Question

CASE: HAROLD DAVIS and ENID DAVIS, Plaintiffs-Appellants, v. UNITED STATES OF AMERICA, Defendant-Appellee UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT 861 F.2d 558 November 14, 1988 Plaintiff-appellants Harold and Enid Davis claimed charitable deductions under IRC section 170 for funds they sent to their two sons for their support while they served as full-time unpaid missionaries for the Church of Jesus Christ of LatterDay-Saints at the New York City Mission and at the New Zealand/Cook Islands Mission. These deductions were disallowed by the IRS. BACKGROUND A primary activity of the Church is its worldwide missionary program. Over 25,000 individuals have participated annually since 1977. Missionaries typically serve the Church for two years at a location assigned by the Church. Missionary work is uncompensated, but the Church will pay mission-related expenses if the missionary is unable to support himself or obtain the necessary funds from his family. Most missionaries are between the ages of nineteen and twenty-two; many receive payments from their parents to defray their living expenses. After an individual is "called" by the Church to serve as a missionary the Church advises parents of the amount that it believes will be necessary to provide for the missionary's support and requests their assistance. The life of a missionary is closely supervised. Mission rules prohibit missionaries from dating, attending movies or plays, or engaging in various sports or other activities. Missionaries are required to submit weekly reports detailing the time spent in Church service and explaining their expenses for the week. The Missionary Handbook contains the following admonition: "The money received for your support is sacred and should be spent wisely and only for necessary work. Keep expenses at a minimum. Keep records of all expenditures." The Church gives several reasons for its preference not to collect and distribute contributions for its missionaries. First, the Church feels that direct contributions to missionaries foster the Church doctrine of sacrifice and consecration. Second, the Church believes that direct transmittal promotes frugality by missionaries because of their awareness of the personal sacrifices that are being made on their behalf. Third, direct transmittal reduces the administrative and bookkeeping expenses that would otherwise be imposed on the Church. The appellants' sons, Benjamin and Cecil, both were "called" by the Church to serve as missionaries when they became nineteen years old. During 1980 and 1981 the appellants transferred $3480 and $4135 to Benjamin. Benjamin used this money primarily for living expenses. During 1981 appellants transferred $1518 to Cecil. Cecil also used this money primarily to pay his living expenses. The appellants filed two amended tax returns for 1980 and 1981, claiming as charitable contributions the full amounts they sent to their sons. DISCUSSION A. Applicable Law We take judicial notice of the fact that the Church is a qualified religious organization to which deductible contributions can be made. Internal Revenue Service Publication No. 78, Cumulative List of Organizations 216 (1984). Under Section 170, deductions are allowed for contributions "to or for the use of" qualified organizations. The requisite elements are that (1) the transfer of property is made with no expectation of a quid pro quo, (2) it is made to a qualified recipient, and (3) it is made "to or for the use of" the qualified recipient. The appellants argue that the payments to their sons were "for the use of" the Church and therefore deductible as charitable contributions. The government argues that the expenditures were not charitable contributions because they were never within the physical control of the Church. B. Charitable Contributions In situations where a taxpayer has claimed a charitable deduction for funds that have been earmarked for a specific individual, courts have considered whether the charity exercises control over the use of the funds. The appellants claim that actual control by the charity is a factor to be considered, but should not be required in all cases. The government responds that the deduction should be disallowed because the contributions were received directly by the missionaries from the taxpayer parents and were neither to nor for the use of the Church. The better reasoned approach, we feel, is to require that the recipient charity have control over the donated funds. The control gauge stems from the basic requirement that the beneficiary of a charitable contribution must be indefinite. When a taxpayer intends a contribution for a specific purpose, or even a specific individual, but the charity retains control over the funds, this requirement is satisfied. But when a taxpayer makes a contribution directly to the intended beneficiary so that the charity never possesses the funds, let alone controls their use, there can be no guarantee that the beneficiary will be indefinite. See Barry's Estate v. Commissioner, 311 F.2d 681 (9th Cir. 1982) (property bequeathed to member of Jesuit Order, as opposed to Order itself, not deductible though legatee obligated by Canon law to transfer property acquired to the Order). Here the charity lacked actual control over the funds. Contributions were deposited directly into the personal checking accounts of the taxpayers' sons. While the Church admonished the missionaries to spend their money wisely, the use to which the funds were put was solely within the control of the missionaries. CONCLUSION We do not question the high ideals of the Church or the valuable services it performs in connection with its missionary program. We are constrained by the law, however; and it is up to the legislature to provide the remedy that is sought by the appellants. The decision of the lower court is affirmed.

Question: The brothers Davis bravely did missionary work for the LDS Church. Their parents supported them financially. Discuss how you, as the Davis family’s CPA, would have argued to the IRS auditor (or the court) that the amounts paid by the Davis parents were properly deductible as charitable contributions.

Answer 1

A contribution is deductible only if it is made “to or for the use of” a charitable organization, not a designated individual.Direct contributions to missionaries, or any other individual, are not tax deductible, even if they are used for religious or charitable purposes. However, contributions to designated individuals in the context of mission work may be deductible where it is shown that the contributions were to a charitable organization and for the use of the organization, not just the individual missionary designated. Contributions to a missions agency or church for the benefit of a particular missionary may be deductible if the missions agency or church exercises full administrative and accounting control over the donated funds so as to ensure that the funds are spent in furtherance of the agency’s or church’s exempt purpose.If taxpayer’s contributions to the fund were earmarked for a particular individual, they are to be treated, in effect, as being gifts to the designated individual and are not deductible.However, the IRS will permit a deduction where it is established that a gift is intended by a donor for the use of the organization and not as a gift to an individual. The key is whether the organization 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.

Here contribution made to Brother Davis by Davis's parents are not deductible since it is paid to individual missionary for his living expense,not for charitable purpose.Taxpayer’s contributions to the fund were earmarked for a Davis, they are to be treated, in effect, as being gifts to the designated individual and are not deductible.Therefore amount paid by Davis parents weren't properly deductible as charitable contributions