Can I have an opinion?

[Gregg]

Every year I get a block of tickets to a concert that I give away for free. I pay face value for the tickets the only perk I get is I can buy them before the general public can.

When I give the tickets away, I ask people to donate to a charity I suggest the face value of the tickets. I don't do anything to check that they did and if they donate to another charity of their own choosing I would consider that good enough. The charity I suggest is a 501 (3) (c) charity, and when I suggest it I mention that it is tax deductible.

For the first time, someone asked me if they receipt of the tickets negates the value of the deduction.
Do anyone think so?

My answer was, the charity is not giving you the tickets, I am. In any event, I'm not telling the IRS anything....

Am I correct?

Thanks for your thoughts

[Famspear]

Every year I get a block of tickets to a concert that I give away for free. I pay face value for the tickets the only perk I get is I can buy them before the general public can.

When I give the tickets away, I ask people to donate to a charity I suggest the face value of the tickets. I don't do anything to check that they did and if they donate to another charity of their own choosing I would consider that good enough. The charity I suggest is a 501 (3) (c) charity, and when I suggest it I mention that it is tax deductible.

For the first time, someone asked me if they receipt of the tickets negates the value of the deduction.
Do anyone think so?

My answer was, the charity is not giving you the tickets, I am. In any event, I'm not telling the IRS anything....

Am I correct?

Thanks for your thoughts

I don't know whether there is any case law on this, but I think there is a reasonable argument that the person who receives the ticket from you and then donates some amount of money to a 501(c)(3) charity would generally be entitled to the charitable contribution deduction. Based on the facts you presented, the donation of money the individual makes to the charity is not contractual consideration for having received the ticket from you. You and the individual have made no binding agreement that the individual would make any charitable contribution at all. There was no contract -- just a suggestion on your part that the individual make the donation.

[Burnaby49]

This is actually a huge issue in Canada. As in, literally, billions in claimed tax deductions for charitable gifts. All disallowed. The Canada Revenue Agency and the Tax Court are still working through a huge backlog of appealed reassessments on what can only be considered scams based on taxpayers making cash donations or gifts-in-kind to charities and having a third party finance the bulk of it. These were massive pre-arranged schemes, largely run by promoters, that involved thousands of taxpayers. All the taxpayers had to do was pay what was essentially a fee to participate and sign documents.

Here is a rough idea how they worked, I'll stick to the cash schemes rather than the gifts in kind. Joe Fool would make a $100,000 cash donation to a charity. Many of these charities were set up specifically for the schemes and received no other donations apart from those of scheme participants. Joe would pay $30,000 of the $100,000 out of his own funds and a third-party lent Joe the remaining $70,000 in an interest-free 20 year loan with only one payment at the end of the twenty years. Joe didn't actually get his hands on the money, the third party lender gave it directly to the charity on his behalf. Then, through a series of transactions, the funds ended up back in the hands of the original lender. Burt poor Joe apparently is still on the hook for the $70,000 even if he had a 20 year grace period. However, through another series of bullshit transactions, his loan was eliminated without him paying any of it off. Since there was actually $100,000 cash donated to a registered charity and Joe got a $100,000 donation receipt the fools who bought into this thought it was golden. The CRA reassessed all of them on the basis that they had not actually gifted anything for two separate reasons, each sufficient on it's own. The CRA relied on the meaning of the word "gift".

The Income Tax Act does not define gift so the CRA, and the Canadian courts, rely on a definition used in a 1992 tax case, The Queen v. Friedberg, 92 DTC 6031 (FCA):

The word gift is not defined in the statute. I can find nothing in the context to suggest that it is used in a technical rather than its ordinary sense.

Thus, a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor (see Heald, J. in The Queen v. Zandstra [74 DTC 6416] [1974] 2 F.C. 254, at p. 261). The tax advantage which is received from gifts is not normally considered a “benefit” within this definition, for to do so would render the charitable donations deductions unavailable to many donors.

The CRA took the position that the taxpayers had not made any gift because they had a benefit flow back to them, the interest free loans and the contractual right to not have to pay them off in any case. This obviously had value. Additionally, since the taxpayers got more back in tax refunds than they actually donated (the whole intent of the scheme) the CRA said that they had no donative intent since they were in no way impoverished.

The lead case on this was Maréchaux v. the Queen. This was the test case for about $220,000,000 of disallowed charitable donations. My numbers above come from this.

