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Tax Soup is a page dedicated to interesting or quirky IRS rulings and cases.  These posts are designed to inform the reader about tax law but also to show that taxes don’t have to be boring.  We hope you enjoy our light commentary.

IRS Confirms Timing of Deductibility of Donations by Credit Card

Each year, sometime in early December, my spouse and I discuss our charitable donations to be made prior to year-end. We look at what donations we made up to that point, and then together decide what we’re going to donate prior to December 31 so that we can deduct these donations on that year’s income tax return. Once we decide our charities and amounts, we set about to implement our plan. Frequently, that means going online and giving via credit card payment through the organization’s website.

Frankly, it never occurred to me that because I actually pay these credit card bills in January of the following year that there could be an argument that because I actually paid the amount the following year I couldn’t deduct it the year in which I clicked “confirm donation” on the website.

I’m in luck. The IRS recently confirmed that you can deduct charitable donations made by credit card in the year the charge is made, regardless of the timing of the payment of the credit card bill.  The IRS states that you must retain the credit card statement which shows the date of the charge, the charity’s name and the amount of the donation.  While individual taxpayers must use cash basis accounting for calculating tax, here is an element of an accrual-based method that we can use for our benefit.  And, I’m glad to know that my past practices won’t get me in trouble.  INFO 2010-0153. 

By: Kim Civins on July 22, 2010

Here’s the Cheese, but Forget the Wine

The IRS, in PLR 201025078, denied exemption under section 501(c)(7) to a winemaking club.   The club was formed for the specific purpose “to encourage the appreciation of winemaking, promote the responsible use of wine, educate wine tasters and home wine makers, and to promote and support the healthful creation of wine made without sulfites.”  Although the club, had it been properly managed, could have qualified under section 501(c)(3) as an educational organization, the club failed to qualify as exempt under any section due to its commercial nature.  Specifically, the club allowed anyone to become a “member” for a fee, didn’t allow its “members” any actual rights, and didn’t allow its “members” enough socializing amongst each other.  Perhaps if the wine club had been more exclusive in its membership and hosted more parties among its members, the IRS would have granted exemption.  Of course, the club should have also considered adding a few more disinterested board members and entering into a few less transactions with its founders…

The lesson here?  If you want to form an exempt wine club, follow these simple rules: 

  • Be exclusive (but not too exclusive);
  • Host winetasting parties regularly (at least weekly); 
  • Prepare long, educational soliloquys about your love of wine (or your recent Italian vacation); and
  • Most importantly, consider tipping your hostess with cheese that complements the wine (I prefer soft blue cheeses with my Cabernet Sauvignon).

 By: Erika Labelle on July 11, 2010

Fertility Clinic not so Fertile (or Exempt)

In Free Fertility Foundation v. Commissioner, the Tax Court affirmed the IRS’ denial of 501(c)(3) status to The Free Fertility Foundation—an organization that provides its founder’s sperm “free of charge to women seeking to become pregnant through artificial insemination or in vitro fertilization.” Interestingly, the court stated the “free provision of sperm may, under appropriate circumstances, be a chartable activity.” But The Free Fertility Foundation did not qualify because the class of potential beneficiaries is “not sufficiently large to benefit the community as a whole.” After all, the class of potential beneficiaries is limited to those that want the founder to be the biological father of their children. Further, the founder and his father choose recipients from applicants based on a “very subjective, and possibly arbitrary” process that includes a questionnaire on topics such as an applicant’s education, ethnicity, geographic location, fertility history and contribution to their communities.

I will be interested to see if the Free Fertility Foundation changes its operations to be consistent with the Tax Court’s guidance—if it added some more sperm donors and selected recipients from among the applicants based on health-related issues, it’s next letter from the IRS could be a determination letter. I asked my wife what she thought of the case (she is not a student of the laws governing tax-exempt organizations—other than listening to my ramblings from time to time—but she is 3 months pregnant and I thought she might have a different perspective than I). Her take on it was: “Don’t ever interrupt me during a commercial-free airing of Anne of Green Gables. But while you are up, get me some ice cream.”  So there you have it.

By: Nathan Boyce on July 10, 2010

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