The next music director of the New York Philharmonic, Jaap Van Zweden, received $5,110,538 in 2013 from the Dallas Symphony as compensation. The Maestro’s salary was $1,788,997. But $3 million plus of his total compensation came from a signing bonus from one individual who made the donation as a restricted gift exclusively for Mr. Van Zweden’s compensation, according to The New York Times.1 Mr. Van Zweden will join the New York Philharmonic starting with the 2018-19 season.
Interesting issue (to those interested in this stuff): Did the donor make a deductible charitable gift to the Dallas Symphony or a gift to the conductor?
Cases and Rulings
Let’s look at the cases and the revenue rulings on earmarked gifts. The underlying issue and overriding fact question is whether the donor intended to benefit a specific individual or the charitable organization.
- In Private Letter Ruling 9322017 (March 8, 1993), a university was directed by a donor to use the income from his gift to pay the president’s salary. The post was vacant, and the donor didn’t know the candidates and wouldn’t have a say in choosing the president. The Internal Revenue Service ruled that the donation is deductible because it’s for the university’s administration and isn’t earmarked for a specific individual's benefit.
- In Tripp2, the taxpayer wrote to a college, stating that he knew a contribution for a scholarship was deductible only when the recipient was unspecified. But he then added that if in the college’s opinion, his check could be applied to a designated individual’s advantage, “it would be constructive.” The court found that the donor’s letter, despite its equivocal language, earmarked the gift for an individual. Thus, it wasn’t deductible, even though the individual would have been an appropriate scholarship recipient had the college used its own funds.
- In Rev. Rul. 79-81, “sponsors” made tuition payments to a religious school, designated for the benefit of a particular student. Although the payments were to be used at the school’s discretion, the IRS denied deductions because each sponsor intended to benefit a particular individual.
- In Rev. Rul. 68-484, deductions were allowed for corporate scholarship grants to colleges from which the donor recruited many of its employees. The colleges selected the scholarship recipients, and the donor or the recipients made no employment commitments. The IRS found that the corporation intended to benefit the charitable organization, not the individual recipients.
- In White3 and Brinley4 the courts allowed parents of missionaries to treat payments to their sons as out-of-pocket expenditures incident to rendering volunteer services, even though the parents weren’t rendering services themselves. Despite the IRS' warning that low-bracket children could pass deductions on to higher-bracket parents, the appellate courts treated the family as a single taxpaying unit.
- In PLR 9338014 (June 23, 1993), the donor established a university scholarship fund to honor his relatives. Needy students had preference to receive aid, but recipients could include the donor’s family. A scholarship committee had the power to select recipients. The IRS ruled that the donor’s contributions qualified for income and estate tax charitable deductions. Although the class of permissible recipients may include the donor’s family, the selection committee wasn’t required to give them preference. The IRS conditioned its ruling on the absence of an understanding between the parties that the donor’s relatives would be given preference in the selection of scholarship recipients.5
- In Hubert,6 the donor created two testamentary trusts. Income was paid to a charity to support its missionary work through two individual missionaries, including their support during retirement. The IRS argued the bequests weren’t deductible because the intent and effect of the gifts was to benefit the individual missionaries and not the charity or the community. But the Tax Court disagreed. The donor intended to benefit the general public and had been supporting the missionaries for many years. He had no connection with them except through the charity. Supporting the missionaries during their retirement furthered the donor’s charitable purpose by ensuring that they could continue their work in later years. The charity controlled the trusts and could guarantee that they were used solely for charitable purposes.
- In PLR 200250029 (Sept. 9. 2002), the charity, for many years, supported musical composition and performance. It hosted composer events, placed composers in residencies with professional arts institutions, funded recordings of new American music and made agreements with professional arts institutions to commission works to be performed by those institutions. In January, donors (husband and wife) told the charity that they were interested in supporting the composition of a work by Rosa Composer (That’s the name I substitute for the individual the IRS calls “A.”) In July, they contributed funds to the charity. At that time, the charity didn’t make any commitment to use the funds to commission a work by Ms. Composer and didn't represent that the funds would be so used. Rather, the charity told the donors that the funds would be used at the discretion of its officers, and the donors represented to IRS that they understood that.
The charity’s acknowledgment letter thanking the donors for their contribution stated that there could be no assurance that their contribution would be used to support Ms. Composer’s work. In November, the charity, Ms. Composer and the Orchestra entered into an agreement providing that the charity would pay Ms. Composer a commissioning fee and copying costs and would reimburse her expenses for appearing at her work’s premiere. The donors’ contribution was sufficient to pay for all of that. Ms. Composer agreed to complete a work of specified form and duration, and the Orchestra agreed to make reasonable efforts to perform it and was granted the exclusive right to perform the premier and for a limited time thereafter.
The IRS ruled that the donors’ contribution wasn’t impermissibly earmarked for Ms. Composer and thus is deductible. The IRS' rationale for ruling favorably: The donors made a payment to a recognized charity and expressed an interest in supporting the work of a particular composer. This expression of interest raises the issue of whether the contribution was impermissibly earmarked for this composer. However, no commitment or understanding existed between donors and the charity that the contribution would benefit the composer. The donors understood, the IRS determined, that any funds contributed to the charity would be distributed in the charity's discretion. Although the donors expressed an interest in the selection of a particular individual to compose a work for the charity, the common understanding was that the contribution would become part of the general funds of the charity and would be distributed as determined by its officers.
Reminder. A PLR isn’t authority except for its recipient.
Parthian shot. If a gift is held to be earmarked for an individual, not only does the donor lose the income tax charitable deduction, but also could be subject to the federal (and possibly state) gift tax on transfers to individuals (assuming it exceeds the $14,000 per donee annual exclusion).
Exception
The recent slaying of five Dallas police officers recalls a legislative exception to the earmarked-charitable-deduction-denial rule.
Cash gifts made for the exclusive relief of the families of two slain New York police officers were allowable 2014 deductions if made between Jan. 1 and April 15, 2015.
The law provided that the gifts were deductible even though the contributions were made to organizations that specifically benefited the families of Detectives Liu and Ramos.7
Endnotes
1. Michael Cooper, “How Jaap van Zweden Became America’s Best-Paid Conductor in 2013,” The New York Times (June 23, 2016).
2. Tripp v. Commissioner, 337 F.2d 432 (7th Cir. 1964).
3. White v. United States, 725 F.2d 1269 (10th Cir. 1984).
4. Brinley v. Comm’r, 782 F.2d 1326 (5th Cir. 1986).
5. See also PLR 9631004 (April 30, 1996).
6. Hubert v. Comm’r, T.C.M. 1993-482.
7. Slain Officers Family Support Act of 2015, signed into law on April 1, 2015.
© Conrad Teitell 2016. This is not intended as legal, tax, financial or other advice. So, check with your advisor on how the rules apply to you.
