The court found a “cooperative arrangement” among the three organizations, facilitated by the fact that A was the sole signatory on the bank accounts of the organizations.173 The court found the following “circular flow” of funds: (1) CO loaned money to BL on a short-term basis at a 2.5 percent interest rate; (2) BL then lent the money to FP for a 20-year term, also at a 2.5 percent rate; (3) FP then lent the funds at a 3 percent interest rate to investors; and (4) the investors would complete the flow by contributing the funds to CO.174
The consequence of this money circle scheme was that the organizations and the “contributors” improved themselves financially. With each transaction, FP received a promise of small interest payments and a repayment of principal in 20 years. CO, while breaking even on the funds “contributed” (since it was the source of the funds), received a small contribution from an investor's personal funds with each transaction. Each investor received a large tax benefit from the charitable deduction, a benefit that more than offset the present value of the interest and principal they agreed to pay to FP. Said the court: “The loser in the whole enterprise was the federal government, which in effect financed the gains received by the [three related] organizations and the private investors.”175
One of the many of these “donors” (the subject of the case) was B. He borrowed $22,500 from FP; within 20 minutes of the borrowing, he added $2,500 of his own funds and made a $25,000 “gift” to CO. The IRS disallowed $22,500 of the claimed charitable deduction, and the matter went to court, where the government prevailed. The denial of the deduction was based on the lack of economic substance underlying the transaction. The court concluded that the three organizations “operated essentially as an integrated whole” with respect to the loan program.176 It viewed the three organizations as a “single unit” that was not enriched by the $22,500 “contribution.”177 The court observed that the passage of the $22,500 through the three organizations left each of them in essentially the same position as if no contribution had been made. Aside from the $2,500 “true” contribution, the court found that the only real economic change at the close of the transaction was B's obligation to pay funds over the next 20 years to FP, a result no different than if B had signed a note to pay CO $22,500 over 20 years. The court observed that this type of promise to make a contribution in the future does not qualify for a current charitable contribution.178
(f) Requirement of Donor Ownership
A related fundamental principle is that a donor, to be a donor, must contribute property that he, she, or it owns.
An illustration of this principle occurred following the grant by the U.S. Forest Service to two individuals, who owned a ranch, of a permit to graze livestock on a parcel of government-owned land in a neighboring national forest. This permit did not allow the permit holder to transfer or sell it; if the property was sold, the permit had to be waived back to the federal government or be canceled. The ranch was subsequently sold; the grazing permit reverted to the government. These individuals claimed a charitable contribution deduction for the alleged value of the permit. A court held that grazing and livestock use permits of this nature do not convey any title, right, or interest to or in the permit holder. This court observed that, because the federal government already held all right, title, and interest in and to the property, it did not receive any value when the permit was waived back to it. The court sagely noted that “[o]ne cannot donate something one does not own or possess.”179
Another illustration of this fundamental point was provided by a case involving a lawyer who contributed to a tax-exempt university files of photocopied materials he had received from the federal government in connection with his representation of a criminal defendant in a high-profile case. Under the law of the state involved, lawyers do not own their clients' case file but rather maintain mere custodial possession of it. Because this lawyer did not possess an ownership interest in the materials, he, in the words of a court, “was not legally capable of divesting himself of the burdens and benefits of ownership or effecting a valid gift of the materials.”180 Thus, the court ruled that a charitable contribution deduction was not available for this gift.
(g) Donor Recognition
In general, it has long been recognized that the mere publicity for a person as a benefactor of a charitable organization is an incidental benefit that does not adversely impact a charitable deduction.181
Thus, a gift or contribution is a payment of money or a transfer of property to a charitable organization when the person making the payment or transfer does not receive anything of consequence or of approximate value in return.
(h) Anticipatory Income Assignments
A transaction may appear to be a charitable gift of property but, in actuality, be an anticipatory assignment of the income from the property that would otherwise have flowed directly to the transferor. If that is the case, the charitable contribution deduction is determined as if the gift were of money first received by the donor from the property,182 subject to the 50 percent limitation,183 rather than a gift of the property, such as long-term capital gain property subject to the 30 percent limitation.184 Also, if the property has appreciated in value, the donor may be taxable on the resulting gain.185
An anticipatory assignment of income occurs in the charitable giving setting when a person has certain rights in the contributed property that have so matured or ripened that the person has a right to the proceeds from the property at the time the transfer is made.186 If the transaction is an assignment of income, there may not be a charitable contribution deduction for the fair market value of the property transferred; the transferor may be taxable on the proceeds diverted to the charitable organization, and the charitable deduction may be determined as if the gift were of the after-tax income.
The distinction between a gift and an assignment of income is rarely easy to make. All that is clear in this area is that the assignment-of-income doctrine must be applied on a case-by-case basis.187 As one court stated: “Whether a taxpayer possesses a right to receive income or gain is, of course, a question of fact, each case turning on its own particular facts. The realities and substance of the events, rather than formalities . . . must govern . . . [the] determination of whether an anticipatory assignment of income occurred.”188
A court opinion illustrated the sometimes