A charitable gift is considered made on the “date of delivery.” Determining that date is important. It determines: (1) the tax year in which the gift is deductible; (2) the value of the gift for assets that fluctuate in value, such as stock; and (3) in close cases, whether a gift is of long-term or short-term property.
Don’t wait until the end of December to review these rules. To the ancient saying, “Time and tide wait for no man” add “neither does timely ‘delivery’ of charitable gifts.”
The rules vary—depending on the type of property contributed and how it’s transferred.
Securities
The delivery date depends on how and to whom delivery is made. Delivery must be unconditional, and the stock certificate must be properly endorsed. If the stock certificate isn’t endorsed, the donor should give the charity a properly endorsed stock power with the stock certificate.
Hand-delivered. For securities that are hand-delivered to the charity by the donor (or delivered to the donor’s broker or agent who then hand delivers them to the charity), the delivery date is the day the charity receives the securities.
Mailed. For securities mailed by the donor to the charity or to its broker or other agent (or delivered to the donor’s broker or agent who then mails them to the charity), the delivery date is the day the securities are mailed to the charity or to its agent; provided that the securities are then received by the charity or its agent in the “ordinary course of the mails.” See discussion of “delivered when mailed rule” below.
Reissued in charity’s name. For securities that are delivered by the donor to their bank or broker (as their agent) or to the issuing corporation (or its agent) with instructions that the securities be reissued in the charity’s name, the delivery date is the day the stock is transferred to the charity’s name on the corporation’s books. Doing it that way, a donor loses control over the delivery date and the value of the contribution if the securities fluctuate in value.
Depository Trust Company: Electronic Transfers
The Internal Revenue Code and the regulations on date of delivery were written back in the pony express days and haven’t been updated. But relying on general principles, the gift is made when the transfer to the charity’s account is completed.
Mutual Fund Gifts
The donor should direct the fund’s management to transfer their shares to the charity’s name; the delivery date is the date the transfer takes place. Depending on the fund, it can take several weeks to complete the transfer, so mutual fund gifts should be planned well in advance.
Gifts by Check
Under the delivered-when-mailed rule, the date of mailing to the charity is deemed the date of delivery if there are no restrictions on the time or manner of payment and the check is honored when presented. Thus, a donor will get a deduction on a 2018 income tax return for a check mailed on Dec. 31 even though it isn’t received by the charity until January 2019.
Delivered-when-mailed rule. Until 1996, the delivered-when-mailed rule only applied to U.S. postal mail, not to private couriers. (Leith, 47 TCM 255 (1983).) In 1996, Congress authorized the Internal Revenue Service to expand the timely-when-mailed filing rule for tax returns and other documents filed with the IRS and documents filed with the Tax Court to include designated private delivery services. IRC Section 7502(f).
The IRS issued final regulations regarding to the use of a PDS:
“Thus, these final regulations provide that, other than direct proof of actual delivery, proof of proper use of registered or certified mail (registered or certified mail sender's receipt), and proof of proper use of a PDS duly designated under criteria established by the IRS, are the sole means to establish prima facie evidence of delivery of documents that have a filing deadline prescribed by the internal revenue laws.”
The IRS has provided addresses to be used by private delivery services to deliver returns. Private delivery services shouldn’t deliver returns to IRS offices other than those designated. See www.irs.gov for these addresses.
Caution: The delivered-when-mailed rule applies to filing tax returns and documents with the IRS and Tax Court; the regulations don’t extend the delivered-when-mailed rule to charitable gifts of cash and securities sent to charities by PDS.
Caveat: A donor shouldn’t rely on a postage meter to establish the date of delivery for a gift that’s mailed. In three cases (not in the charitable area), the Tax Court dismissed petitions that weren’t timely filed even though the envelopes containing the petitions had been stamped on the proper date by a private postage meter. (Shipley, 572 F.2d 212 (9th Cir. 1978); Lindenmood, 566 F.2d 646 (9th Cir. 1978); and Estate of Labovitz, 50 TCM 1325 (1985).) Not only must the date be correct, but: “the document … must be received … not later than the time when a document … contained in an envelope that is properly addressed, mailed, and sent by the same class of mail would ordinarily be received if it were postmarked at the same point of origin by the U.S. Postal Service.” Treasury Regulations Section 301.7502-1(c)(1)(iii)(B).
A donor who depends on a private postage meter places herself at the mercy of the post office (not a good place to be). When it’s important to establish the delivery date, the gift should be mailed through the post office, certified or registered mail, return receipt requested. (See Correia, 58 F.3d 468 (9th Cir. 1995).)
A certificate of mailing is no substitute for certified mail. Unlike registered or certified mail, a certificate doesn’t identify the item sent; it merely vouches that some piece of mail was received by the post office. Haaland, 48 TCM 348 (1984).
The date of mailing won’t make any difference if the check is postdated. In Griffin, 49 TC 253 (1967), the Tax Court disallowed a deduction for the year of mailing, stating: “A postdated check is not a check immediately payable but is a promise to pay on the date shown.”
Gifts of Artwork and Other Tangible Personal Property
The date the property is received by the charity is the delivery date. Title must also be transferred.
