Page 128 - Washington Nonprofit Handbook 2018 Edition

The question of earmarking arises in situations where the terms and
conditions of a donor’s gift (i.e., a requirement that that the gift be used for a
specific beneficiary or be regranted to a specific organization) may prevent the
recipient organization from controlling the gift. Where a gift is earmarked for the
ultimate benefit of another organization, the recipient organization is a mere
conduit, and the true recipient of the gift is the ultimate beneficiary. In these cases,
the tax implications of the gift must be determined as if the donor directly made
the gift to such recipient.

Clearly, the earmarking risk can arise where a donor makes a gift to a U.S.
exempt organization with the intention that the gift ultimately be used for a non-
U.S. organization. It can also arise in determining whether contributions intended
to be used for another recipient will constitute “public support” for purposes of
determining an organization’s public charity status.

b. Revenue Ruling 63-252

Revenue Ruling 63-252, 1963-2 CB 121, sets out the general rule that a
donor’s income tax deduction will be disallowed under Code section 170(c) if the
donor’s contribution is inevitably committed to a foreign organization and it comes
to rest only momentarily in a qualifying U.S. organization. The key question is
whether the U.S. organization is the real recipient of the gift because of its right to
exercise control over the disposition of the gift. If this control does not exist, the
secondary donee will be the ultimate beneficiary.

The IRS uses five examples to illustrate the general rule of Revenue Ruling
63-252. In the first three examples (below), the IRS rules that the U.S. recipients
were agents of the foreign organizations or conduits, and therefore contributions
were earmarked, the U.S. entity was not the recipient of the contribution, and the
donors could not deduct their contributions.

(1) In pursuance of a plan to solicit funds in [the United States,] a
foreign organization formed a domestic organization. At the time of
formation, it was proposed that the domestic organization would conduct a
fundraising campaign, pay the administrative expenses from the collected
fund and remit any balance to the foreign organization.

(2) Certain persons in [the United States,] desirous of furthering a
foreign organization’s work formed a charitable organization within the
United States. The charter of the domestic organization provides that it will

WASHINGTON NONPROFIT HANDBOOK -117- 2018