Maréchaux v. The Queen
2009 TCC 587
http://canlii.ca/t/26ljg

2010 FCA 287
http://canlii.ca/t/2d5m8

The Tax Court decided that the benefit Mr. Maréchaux received back in terms of the financing and loan forgiveness vitiated the gift so he was not entitled to a deduction, not even his personal cash payment of $30,000. This was sustained on appeal.

So if American tax law matches up to Canada's then your gift to your buddies of the Arlo Guthrie tickets would result in them not having any right to a tax deduction for the donation. Now two further points. First Famspear's comment;

I don't know whether there is any case law on this, but I think there is a reasonable argument that the person who receives the ticket from you and then donates some amount of money to a 501(c)(3) charity would generally be entitled to the charitable contribution deduction. Based on the facts you presented, the donation of money the individual makes to the charity is not contractual consideration for having received the ticket from you. You and the individual have made no binding agreement that the individual would make any charitable contribution at all. There was no contract -- just a suggestion on your part that the individual make the donation.

In the scheme reviewed in Maréchaux the scheme promoters made sure that the financing and the loan forgiveness were not a contracural right attached to the gift. None of the "donors" had any right to these benefits, they were just bestowed on them. Court said "so what?". All the participants got free financing and loan forgiveness so it was part of the deal contract or not. The Canadian Tax Court has tended to look past actual contractual obligations to the underlying facts. Then on to Gregg's comment;

My answer was, the charity is not giving you the tickets, I am. In any event, I'm not telling the IRS anything....

That specific point about Gregg giving the tickets rather than the recipient charity was considered in Kossow, another huge scheme with hundreds of millions of donation claims involved.

Kossow v. The Queen, 2012 TCC 325
http://canlii.ca/t/fsstb

In the Kossow scheme the promoters took care that the charity gave nothing back to the donors. The money came from an apparently unconnected source. Sadly for the scammers the court didn't care where the money came from, the source of the benefit was irrelevant as long as there was a benefit;

[71] Counsel for Ms. Kossow argued that a gift is only vitiated where there is evidence of consideration from the donee to the donor. In support of her position, counsel relied on the recent decision of the Ontario Court of Appeal in McNamee v. McNamee, 2011 ONCA 533 (CanLII) where the court stated:

31. It is helpful to remember that the issue is not whether the donor (or, for that matter, the donee) received some benefit from the estate freeze (Mr. McNamee Sr. accomplished his corporate planning; the boys received their common shares). The issue is whether the donee has provided any consideration to the donor for the transfer of the shares. For the reasons outlined above, the appellant provided no consideration in that regard. The fact that Mr. McNamee Sr. accomplished his corporate planning goals - including capping his value in the company at $2 million, with the right to draw out more if he wished; protection from creditors; and relief from possible tax consequences on his death - do not amount to consideration flowing from the appellant to him. Nor, we would add, did the appellant's continued employment with McNamee Concrete constitute consideration for the transfer of the shares in the circumstances. The appellant receives a good salary for his services as an employee of the enterprise, and the father's vague hope that his sons would continue with the company does not constitute consideration flowing from the boys. The shares were not transferred in order to ensure the sons' continued involvement in the company; they were transferred to give effect to the estate freeze plan. Motive underlying a donor's conduct is not the same thing as consideration flowing from the donee. (emphasis added)

[72] It is my view that the Appellant has taken the statement of the Ontario Court of Appeal out of context and she has misinterpreted its scope. The statement in McNamee was made in the context of a Family Law matter where there was a disagreement whether shares received by the husband from his father were part of the matrimonial property. The question revolved around whether the shares had been gifted to the husband by his father.

I've reviewed all of the cases involving these schemes and I get the impression it didn't matter what the taxpayers argued. The courts found them so offensive that they just weren't going to allow them.

However i Gregg's case, as he implied, the IRS has no way of knowing about the donors getting the tickets so there is nothing to trigger an audit review.

[Burnaby49]

I would like to point out that I'm not implying that what Gregg and his friends are doing offends the intent of the law nor am I equating it to our sleazy schemes. To start with the individuals in the Canadian scheme profited financially by participating, that was the whole purpose. If Gregg's friends donate an amount equal to the value of the tickets they have still donated the difference between the amount they gave and the refund so they are out of pocket for most of the amount. However if you add the value of the ticket to that there is an argument that they have a net benefit.

