The Law of Charitable Pledges
At its annual banquet, a major charity calls out the name of each attendee who then stands and announces the amount he pledges to the annual campaign.
One guy refused to satisfy his pledge; the charity sued him and won. Mistakenly, he was invited to the following year’s banquet and he attended. When his name was called, he stood and said, “I pledge
State law determines a pledge’s enforceability. And, unless a pledge agreement specifies the applicable state law, a conflict-of-laws issue can arise if the donor and the charity are in different states.
Pledges have been held binding on one or more grounds:
• The pledge is an offer to contract that becomes binding when work obligated by the pledge has begun, or the charity relying on the pledge has otherwise incurred liability.
• The consideration for the donor’s pledge is its support by pledges of others.
• Donor’s pledge has induced other pledges.
• The charity’s acceptance of the pledge imparts a promise to apply the funds according to the donor’s wishes, and his pledge is supported by that promise.
• Public policy requires the donor’s liability on a pledge.
Recent
The details. Charity maintained that Kramer executed the Subscription on
Four groups of family members and the Public Administrator opposed Charity’s
The Public Administrator and other family groups argued that the pledge was barred by the doctrines of laches* and unclean hands.** Still other family groups asserted that the claim was barred by the statute of limitations. Yet other family groups asserted that the Charity’s claim was barred on the ground of fraud or fraudulent inducement. Finally, some family groups asserted that the decedent lacked the mental capacity to make the pledge.
The Charity responds:
Notwithstanding its failure to seek collection of the Subscription during Kramer’s lifetime, the Subscription is a charitable pledge enforceable against Kramer’s estate. It was freely made by him and he had the requisite mental capacity to make the gift. Kramer was a longtime and widely recognized supporter of the Charity’s work, and the Charity maintained that it had proceeded with the
The Charity and all who opposed the pledge relied on identical case law to support their opposing conclusions regarding reliance.
It all came down to the issue of reliance. The court found that the Charity failed to satisfy its burden to demonstrate reliance on Kramer’s Subscription.
In many of the cases cited by the parties, some substantive progress had been accomplished toward the charitable purposes for which the pledges were received. In Cohoes
In some instances, charitable pledges have been enforced where partial payments were made. See, for example,
Finally, in a number of cases charitable pledges were enforceable where the facts demonstrated actions in reliance by the charities as well as partial pledge payments by the donors. See, for example,
Public policy wasn’t enough to enforce Kramer’s pledge. “Despite the widely recognized public policy favoring enforcement of charitable pledges,” said the court, “consideration must actually be demonstrated by proof of meaningful and substantive actions in reliance thereon. The facts of the instant case, and the negligible proof submitted, necessitate a finding that [Charity] has neither commenced construction, formally engaged any design, engineering or building professionals to commence construction, nor incurred any obligations, legal, financial or contractual, with respect to the building project.”
Court’s holding. The motion to dismiss the objections to the Charity’s petition for a determination of the validity and enforceability of Kramer’s pledge is denied. The cross-motions to dismiss Charity’s petition is granted.
Matter of Estate of Kramer, NYLJ,
An earlier
Mrs. Payson’s executors refused to pay anything further to the museum and asked the Surrogate’s Court to determine the validity of the museum’s claim for the unpaid
The Surrogate’s Court held. The Statute of Frauds (which requires written evidence to enforce certain promises) was satisfied because
But the court cautioned that donors and donees should be meticulous:
There is no more room for casual estate planning in charitable gift-giving than there is in any other estate planning device. This warning is issued to donors and charitable donees alike. The loss of litigation by donors’ estates should be no solace to charitable donees for such litigation, caused by inexcusable casualness, may cause less charitable gift-giving by others. These proceedings would not have been necessary if the Museum had followed reasonably prudent business methods and had the decedent sign a simple pledge form.
Estate of Payson, Surrogate’s Court,
290 S.2d 484 (FL Sup. Ct, 1974)
Income Tax Deductibility Rules
When deductible. A charitable pledge is deductible on a donor’s income tax return in the year fulfilled, not when the pledge is made. IRC Section 170(a)(1).
Capital gain. Generally, satisfying a debt with appreciated property is the equivalent of selling the property and satisfying the debt with the proceeds: Capital gains tax must be paid on the appreciation. But a donor who satisfies a binding pledge with appreciated property doesn’t trigger capital gain tax on the difference between the property’s basis and its fair market value. Rev. Rul. 55-410, 1955-1 CB 297.
IRA distribution in satisfaction of a pledge. From 2006 through 2014, an individual age 70½ or older could make direct charitable gifts from an IRA, including required minimum distributions, of up to
Situation. The donor made a legally enforceable pledge to give money or property to a charity and subsequently satisfied the pledge by making an IRC Section 408(d)(8) qualified charitable distribution directly from the donor’s IRA to the charity.
Interesting question. Is a donor subject to federal income tax if the donor satisfies a personal pledge to a charity with a distribution from an individual retirement account?
The IRS’s legal analysis. IRC Section 61 defines gross income as all income from whatever source derived, unless a specific exception applies. IRC Section 408(a) provides that the term “individual retirement account” means a trust created or organized in
Rev. Rul. 55-410, 1955-1 C.B. 297, provides that the satisfaction of a pledge to a charitable organization by means of a donation or gift of property that has either appreciated or depreciated in value does not give rise to a taxable gain or a deductible loss. In effect, Rev. Rul. 55-410 holds that a charitable pledge does not create a debt for federal income tax purposes and is not a legal obligation for purposes of IRC Section 677. Rev. Rul. 64-240, 1964-2 C.B. 172. See also Rev. Rul. 57-506, 1957-2 C.B. 65.
