Tricky Transactions: Handling Weird Donations

By Raul Rivera

Weird donations may be a sign that your church is doing great. People are willing to give whatever they can because they love the Lord and their church. They come in many forms, some of which may be unconventional or unexpected. How should one approach the situation when a church receives a donation that deviates from the norm, such as a wedding ring, real estate with a restrictive covenant, a promissory note, or a check with the wrong date? Addressing these donations appropriately is crucial.

This blog will also cover the necessary steps to take when issuing refunds for donations that the donor has previously claimed on a tax return. Ensuring these gifts are processed correctly is imperative to keep the church in compliance with the 'aiding and abetting' provisions outlined in Section 6701, which penalizes those who assist in the preparation of erroneous or fraudulent tax documents, leading to reduced tax liability. I will outline five weird donation scenarios and guide you on how to manage them properly.

1. Promissory note:  Consider the scenario where a Phoenix couple generously donated a promissory note to their church linked to a business they sold in 2008. At the time of donation, the outstanding balance on the note was $375,000.00, with four years remaining until its maturity. The terms of the note dictate monthly payments of $8,593.58 to the church, accumulating to a total of $412,491.84 over the ensuing four years. The question is whether this donation is tax-deductible, and if so, to what extent can the couple claim a deduction? Is the deduction applicable entirely in the year of the donation, or can it be spread over the four years of the note?
   
   The quick answer is that the couple may deduct the fair market value of the promissory note in the year they made the donation, which stands at $375,000.00 in this instance. Even though the church will receive $412,491.84 over the next four years, the donors cannot get a tax deduction for the interest the church will receive (Petty, 40 TC 521 (1964)). It is critical to note that such a deduction presumes the note is backed by a lien against assets of at least an equivalent value.
   
   It is best practice for the church to issue a letter to the donor that recognizes the donation of the promissory note, including its fair market value, and explain how the contribution will support the church’s mission and objectives; you can download a free copy here.
   
   
2. Wedding ring and other personal assets: In my experience with financial contributions to both small and large congregations, an array of unusual items have been offered, including wedding rings, bracelets, car titles, eggs, and even animals. The question arises: how should a church respond, and what is the appropriate way to acknowledge these gifts? For example, a church received a wedding ring valued at $14,000 from a recent divorcee. This individual saw giving the ring as a way to leave behind a piece of her past, and she included her name in the envelope with the ring.
   
   Regarding donations of personal property, it is important to note that under section 170(f)(8), churches are restricted from assessing and documenting the fair market value of such items. Therefore, the church's responsibility is to issue a letter to the donor that recognizes the donation, provides a full description of the item, and explains how the contribution will support the church’s mission and objectives without assigning a value to the gift. You can download a free copy here.
   
   
3. Remainder interest donation:  Knowing that he only had a couple of years to live, an elderly man donated his home, which sat on 12 acres of land, to the church.  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 does not take possession during the donor's lifetime.  Upon receiving such a 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.  You can download a free copy here.
   
   When a donor gives a remainder interest in a property to a charitable organization, the donor can take a charitable deduction on their income tax return. It is the donor’s responsibility to follow up with tax advice to properly deduct the donation from his tax return. The value of this deduction is based on the present value of the remainder interest that the church will receive upon the donor's death.
   
   The basic steps the donor (not the church) must take to determine his deduction are:
   
   
   1. Determine the property's fair market value (FMV) at the time of the gift through an appraisal.
   2. Obtain the applicable federal rate (AFR) for the month of the gift from the IRS. This rate is also known as the Section 7520 rate and is updated monthly.
   3. Estimate the life expectancy of the donor using the IRS's actuarial tables.
   4. Calculate the present value of the remainder interest the church will receive after the donor's death using the FMV, the Section 7520 rate, and the donor's life expectancy.
      The IRS provides publications and tables to help with this calculation, including Publication 1457 (Actuarial Values Book Aleph) and Publication 1458 (Actuarial Values Book Beth). These publications contain tables that can be used to determine the factor by which the FMV of the property is multiplied to obtain the value of the remainder interest.
      
      
4. Donations to a terminated project:  A church in Boston decided to close 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 Nigerian foreign missions program had been terminated, a donation of $10,000.00 came in for the Nigerian 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.
   
   
   1. Offer to redirect:  The church's first option is to inform the donor that the fund was terminated and ask him if they would like to redirect the money to the general fund or some other program.
   2. Offer a refund:  The second option is to ask the donor if he would prefer the church to refund his money. The church is under a legal obligation to offer a refund because it is a program that the church set up and asked people to support. Now that the program is no longer operational, the church must offer a refund as an option.  Donations to these types of programs 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 a tax deduction on his tax return, he may need to amend the tax return using Form 1040X. This is to ensure that the church does not fall into the pitfall of aiding and abetting a taxpayer to underreport income under section 6701. This is a due diligence matter and should be the church's policy when refunding a donation. You can download a free copy here.
      
      
5. Checks with wrong date:  An annual occurrence every New Year is when the church collects tithes and offerings on the initial Sunday of the year, often accompanied by checks dated from December. Numerous churches mistakenly rely solely on the check's date to determine the donation's crediting date. Nevertheless, Treasury regulation § 1.170A-1(b) specifies that a contribution is considered made when: 
   
   
   1. delivery is completed, or
   2. the postmark date on the envelope if the check was mailed.
      
      

Closing Thoughts

The right tools can make all the difference in navigating the intricacies of handling unique donations and maintaining compliance. That's where Giving Halo comes in. Our user-friendly giving software is designed to simplify donation management, maintain accurate records, and ensure your church's financial operations run seamlessly.

Giving Halo not only simplifies donation management but also offers the capability to generate and store personalized acknowledgment letters for your contributors. With this integrated functionality, you can effortlessly express your gratitude to donors while ensuring compliance with IRS regulations. Discover how Giving Halo can streamline your donation processes and enhance donor communication by visiting Giving Halo today. Elevate your church's giving experience with this comprehensive software solution.

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