MIssion Trip info via M.W. 07-16-08

MIssion Trip info via M.W. 07-16-08

  TO:    Interested Onliners                                                                                               FROM: Jim Bramer. Retired Auditor-CPA
                                                                                                                                                  FILE: 0177-77/all

   Re: Mission Trip Donation Matters                                                                              Originated in April 2008

                Below is some material that resulted from some research by a Ministry savvy Attorney on this overall topic. Please let me know at Jim@bcidot.org is you desire more information about this person or more data on this subject.

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From a Methodist Church Website

Designated Contributions

        “Designated contributions” are those that are made to the Church for a specified purpose. If the purpose is an approved project or program of the Church, the designation will not affect the deductibility of the contribution. An example is a contribution to a church building fund or mission trip. However, if a donor’s contribution specifies that it be spent on a designated individual, then no deduction ordinarily is allowed unless the Church exercises full administrative control over the donated funds. Designated contributions that ordinarily are not deductible include contributions to a church scholarship fund that are earmarked for a specific individual. However, contributions to a church, mission trip, or missions agency that specify use by or for a particular missionary may be tax-deductible if the church or missions agency exercises full administrative and accounting control over the contributions and ensures that the contributions are spent in furtherance of the church’s mission.
         The Church may, from time to time, accept special gifts and/or offerings for a predetermined purpose. Documentation of such gifts will be included on a donor’s statement of annual giving based on the Church’s ability to identify the donor.

Mission Trip Contributions
          Contributions for mission trips are made with the understanding that the Church must have full administrative and accounting control over the funds, including all decisions about who will receive a benefit from the gift. In order to be deductible, a mission trip contribution must not designate a specific individual on the check. In addition, the Church will make a reasonable determination as to the portion of any mission trip expenditure that is for purposes other than mission work, e.g., sight-seeing or other recreational or pleasure activities. If a trip is not substantially devoted to mission activities (as determined by the Church), contributions for it and expenses incurred in connection with it are generally not deductible.

The following excerpt is from the 2008 Church & Clergy Tax Guide, pages 389-391; Richard R. Hammer, J.D., LL.M., CPA

Contributions to churches or missions agencies that designate a particular missionary as the recipient of the contributed funds

        Assume that a church member makes a contribution of $500 to a denominational missions board and designates on the check (or with a cover letter) that it is for a designated missionary. Is this common practice affected by the Supreme Court’s decision in the Davis case (summarized below)? In many cases it will not be. In 1962 the IRS ruled that designated contributions are tax-deductible (assuming that all of the other legal requirements applicable to charitable contributions are satisfied) so long as the church or missions board “has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes.”

        In other words, if a donor contributes funds to a missions board, designating a particular missionary, the contribution will be deductible so long as the missions board retains full administrative and accounting control over the funds. What does this mean? Neither the IRS nor any federal court has addressed this issue directly. Presumably, this test could be satisfied if a missions agency adopts the following procedures:

----·  Require each missionary to complete a periodic (e.g. quarterly) activity report summarizing all missionary activities conducted for the previous period. This would include services conducted, teaching activities, and any other missionary activities. The summary should list the date and location of each activity.

----·  Require the missionary to complete a periodic accounting of the donated funds received from the missions agency. The agency should prepare an appropriate form. The form should account for all dollars distributed by the agency. Written receipts should be required for any expense of more than $75. This report should indicate the date, amount, location, and missionary purpose of each expense. It can be patterned after the expense report used for business travel. Keep in mind that “religious purposes” includes not only those expenses related directly to missionary activities but also ordinary and necessary travel and living expenses while serving as a missionary.

----·  The missions agency must approve each missionary’s ministry as a legitimate activity in furtherance of the church’s religious mission.

----·  Prepare a letter of understanding that communicates these terms and conditions. The agency should specifically reserve the right to audit or otherwise verify the accuracy of any information provided to you. For example, you may on occasion wish to verify that the activity reports are accurate.

----·  Reconcile the expense summaries with the activity summaries. That is, confirm that the expenses claimed on the expense reports correspond with the missionary activities described in the activity reports.

        Such procedures can be burdensome for a missions agency. This is the type of accounting and administrative control the Mormon Church was attempting to avoid by its practice of direct person-to-person donations. However, such procedures (or similar ones) will be essential in order to demonstrate that the agency maintains administrative and accounting control over contributions designating specific missionaries.