In Canada the law, strictly applied, would, probably result in the donation being disallowed however the law isn't strictly applied even here. Legally any benefit back, no matter how small, negates the donation. So if you give a $1,000,000 to your church and get a free church-basement dinner in law the gift isn't allowable. Obviously that would be plain stupid even if legally correct so the CRA doesn't get too picky about the small stuff.

[Famspear]

I would like to point out that I'm not implying that what Gregg and his friends are doing offends the intent of the law nor am I equating it to our sleazy schemes. To start with the individuals in the Canadian scheme profited financially by participating, that was the whole purpose. If Gregg's friends donate an amount equal to the value of the tickets they have still donated the difference between the amount they gave and the refund so they are out of pocket for most of the amount. However if you add the value of the ticket to that there is an argument that they have a net benefit.

In Canada the law, strictly applied, would, probably result in the donation being disallowed however the law isn't strictly applied even here. Legally any benefit back, no matter how small, negates the donation. So if you give a $1,000,000 to your church and get a free church-basement dinner in law the gift isn't allowable. Obviously that would be plain stupid even if legally correct so the CRA doesn't get too picky about the small stuff.

Again, I haven't read enough case law on the U.S. federal income tax effect of charitable giving, but my quick and dirty answer would be that under the U.S. law, even the fact that the donor receives a benefit might not be determinative. Under the U.S. tax law, it is the intent of the donor. Does the donation arise from the donor's "detached and disinterested generosity"? If so, then there might be a gift (for tax purposes). Yes, the amount of the gift is reduced by the value of products or services provided to the donor as part of donative act. But, was the transfer of the concert ticket really part of the donative act? Was there a sufficient link between the two acts to negate a deduction for the full amount of the putative donation to the charity?

If an individual sees a fund drive on an educational TV station where the announcer says, "for a charitable donation to this station of $50, we will send you a coffee mug with the station logo on it", and the coffee mug has a value of $4, then I believe we would agree that the actual charitable donation is only $46, and that $46 would be the deductible amount, for U.S. federal income tax purposes. Here, the coffee mug was clearly provided in exchange for having made the charitable donation. There is some linkage here, beyond merely a non-binding non-contractual suggestion. Indeed, I would argue that if the individual makes the $50 donation as requested, he might have a legally enforceable, contractual right to receive the $4 mug (or, at least, its value ) -- a right enforceable in court.

I believe I could argue that Gregg has described a qualitatively different situation. In Gregg's case, the donor has received a concert ticket as a gift from Gregg, with Gregg's suggestion that the donor make a contribution to a charity. However, because Gregg has not conditioned his transfer of the tickets to the recipient's making of a charitable donation, I would argue that although the donor has received a benefit, he has not received that benefit in exchange for making the donation. He could have just as well used the concert ticket and not made the donation.

I think one reasonable argument to be made is that in the events described by Gregg, both the legal form and the economic substance are consistent with the presence of a valid, deductible charitable contribution on the part of the donor -- without any reduction in the amount of the deduction because of the fair market value of the concert ticket received from Gregg.

I would have to do some tax research to be able to be more confident about this argument, though.

[NYGman]

I have always taken the position that the net amount donated is The correct allowable charitable deduction. This is derived by taking the amount donated less the value received related to the contribution, however derived. As long as there was an agreement, written or oral connecting the payment and the gift. Think of a charitable auction. I bid for an item, offered by a third party, and win said item. Item cost $400 but valued at $250. I give $400 to the charity, and I get my $250 item from the third party. I can potentially deduct only 150.

While I do agree in this situation, the connection would be hard if not impossible for the IRS to make, the only way it would be known would be to disclose voluntarily, if only the IRS had some type of form one could make this on, but I digress. While I think that you could easily get away with this deduction, should you morally take it?

I also tend to agree with Burnaby's analysis, but here we are talking $75 a ticket which is not material in comparison to that example and it would probably cost more in time and energy to type up and mail a notice, than would be the after tax benefit received from the deduction. However, While a $75 deduction May not be material, and while I believe here, technically wrong, would likely never be challenged, should you take it. And if $75 is ok, would $750 be in another scenario, how about $5,000. At what point does it become morally wrong or am I just too conservative with my interpretation and can the two events be seperated? Can I view the gift of tickets independently to the contribution? Maybe this depends on the relationship between Gregg and who he gives the tickets too. There may be other factors at play. Was the donation planned? Would it have occoured independently? Was there a meeting of the minds and an agreement where one was contingent on there other? This may be more complicated.

