Can I Fundraise for a Child with a Disease?

One of the questions I am most frequently asked is painful to answer. A child has a rare disease. Family and friends are raising money to pay for an operation that may save his or her life. Will The Community Foundation accept gifts on the child's behalf?

The painful answer is, "No." It is not that we do not have a heart. The reason is the IRS does not allow it.

To understand the IRS's reasoning, think about it this way. Let's say you are a parent who makes gifts annually to children and grandchildren up to the annual exclusion of $12,000. Do you take a tax deduction for these gifts? Clearly, you do not. What difference does it make to the IRS if the individual to whom you make a gift is a relative or not? None. A gift to an individual is not a charitable gift, and furthermore it is subject to limits above which you pay a gift tax.

These facts do not stop some people from claiming a charitable deduction for such gifts. If their tax returns get audited by the IRS, they will face a rude awakening.

There is one loophole, however, that seems to work even if it is not "kosher." That is, churches will often set up collections to help needy individuals. Congregants give to the church and take a tax deduction. The church does not file an informational 990 return with the IRS, as 501(c)(3) nonprofits do, because it is a church. Nobody is willing to look behind the veil of the church's activities because of the separation between church and state. Nor, am I advocating that the IRS should look behind that veil. Yet, these are the facts, and some people are managing to claim tax deductions for gifts to individuals.

Can one ever make gifts to individuals and legitimatelyreceive a charitable deduction? Yes, but the giver cannot choose the specific individual who will receive the gift.

A scholarship fund is a good example. You make a tax deductible gift to a scholarship fund, for instance, at a community foundation where an independent scholarship committee chooses awardees based on pre-established criteria that make the scholarship available to a sufficiently large class of individuals. The Community Foundation's Board of Governors approves in advance the scholarship committee's members and the scholarship criteria, and all participants sign a conflict of interest statement to ensure that nobody's child, grandchild, niece, nephew or similar relation of a close friend or relative receives favoritism. Similar funds have been established for disaster relief and for hardship. In no case, may the giver specify the individual who receives an award.

So, for those of you who are charitably minded and wish to help specific individuals, these are the rules. We did not make them up. The good news is that despite the absence of a tax deduction, people often give generously to help other people. Perhaps this generosity of spirit in our country presages the effect on giving of a zero estate tax, which many perhaps falsely presume to be a death knell for charitable bequests.

Robert Thalhimer

Posted at 1:44 AM, Feb 26, 2008 in Accountability | High Net Worth Donors | Permalink | Comment