Contributions to a local church designating a particular missionary not associated with any missions board or agency

        Are these contributions tax-deductible? According to the IRS 1962 ruling, such contributions are deductible only if the church “has full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out its functions and purposes.” This means that the local church must assume the role of a missions board and implement the kinds of procedures described above with regard to each such missionary. This is a significant responsibility that many churches will not be willing to assume. The Supreme Court’s decision in the Davis case (summarized below) ensures that contributions to local churches for independent missionaries and short-term “lay missionaries” from one’s own church are not tax-deductible without such controls.

Davis v. United States, 110 S. Ct. 2014 (1991)

        In this ruling the Supreme Court gave its most detailed interpretation of the requirement that a charitable contribution be to or for the use of a qualified charitable organization. The case involved the question of whether the parents of Mormon missionaries can deduct (as charitable contributions) payments they make directly to their sons for travel expenses incurred in performing missionary activities. The parents conceded that their payments were not made to a qualified charity, since the monies went directly to the sons and not to the Mormon Church. However, they insisted that their payments were for the use of the church, since the church “had a reasonable ability to ensure that the contributions primarily served the organization’s charitable purposes.” They pointed to the church’s role in requesting the funds, setting the amount to be donated, and requiring weekly expense sheets from the missionaries.

        On the other hand, the IRS interpreted “for the use of” much more narrowly, to mean “in trust for.” In other words, for a contribution to be “for the use of” a charity, it must be made to an individual or organization pursuant to a trust or similar legal arrangement for the benefit of the charity. Without such a legal and enforceable arrangement, a contribution to an individual cannot be considered for the use of the charity, since no legal means are in place to ensure that the contribution will be used for the exclusive benefit of the charity. An example of a donation for the use of a qualified charity would be a contribution to a trustee who is required, under the terms of a trust agreement, to spend the trust income solely for the benefit of specified charities. Such a contribution is not to a charitable organization, but it should be deductible if made to a trustee who is required to distribute the funds to qualified charities. Obviously, the parents’ transfer of funds to their sons’ personal checking accounts failed this definition.

        The court conceded that the words “for the use of,” taken in isolation, could support the interpretation of either the parents or the IRS. However, it reviewed the events leading to the enactment of the phrase “for the use of” in 1921 and concluded that “it appears likely that in choosing the phrase ‘for the use of’ Congress was referring to donations made in trust or in a similar legal arrangement.” The court noted that the parents had presented no evidence supporting their claim that Congress intended the phrase “for the use of” to mean contributions directly to individual missionaries so long as the church “has a reasonable ability to supervise the use of the contributed funds.” The court further emphasized that the parents’ interpretation.

   "would tend to undermine the purposes of [federal tax law] by allowing taxpayers to claim deductions for funds transferred to children or other relatives for their own personal use. Because a recipient of donated funds need not have any legal relationship with a [church], the [IRS] would face virtually insurmountable administrative difficulties in verifying that any particular expenditure benefited a [church]. Although there is no suggestion whatsoever in this case that the transferred funds were used for any improper purpose, it is clear that [the parents’] interpretation would create an opportunity for tax evasion that others might be eager to exploit."

        The court concluded that the parents could not deduct the payments they made directly to their missionary sons because the payments were not made either to or for the use of a church or other qualified charity as required by federal law. The payments could not be considered for the use of a church, since the parents

    "took no steps normally associated with creating a trust or similar legal arrangement. Although the sons may have promised to use the money in accordance with Church guidelines, they did not have any legal obligation to do so; there is no evidence that the [church’s] guidelines have any legally binding effect….We conclude that because the [parents] did not donate the funds in trust for the Church, or in a similarly enforceable legal arrangement for the benefit of the Church, the funds were not donated ‘for the use of’ the Church."

KEY POINT.

        A Tax Practitioner Newsletter published by the IRS Salt Lake City District specifies: “The LDS Church initiated a new missionary funding program, on January 1, 1991. Under this new funding program, called the Equalized Funding Program, all missionary contributions are made directly to the Church. Contributions under the program then become the property of the Church and are under its control. The Church has the discretion to use those funds as the need appears in the various missions of the Church. By contrast, under the former missionary funding program of the Church, contributions sometimes were made directly to the individual missionaries. The Supreme Court held in Davis v. United States that such contributions were not deductible because they were not to or for the use of the Church. The IRS stated that contributions made directly to the Church under the new Equalized Funding Program qualify as deductible contributions under Internal Revenue Code section 170.”

UPTD: July 16, 2008

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