Just saw Famspear's response before I posted, and it is an interesting point that the fact that the grant of tickets was without conditions and that may be enough to allow the deduction because it is only a suggestion, not a dependency. However could the fact that the condition was followed, negate that position? As the fact that there was a donation where none would have come otherwise, show that there was an agreement? Is it my intent?

[Famspear]

In Gregg's example, I don't see any mention that Gregg is taking any sort of deduction for either the purchase of the concert tickets or for the putative gift of the tickets to the various individuals.

If we change the facts and say that Gregg's intent in purchasing the tickets is to help promote his own trade or business, could he validly deduct the cost of the tickets as promotion or advertising expense? As business gifts?

Or, could he take the donation as a business gift, but only for the tax year in which he gives the tickets away? (I'm thinking of the scenario where he buys the tickets on, say, December 29, 2013, and gives them away on January 2, 2014.)

NYGman wrote:

Just saw Famspear's response before I posted, and it is an interesting point that the fact that the grant of tickets was without conditions and that may be enough to allow the deduction because it is only a suggestion, not a dependency. However could the fact that the condition was followed, negate that position? As the fact that there was a donation where none would have come otherwise, show that there was an agreement? Is it my intent?

Ahh, there's the rub!

[LaVidaRoja]

My understanding is that Gregg GIVES THE TICKETS AWAY. When the recipient asks "What do I owe you?", Gregg asks/suggests that they donate the face value of the ticket to a qualified charity. While Gregg may suggest a particular charity, if the recipient wants to donate to some other cause, so be it. Also, Gregg has no enforceable contract with the recipient. If the recipient refuses to donate anywhere, or is a total scumbag and scalps the tickets, Gregg has no recourse. It is no different than if one of my acquaintances asked me, "What can I do for you?" and I suggest that they donate to a particular cause. Gregg might well strike that person from ever again receiving tickets, but there is no legal contract, no real or enforceable obligation. Gregg does not say "Give $XX to YY charity and I will give you these tickets. THAT would be a problem as far as a deduction for the recipient. I do no believe there is one here.

[Famspear]

To make things more interesting, of course, we should point out that a mere lack of a contractual linkage would not necessarily mean that there is a valid gift for federal income tax purposes. Consider the leading case, Commissioner v. Duberstein, 363 U.S. 278 (1960), at:

http://scholar.google.com/scholar_case? ... s_sdt=3,44

There were two cases in that opinion: Duberstein (No. 376), and Stanton (No. 546).

In No. 376:

The taxpayer, Duberstein, [footnote 2 not reproduced] was president of the Duberstein Iron & Metal Company, a corporation with headquarters in Dayton, Ohio. For some years the taxpayer's company had done business with Mohawk Metal Corporation, whose headquarters were in New York City. The president of Mohawk was one Berman. The taxpayer and Berman had generally used the telephone to transact their companies' business with each other, which consisted of buying and selling metals. The taxpayer testified, without elaboration, that he knew Berman "personally" and had known him for about seven years. From time to time in their telephone conversations, Berman would ask Duberstein whether the latter knew of potential customers for some of Mohawk's products in which Duberstein's company itself was not interested. Duberstein provided the names of potential customers for these items.

One day in 1951 Berman telephoned Duberstein and said that the information Duberstein had given him had proved so helpful that he wanted to give the latter a present. Duberstein stated that Berman owed him nothing. Berman said that he had a Cadillac as a gift for Duberstein, and that the latter should send to New York for it; Berman insisted that Duberstein accept the car, and the latter finally did so, protesting however that he had not intended to be compensated for the information. At the time Duberstein already had a Cadillac and an Oldsmobile, and felt that he did not need another car. Duberstein testified that he did not think Berman would have sent him the Cadillac if he had not furnished him with information about the customers. It appeared that Mohawk later deducted the value of the Cadillac as a business expense on its corporate income tax return.

Duberstein did not include the value of the Cadillac in gross income for 1951, deeming it a gift. The Commissioner asserted a deficiency for the car's value against him, and in proceedings to review the deficiency the Tax Court affirmed the Commissioner's determination. It said that "The record is significantly barren of evidence revealing any intention on the part of the payor to make a gift. . . . The only justifiable inference is that the automobile was intended by the payor to be remuneration for services rendered to it by Duberstein." The Court of Appeals for the Sixth Circuit reversed. 265 F. 2d 28.

