and it has been the position of the IRS that the gift receipting practices of charitable institu- tions should not mislead donors into believing the full value of charitable payments is tax deductible. Rather, . . . the amount properly attributable to the purchase of admissions or other privileges and the amount solicited as a gift should be determined in advance of the solicitation. The respective amounts should be stated in making the solicitation and clearly indicated on any ticket, receipt, or other evidence issued in connection with the payment. [Revenue Ruling 67-246] At the present time, no penalties are imposed on charities for failing to provide this information. However, the IRS has gone so far as to state that discovery of a case where donors had been misinformed concerning the deductibility of their payments could be the basis for "special scrutiny" of other donors to the same organization, resulting in a higher incidence of audits. It should be noted that the IRS does not consider itself bound by the charity's estimate of the value of an item or privilege, and to this extent the charity is not being helpful to its donors if it underestimates this amount. Preview of Coming Attractions. Recently, the Congress has expressed its concern, in the House Budget Committee's Report on the Omnibus Budget Reconciliation Act of 1987, that: . . . some charitable organizations may not make suffi- cient disclosure, in soliciting donations, membership dues, payments for admissions or merchandise, or other support, of the extent (if any) to which the payor may be entitled to charitable contributions for such pay- ments. . . . [T]he committee anticipates that the Internal Revenue Service will monitor the extent to which taxpayers are being furnished accurate and sufficient information by charitable organizations of the nondeductibility of payments. . . . The Committee also considered some calls for imposing penalties on charities for failing to inform or misinforming donors of the nondeductibility of payments, although none have yet been adopt- ed. Given the perception of the Congress that ". . . this limitation on the amount of the allowable charitable deduction is often ignored by taxpayers, sometimes with the implicit encouragement of the charitable donee. . ." campuses are strongly urged to follow the IRS's position that solicitations and receipts issued by charities should indicate the portion of the payment that is tax deductible. Copies of the pertinent IRS rulings, which include further ex- amples of deductibility, are available on request from Develop- ment Policy and Administration, Office of the President. References: IRS Technical Information Release No. 747, June 30,1965; IRS Revenue Ruling 67-246; IRS Revenue Ruling 68-432; IRS Revenue Ruling 75-66; IRS Revenue Ruling 84-132; IRS Revenue Ruling 86-63; IRS Publication 1391; California Business and Professions Code Section 17510.3; California Penal Code Section 319.