Rev. Rul. 81-110

ISSUE

For purposes of sections 2511(a) and 2522(a) of the Internal Revenue Code, is the payment of an enforceable charitable pledge of another a gift to charity or a gift to the pledgor, and if a gift to the pledgor, is the pledgor's gift to charity deductible when the pledge becomes enforceable or when the pledge is paid?

FACTS

In January 1977, A made a written pledge to contribute, before May 31, 1977, 10x dollars to X, an organization described in section 2522(a), contributions to which are deductible. Relying on the pledge, X incurred expenses in March 1977, by making improvements to its real property. In May 1977, A lacked the funds to pay the charitable pledge. D, another individual, paid A's pledge, advising X that A's debt was then being paid. D told A that the payment was a gift and that D did not expect any reimbursement from A.

Under local law a pledge, or promise, to contribute money or property to charity is regarded as a revocable offer. However, a revocable offer becomes irrevocable and legally binding when the charity has taken action in reliance on the promise.

LAW AND ANALYSIS

Section 2511(a) of the Code provides that the gift tax applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

For purposes of section 2511(a), gift property need not be transferred directly to the donee. The payment of money or property in satisfaction of an individual's legal obligation is equivalent to a payment directly to the individual. See, for example, Rev. Rul. 78-362, 1978-2 C.B. 248. The gratuitous payment of an individual's indebtedness is a gift to the individual rather than a gift to the individual's creditor. H.R. Rep. No. 708, 72nd Cong., 1st Sess. 27.28 (1932).

Section 2522(a) of the Code allows a gift tax deduction for transfers to or for the use of a charitable organization. However, for a transfer to come within the purview of section 2522, it is necessary that the charitable organization be the donee of the transfer. It is not sufficient that the charitable organization merely receive the property. See, for example, Estate of Callaghan v. Commissioner, 33 T.C. 870 (1960), holding that an estate tax deduction for a transfer to charity is allowable only when the legatee of the transfer is a charitable organization; the mere receipt of the transferred property by a charitable organization through an independent obligation of the decedent's heir does not qualify the transfer as a charitable transfer by the decedent under the estate tax section.

Since the estate and gift tax provisions are generally in pari materia, the principle stated in Callaghan is pertinent in the application of section 2522. Consequently, a transfer by a donor to an individual for the individual's own benefit is not a charitable transfer by the donor under section 2522 notwithstanding that the property is used by the individual for charitable purposes. See Bolton v. Commissioner, 1 T.C. 717 (1943).

A pledge to a charitable organization is a transfer for gift tax purposes when the pledge becomes a binding obligation of the pledgor.

In the present situation, the pledge was a binding obligation of A under local law since X had acted in reliance on A's pledge. Therefore, for purposes of sections 2511(a) and 2522(a), D's gratuitous payment of A's indebtedness was a gift to A rather than to X since the payment was in satisfaction of A's legal obligation.

HOLDING

D's payment of A's pledge of 10x dollars to charity is not a charitable gift of D under section 2522 of the Code since the pledge was a binding obligation of A. D's payment is a taxable gift from D to A. A's pledge is an independent gift that is made from A to X at the time the pledge becomes enforceable. Since the donee of A's gift is a charitable organization, A may deduct the amount of A's gift to X, as a charitable gift under section 2522(a), at the time the pledge becomes binding. However, for federal income tax purposes, A may not deduct the gift as a charitable contribution under section 170 of the Code until payment is actually made to the charitable organization. See section 1.170A-1(a)(1) of the Income Tax Regulations.