In effect, the Supreme Court ruled that on these facts, the Treasury Department -- and the Tax Court -- were correct. Although there was no legal obligation on the part of Berman to transfer the auto to Duberstein, the receipt of the auto was taxable to Duberstein as income; it was not a gift for Federal income tax purposes.

[Burnaby49]

I believe I could argue that Gregg has described a qualitatively different situation. In Gregg's case, the donor has received a concert ticket as a gift from Gregg, with Gregg's suggestion that the donor make a contribution to a charity. However, because Gregg has not conditioned his transfer of the tickets to the recipient's making of a charitable donation, I would argue that although the donor has received a benefit, he has not received that benefit in exchange for making the donation. He could have just as well used the concert ticket and not made the donation.

You may well be right in the United States, you are way ahead of me in your knowledge of American tax law since I have essentially none. All I can reasonably discuss is the Canadian tax response to Gregg's question so everything I said in my two prior posts might be inapplicable because of your differing legislation and the court's interpretation of it. Also others (Hi LaVidaRosia and Gman) with other points including materiality. I'm sticking to a straight interpretation of Canadian tax law and jurisprudence without getting into subjective areas.

So, using Canadian law and jurisprudence, the argument Famspear made in the above quote has been very recently tried in Canada and failed.

Mariano v. The Queen, 2015 TCC 244
http://canlii.ca/t/glrs3

Another massive donation deduction scheme. I've gone through Mariano but not done a detailed review of it. This one was different than the prior cases I reviewed because it involved cash donations and gifts-in-kind. The gifts were software licenses vastly overvalued by the schemes promoters. The plan was that taxpayers who chose to become involved in the scheme would become beneficiaries of a trust. The trust would make distributions to the beneficiaries of the licenses and rhere was a compliant charity waiting to accept them from the taxpayers and issue donation receipts for the license values determined by the promoter. There was a second charity set up to accept the cash donations. The scheme was that the taxpayers would get huge donation receipts for software they had received free as trust beneficiaries and get separate receipts for the cash. The promoters of course got the cash and a bunch (millions) of useless software licenses they didn't want but which were essential to get the cash, their real goal.

Now your argument is that if Gregg's friends don't have to make the donation to get the tickets then there are two separate issues and the tickets wouldn't be linked to the donations. The Mariano scheme attempted to avoid this issue through the separate charities and the trust. The trust was legally separate from both the cash and software donations. There was no contractual or legal link. Anyone could apply to be a trust beneficiary without agreeing to make any charitable donations, cash or software. The trust gave them the software to with what they wanted, keep it, donate it to the compliant charity, or donate it to another charity. This all happened before the cash donation was made so it was similar to Gregg's friends getting the tickets before they donated to charity. The taxpayers had the software with no obligations attached.

[36] The Appellants also argue that the transaction documents support their stated intention to support their donative intent and the non�connection of the two donations by arguing that they had the ability in the two respective Directions they executed in favour of the Escrow Agent to revoke their decision to deliver the cash or gift of licences within 72 and 48 hours respectively of being advised of their acceptance as capital beneficiaries. Consequently, they argue that they could have made a gift of cash only, or a gift of licences only, or both or none. On its face, such options seem to suggest there was no requirement of a cash payment and hence it could not be seen to be a fee for participating in any scheme.

There was also the added advantage that there was legally, no link to a benefit back (software) as a result of the donation because they donors got the software first before actual money paid or legally committed to pay.

However the court looked past all that and concluded;

[48] There is no dispute that the Appellants voluntarily chose to participate in the program and did not do so under any duress to do so. The fact that one voluntarily chooses to donate cash to a charity does not mean such person automatically has the donative intent to make a gift. In answering the crucial question as to whether the Appellants intended to impoverish themselves, it is clear they participated in a leveraged donation scheme that was interconnected and all part of the same transaction or series of transactions, the same program if you will, that was clearly marketed to them for the purpose of offering to them and from which they expected to receive, in return for their cash donation, a number of Licences having an expected value of 3 to 8 times the cash donation to donate to another charity, all together resulting in a final benefit in the form of tax receipts entitling them to claim tax credits that would have, if allowed, given them a profit on their original cash donation, marketed to range from 56% to 89%, depending on the province of residence of the participant and based on a 3:1 ratio only. The higher the ratio of gift in kind to cash donation, the higher the profit percentages. Mrs. Mariano was honest enough to admit it. Mr. Moshurchak hid under the veil of an honest and philanthropic citizen until his own evidence and the documentary evidence of the Transactional Documents showed otherwise; in fact, showing he was negotiating a deal for even greater benefits than his fellow participants. In fact, based on the Appellants’ province of residence and the anticipated profit above, the Respondent has calculated that Mrs. Mariano would have a net tax cash advantage, after deduction of her cash donation, of $8,863 for 2005 and that Mr. Moshurchak’s net tax advantage for 2004 would have been $4,527 and for 2005, the huge amount of $241,268. When put in numerical context, the extent of the benefit is staggering, yet the law is clear that any benefit or consideration will do to find there was no donative intent.