IRS’s caveat. “This letter is an ‘information letter’, which calls attention to a well-established interpretation or principle of tax law without applying it to a specific set of facts. It is intended for informational purposes only and does not constitute a ruling. See section 2.04 of Rev. Proc. 2010-1 2010- I.R.B. 1,7.”
University Professor of Philanthropy and the Law,
Director, National Center on Philanthropy and the
Law at
written by Michael J. Montemurro,
Gift Tax Deductibility Rules
When deductible. The gift tax deductibility rules differ from the income tax rules. For gift tax purposes, a gift is deemed made at the time a binding pledge is made. No gift tax is payable, however, because a gift tax charitable deduction is allowed.
• Gifts that qualify for the
• Outright charitable gifts of cash (including any IRA transfers) regardless of the amount and property gifts (regardless of the value) qualify for the unlimited gift tax charitable deduction and generally aren’t reportable.
• An outright charitable gift of a partial interest (for example, an undivided one-fifth interest in Greenacre) is reportable. But, no gift tax is payable because it qualifies for the unlimited gift tax charitable deduction.
• “If you are required to file a return to report noncharitable gifts and you made gifts to charities, you must include all your gifts to charities on the return.” Instructions for Form 709 United States Gift (and Generation Skipping Transfer) Tax Return. (This is from the instructions for 2014. The instructions for 2015 haven’t been issued yet. However, the annual instructions have been saying this for a number of years). Presumably “all” means outright charitable gifts to any charity during the year totaling more than
Letter Ruling 8230156 deals with when a pledge gift is deemed made for gift tax purposes. Donor agreed with a charity that he would donate
Fulfilling another’s pledge. The donor pledged
1. Friend’s payment of Donor’s pledge to Charity was not a charitable gift by Friend under IRC Section 2522 (gift tax) because the pledge was a binding obligation of Donor’s.
2. Friend’s payment to Charity was a gift from Friend to Donor.
3. For gift (but not income) tax purposes, Donor was considered to have made a gift to Charity when the pledge became enforceable. Under local law, a pledge to contribute to a charity is a revocable offer. However, the offer becomes irrevocable and legally binding when the charity takes action in reliance on the promise. So for gift tax purposes, Donor made a gift to Charity in March, when Charity incurred expenses in reliance on his pledge.
4. For income tax purposes, Donor could not deduct his charitable contribution until payment was actually made to Charity. Thus (although the ruling doesn’t say so in as many words), Donor was deemed to have made a gift in May and would be entitled to an income tax deduction on that year’s return.
Rev. Rul. 81-110, 1981-1 C.B. 479
Suppose Friend, in this ruling, owed money to Donor and paid the debt with appreciated property instead of cash. Friend would have to report capital gain equal to the property’s appreciation.
By the same token, if Friend paid his debt to Donor by transferring appreciated property to Charity (in satisfaction of Donor’s pledge), Friend would still have to report capital gain on the property’s appreciation.
Qualified Charitable IRA distributions aren’t prohibited transactions — even if used to satisfy pledges. |
Estate Tax Deductibility Rules
Binding pledges. A legally binding pledge that isn’t satisfied by a donor during lifetime is treated as a debt of the donor’s estate and is deductible by the estate as a debt—not as a charitable contribution if: (1) the amount of the unfulfilled pledge is paid to charity; (2) an estate tax charitable deduction would have been allowed if the gift had been made by the donor’s will; and (3) the donor’s promise was enforceable against the donor’s estate. Reg. Section 20.2053-5. State law determines whether a pledge is enforceable.
Non-binding pledges. If an unfulfilled pledge isn’t enforceable against the donor or his estate, no estate tax deduction is allowable. But if a donor makes a non-binding pledge during lifetime and provides in his or her will that any unfulfilled pledge be satisfied by his estate, the donor is deemed to have made a charitable gift that qualifies for the estate tax charitable deduction.
Deductible as debt of estate? Before he died, a donor signed a memo pledging
The
Letter Ruling 9718031
Some Private Foundation Considerations
Private foundation pays an individual’s pledge. Don’t do it. The IRC Section 4941 excise taxes on self-dealing will be imposed. Also, the remainder interest of a charitable remainder trust shouldn’t be used to satisfy a donor’s pledge.
Individual’s pledge to private foundation. Milton was a substantial contributor to Foundation; thus, he was a “disqualified person.” Over the years he made a number of pledges to Foundation, promising to transfer cash or marketable assets. The pledges provided that Foundation could use them as collateral to borrow money. On several occasions, Milton substituted a larger pledge due at a later date. He fulfilled two of his pledges with real property. Wondering whether Milton’s actions were self-dealing, the District Director asked
The
Letter Ruling 8723001
*The doctrine of “laches” is based on the maxim that equity aids the vigilant and not those who slumber on their rights. Laches is not to be confused with latkes (Yiddish for potato pancakes).
**Under the “unclean hands” doctrine, equity will not grant relief to a party who seeks to set judicial machinery in motion and obtain a remedy if the party in his prior conduct has violated conscience, good faith or other equitable principles. One, of course, shouldn’t eat latkes if he doesn’t have clean hands.
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