Some donations can present logistical problems when, for example, the donee doesn’t have the facilities to store or display the gift. Donors may try to surmount those difficulties by transferring title to the property while keeping possession until the charity is ready. The IRS may deny that a gift was actually made. See, e.g., Bennett, TCM 1991-604 (grand piano) and Estate of Miller, TCM 1991-515 (hunting trophies).
Rules enacted by the Pension Protection Act ‘06 make it essential that the charity have possession. More about this soon.
Usually, state law determines what sort of legal formalities are necessary to effectuate constructive delivery. Courts will sometimes give credence to constructive delivery, but only with substantial evidence that the donor hasn’t kept title, dominion or control over the gift. In Murphy, TCM 1991-276, the Tax Court agreed that the charity had no place to put a 7½ foot sandstone statue of John Wayne’s face. Besides, the donee had paid for storage and insurance in the interim.
Nevertheless, as a result of actual and perceived abuses for gifts of artworks and other tangible personal property, make certain that the charity has actual possession.
Physical possession requirement: PPA ‘06. If the donee of a fractional interest in an item of tangible personal property fails to take physical possession within one year of the initial gift (and within one year of any additional gifts)—for a period equal to the donee’s fractional ownership—the donor’s income and gift tax charitable deductions for all previous contributions of interests in the item will be recaptured, plus interest.
The related-use requirement: penalties. If the donee doesn’t use the property for a use related to its exempt purpose, the donor’s income and gift tax charitable deductions for all previous contributions in the item will be recaptured, plus interest.
Additional penalty. If deductions are recaptured under the physical possession or related use rules, an additional tax is imposed equal to 10 percent of the amount recaptured.
Real Estate
The date the charity receives a properly executed deed is the delivery date. But if the deed must be recorded to effectuate title under local law, the delivery date is the date of recording. See Ankeny, TCM 1987-247 and Private Letter Ruling 8901004.
Pledges
For income tax purposes, pledges are deductible in the year they’re fulfilled, not in the year they’re made. Revenue Ruling 75-348. Pointer: Satisfying a pledge with property doesn’t give rise to taxable gain or deductible loss. Rev. Rul. 55-410.
Options
An option is a promise to sell specified property at a certain price in the future. The gift of an option is treated like a transfer of a donor’s own promissory note (discussed below) or pledge. If the option allows the holder to buy property for less than fair market value, it’s considered a promise to make a bargain sale at a future date. Even though the promise may be enforceable, it isn’t deemed a “payment” for purposes of the income tax charitable deduction. Due to the deductibility rules for options, a donor doesn’t know the amount of his deduction until the charity exercises its option. The amount of the contribution is the FMV of the property on the date the option is exercised (the date of delivery), minus the exercise price.
Caveat: The IRS concluded in PLR 9501004 that a donor who transferred an option to a charitable remainder trust wasn’t entitled to a charitable deduction. Donors should tread carefully when making gifts of options.
Promissory Notes
The deductibility rules for the gift of a promissory note depend on whether the donor gives a note that they hold as a creditor or whether the donor gives her own note. A gift of a donor’s own promissory note may not be deducted until the year the note is paid, even if the charity discounts the note at a bank and gets the money immediately. (Petty, 40 TC 521 (1964).) But if a donor gives a promissory note that they hold as a creditor (a third-party note), the donor may claim a charitable deduction for the note’s FMV in the year of the gift. Woodward, 37 TCM 715 (1978).
Credit Card Gifts
Charitable contributions made using a credit card are deductible when the bank pays the charity; it isn’t necessary to wait until the donor pays the bank. Because use of a credit card creates the cardholder’s own debt to a third party, it’s similar, says the IRS, to the use of borrowed funds to make a contribution. Rev. Rul. 78-38. But in a 2006 IRS news release, IR 2006-192 (Dec. 14, 2006), the IRS said “Credit card statements should show the name of the charity and the transaction posting date.”
Suppose the charity receives the credit card information on Dec. 31 and the transaction posting date is in the following year.
That same 2006 news release says: “Thus, donations charged to a credit card before the end of the year count for 2006. This is true even if the credit-card bill isn’t paid until next year.” So what does “charged” mean—posted or giving the credit card information to the charity? When a published revenue ruling is clear, and a not widely distributed IRS news release is ambiguous, the revenue ruling should prevail. Nevertheless, don’t wait until the last minute to charge a gift.
Pay-By-Phone Account
A process similar to the use of a credit card, but having the opposite result, is the use of a pay-by-phone account with a bank. If a donor directs his bank to make a charitable contribution, the gift is deemed made as of the date the bank mails, transfers or delivers the funds to the charity. That date is shown on the bank’s monthly statement, but it might not be the date (or, more significantly, the year) that the donor directed the transfer. Rev. Rul. 80-335.
Text Message
Another, more recent method of contributing to charity, similar to a gift by telephone, is by text message. Contributions made by text message are deductible in the year the text message is sent. A telephone bill showing the name of the donee organization, the date of the contribution and the amount of the contribution will be proof of the date of the gift.
Watch out for Installment Obligations
A gift of an installment obligation (gain is reportable in installments under IRC Section 453) accelerates any remaining deferred gain in the year of the gift. Rev. Rul. 55-157.
© Conrad Teitell 2018. This is not intended as legal, tax, financial or other advice. So check with your advisor on how the rules apply to you.