[49] In the end, I cannot see how any person participating in such a scheme, regardless of whether such person had an honest belief in the value of the Licences he expected to receive or not, can argue, based on the manner in which the scheme was marketed and in the makeup and integration of the Transactional Documents that deliver it, that he or she expected none other than to profit from, be enriched or not be impoverished by, such participation, and thus not have the requisite donative intent.

[50] The Appellants did not have the donative intent to make the gifts of cash or Licences. This is enough to dismiss the appeals of the Appellants, however I wish to address the other aspects of whether there was a valid gift as well for failure to meet the other necessary elements of a gift; namely whether the donor owned or transferred the property.

[146] Having regard to all the foregoing, I find that the Appellants did not have the donative intent to make any of their gifts, did not own or transfer the property that is the subject matter of the gift in kind, i.e. the Licences, and that the Program was a sham; however even if I am wrong on those issues, I find the value of each Licence donated by the Appellants would actually only be 26 cents per Licence but for purposes of these appeals would have to be set at 35 cents per License based on the Minister's assumptions in its Reply of that amount.

[147] Accordingly, the appeals are dismissed, with costs to the Respondent. The parties shall have 30 days to make submissions as to costs if they are not satisfied with the above order as to costs.

Signed at Ottawa, Canada, this 19th day of October 2015.

This decision can be appealed to the Federal Court of Appeal and no doubt it will be. They have a big legal fund just for advancing their appeal. But they will lose. All of the software schemes that went to court lost in Tax Court and the F.C.A.

So, while I can't state how Gregg's situation would pan out if taken to court in the United States it is my opinion that it would have a very difficult time winning in Canada. It's possible you Americans don't even have jurisprudence on this issue since it only cropped up in Canada because of very poorly written tax legislation. Your charitable donation legislation might be better drafted.

[Burnaby49]

In effect, the Supreme Court ruled that on these facts, the Treasury Department -- and the Tax Court -- were correct. Although there was no legal obligation on the part of Berman to transfer the auto to Duberstein, the receipt of the auto was taxable to Duberstein as income; it was not a gift for Federal income tax purposes.

This is a good example of how our tax laws differ. I believe you have a gift tax. Gifts are not taxed in Canada, charitable or otherwise. If I gift millions of dollars worth of Apple shares to my kids I would be taxed on any undeclared capital gains based on their fair market value when I gifted them just as if I'd sold them. But the value of the gift itself would not be taxed to me or the kids. I can give my children all the cash I want without any tax implications. As an extreme example (extreme for me, I'm just a pensioner) my wife and I bought our house almost 40 years ago for $70,000. A modest house even then. It is now worth about a million. We could gift it to our kids tax free and they would be deemed to have a cost for any subsequent transactions of the million dollar current value, not the original $70,000 price.

[Famspear]

....So, while I can't state how Gregg's situation would pan out if taken to court in the United States it is my opinion that it would have a very difficult time winning in Canada. It's possible you Americans don't even have jurisprudence on this issue since it only cropped up in Canada because of very poorly written tax legislation. Your charitable donation legislation might be better drafted.

Now, I'm going to be the lawyer for the tax collector. In the United States, the Internal Revenue Service could well argue that where Gregg gives the concert ticket to the individual and the individual is thereby induced (but is not legally obligated) to make a cash "donation" to a charity, the individual donor's intent involves a feeling that the individual must satisfy some sort of moral obligation, or a feeling of wanting to do the right thing.

Is a feeling of moral obligation, or a feeling of wanting to do the right thing, a "detached and disinterested generosity"?



Burnaby49 wrote:

I believe you have a gift tax. Gifts are not taxed in Canada, charitable or otherwise....

Yes, and I believe the first U.S. federal gift tax was enacted in 1924.

[Burnaby49]

Yes, and I believe the first U.S. federal gift tax was enacted in 1924.

