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Nonprofit Law/Gifts vs in-kind gift

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Question
I am on a committee for an 501c3; My question is in regard to the handling of a payment that was made for us by a donor for our fund raiser. It was a fee that was a necessary obligation and the donor paid it out of pocket for us. Do I send the individual a receipt for the cost of the fee, or is this considered an in -kind donation, since we never received the cash?

Answer
It appears that the donor did not consult competent legal counsel before spending funds for the fund-raiser.  The only way that the IRS allows the 501(c)(3) organization to give an acknowledgement of donation is if the person spends funds while he or she is volunteering. See IRS Publication 526 "Charitable Donations" which is available at http://www.irs.gov/pub/irs-pdf/p526.pdf
starting at the bottom of page 4 under the heading "Out-of-Pocket Expenses in Giving Services" we see that the deduction of the unreimbursed expenses are only allowed incidental to the person performing services.  The details are found on page 19 of the record-keeping requirements in the middle column under the heading "Out-of-Pocket Expenses" where you see that, in that case, the worker would need the organization's written acknowledgment to deduct.  Details of the acknowledgement are also found on pdf page 11 at:
http://www.irs.gov/pub/irs-pdf/p1771.pdf

You asked about treating it like an in-kind donation.  Charitable donations are allowed by 26 U.S.C. §170 which is available at http://www.law.cornell.edu/uscode/text/26/170 and in subsection (c) there is a definition:
--- Start of excerpt ---
(c)
For purposes of this section, the term “charitable contribution” means a contribution or gift to or for the use of [a 501(c)(3) organization among others]
--- End of excerpt ---

The payment by the friend of the organization was not "to" the organization so the question is whether the payment was "for the use of".

From the U.S. Supreme Court case, Davis v. United States, 495 U.S. 472 (1990):
--- Start of excerpt ---
Accordingly, we conclude that a gift or contribution is "for the use of" a qualified organization when it is held in a legally enforceable trust for the qualified organization or in a similar legal arrangement.
--- End of excerpt ---
The payment was a straight payment and was not given to any trustee.  I would need to see paper work from the payee before I could give an opinion as to whether there was a similar legal arrangement like a trust.  However, from what you informed me, it does not appear at all like a trust, but simply a payment for a project of the organization.

Further in the decision, the Court stated:
---Start of Excerpt--
The plain language of 1.170A-1(g) indicates that taxpayers may claim deductions only for expenditures made in connection with their own contributions of service to charities. Unless there is a specific statutory provision to the contrary, a taxpayer ordinarily reports his own income and takes his own deductions.
---End of Excerpt--
http://pages.citebite.com/i1q0p7k3a9xws

The proper procedure in such situations is that the 501(c)(3) organization reimburse the donor the funds.  Then, if the donor wants to give a donation to the organization, that would be in a separate transaction by a check from the donor to the organization.

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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