I think we had a gift tax until it was eliminated in a major rewrite of Canada's tax laws effective January 1, 1972.

[Arthur Rubin]

Yes, and I believe the first U.S. federal gift tax was enacted in 1924.

I think we had a gift tax until it was eliminated in a major rewrite of Canada's tax laws effective January 1, 1972.

IIRC, when you give "appreciated property" in Canada, even to a charity where a cash gift would be deductible, you are liable for capital gains tax as if you had sold it. Is that correct, Burnaby?

[Arthur Rubin]

As for the matter at hand, I don't recall any specific case law in the US, but consider our "public" TV and radio in the US. I don't know if you have them in Canada, but there are stations which claim not to have commercials (noting that major sponsors are sometimes allowed to have "announcements" before a program technically starts), and claim that, if you watch/listen to their station, you have a moral obligation to contribute. I know of no problem with contributions to the stations being deductible.

The stations frequently give "gifts" back for donations, and you can deduct the cash you donated less the FMV of the gift, which the stations acknowledge on the receipt. (Remember that, for gifts over $250, part of the substantiation requirement is that the donee acknowledge the amount and report if any goods or services are provided in return. I believe there are some "charities" which undervalue the services provided, and I think I can find case law on some of those being criminally prosecuted for tax fraud.) I don't know of any "charity" tax fraud rings in the US along the lines of what Burnaby described in Canada.

[Gregg]

For what its worth, if when I suggested a donation, the person getting the tickets said "I don't do charity, Trump 2016!" I would still give him the tickets. I offer them for free to friends and acquaintances, and only bring up the donation when someone offers to pay for them. I dunno if they'd not get future offers, I'd have to think about that, but as my father raised me with certain standards, if I offer the tickets for free, I give them away for free. I also take no deduction for the price I pay for the tickets, this being the one holiday I actually observe I like spending it with people who I like, admire and respect, and everyone I invite is or turns out to be one or more of the above. So far....

Somewhere, maybe not even here (I am discussing this on a few levels) the question turned from a "legal opinion" which it still is, to a moral question. If one were donating directly to the charity and getting the tickets in return (and if you give enough to the charity, you csan indeed get free tickets to the same concert, $2500 donation gets you 2 tickets) you would, properly deduct the $2350 difference. But as has been pointed out, I'm giving the tickets away, and I'm not planning on telling the IRS even if they ask...but is it morally and ethically right to take the deduction when, as I propose the transaction, it is an even exchange.? I hope so. I get no small amount of gratification of both bringing interesting people together for an evening, and steering a few dollars to feeding the hungry and all that...makes me warm and fuzzy in a world where I am rarely thought of as warm and fuzzy. The people I'm asking, by happy coincidence, are all people I assume are not going to break the bank by giving $150 more to charity than they have already, and I hope some might make it part of their annual charity plan. But if they can't, or they don't, I'm not going to lose sleep over it.
Well, if they CAN'T, I would honestly feel a little guilty about suggesting something that put them on the spot....

Its all just a mental exercise, I think we can all agree that this isn't going to be one of the IRS's priorities this tax season and surely no one is going to go to jail....

ANd if in the future I offer you tickets to a concert, please, consider making a donation to a charity, any charity, but if you don't want to or aren't able to, don't feel bad about accepting them, I'm not going to check and I wouldn't have made the offer if I didn't genuinely want to spend a little time with you on what is to me the most special day of the year....

Thanks for the interesting discussion!

[NYGman]

Gregg, I agree that this is an interesting topic of discussion. At the end of the day, the charity receives a donation which it may not have otherwise received, and awareness has been raised, which are both a very good things.

I think I keep coming back to intent of the recipient here, to determine the correct course. If in the recipients mind the action of donation resulted in them receiving the tickets, then I would think the appropriate cause of action would be to not deduct the contribution as it is a wash with the FMV of the ticket. However, if the recipient takes the request to donate as just that, a request, where there is no obligation, then it might be deductible.

So in the initial example, maybe Gregg's friend views the two events as linked, and therefore takes a more conservative approach, and doesn't take the deduction. I did bring up the Moral question, the Slippery slope, as I think it may have some application.

Assuming the friend believes the right thing to do is not to take the deduction, as he views these two events together (The donation and gift of tickets). However, they also know that the likelihood of the IRS tracking this transaction is very low (Unless of course they read these threads and do some serious forensic accounting) and the risk this deduction would be challenged are almost NIL, from a practical perspective, the gift giver has a receipt for $150, the charity doesn't know about the ticked part of the transaction, They could easily claim the deduction, and never get caught doing so. It is a small amount, and not material. As the charity got their funding they are happy, as Gregg is not asking for Compensation, he is not fussed. As the amount is small and there is no Double Dipping on the deduction, I am starting see this as a potential, even though there may be reservations.But what about the following scenario (Excluding Gift Tax issues):

Gregg has an old classic car, in need of repair, I want. it hasn't run in 10yrs, but I know the motor is good, and I can fix it up and have the car of my dreams. It is probably worth $12k in its current condition. Gregg says that If I want the car, I should donate 15k to a charity, and he will give it to me. I donate $15k to charity, and get the car. Now for tax are we talking 15k cash donation or 3k if we need to reduce the FMV of the car at grant time?

[Burnaby49]

Yes, and I believe the first U.S. federal gift tax was enacted in 1924.

I think we had a gift tax until it was eliminated in a major rewrite of Canada's tax laws effective January 1, 1972.

IIRC, when you give "appreciated property" in Canada, even to a charity where a cash gift would be deductible, you are liable for capital gains tax as if you had sold it. Is that correct, Burnaby?

Yes. The reasoning is obvious. If you make a cash donation to a charity then the money is assumed to come from after tax income. You get a deduction to the extent of the cash to partly compensate for your generosity. But let's say you donate public company shares you paid $1 for and are now worth $100,000. If you were not taxed on the disposition of the shares to the charity you would avoid paying the tax on the $99,999 in capital gains and get the $100,000 as a deductable amount. Essentially double-dipping. This was one of the reasons for the set-up in the case I cited;

Mariano v. The Queen, 2015 TCC 244
http://canlii.ca/t/glrs3

Another massive donation deduction scheme. I've gone through Mariano but not done a detailed review of it. This one was different than the prior cases I reviewed because it involved cash donations and gifts-in-kind. The gifts were software licenses vastly overvalued by the schemes promoters. The plan was that taxpayers who chose to become involved in the scheme would become beneficiaries of a trust. The trust would make distributions to the beneficiaries of the licenses and there was a compliant charity waiting to accept them from the taxpayers and issue donation receipts for the license values determined by the promoter. There was a second charity set up to accept the cash donations. The scheme was that the taxpayers would get huge donation receipts for software they had received free as trust beneficiaries and get separate receipts for the cash. The promoters of course got the cash and a bunch (millions) of useless software licenses they didn't want but which were essential to get the cash, their real goal.

The reason for the trust was that, under trust tax law, distributions to beneficiaries are valued at their fair market value. The software was esentially worthless crap, about $0.25 a license, but the scam valued them at a much higher amount for donating purposes. This higher amount was supported by a valuation report prepared by a member of the Canadian Institute of Chartered Business Valuators, the Canadian equivalent to your American Society of Appraisers. The judge kicked his ass all around the courtroom and totally rejected his report. Anyhow the plan was to distribute the software through the trust so that the shareholders were deemed to have received it at the grossly inflated claimed value and donated it at that value. In their little perfect world that meant that they had no tax to pay on the disposition of the software but got huge donations based on a fake software value. Sadly the judge didn't agree.

[Dr. Caligari]

Duberstein was dealing with a different issue-- did the recipient have income, or was it a non-taxable "gift" to him; for obvious reasons of policy, "gift" is construed very narrowly in that context. That is not the same issue as to whether some one who made a donation to a charity gets a deduction for a charitable contribution.

[Famspear]

Duberstein was dealing with a different issue-- did the recipient have income, or was it a non-taxable "gift" to him; for obvious reasons of policy, "gift" is construed very narrowly in that context. That is not the same issue as to whether some one who made a donation to a charity gets a deduction for a charitable contribution.

Yeah, and the difference between Duberstein and Gregg's example is why I think although the lack of a legal obligation on the part of the transferor in Duberstein did not prevent the transfer of the car from "not being a gift for tax purposes," the lack of a legal obligation (on the part of the individual in Gregg's case) to make the charitable contribution might still be important in that charitable contribution case. The facts of the two situations are different enough that the lack of legal obligation in the latter case might arguably be crucial, while the same lack was not determinative in the former case. Again, I haven't studied this area in a long time, but I would think that the intent of the donor (the Duberstein language) could still be important in determining the availability of a deduction for a putative charitable contribution.