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Posted February 9th, 2018

Let’s Look at Some Key IRS Rulings, Part 6

We continue looking at IRS rulings on pledges (read Part 5 here). First up is a 1981 Revenue Ruling, Rev. Rul. 81-110.

The facts here are that Party A made a legally enforceable pledge to a charity. Subsequently, Party B paid the pledge.

Focusing on the fact that Party B’s payment relieved Party A of a legal obligation, the IRS ruled that:

• Party B’s payment was functionally a payment (a gift) to Party A.
• Therefore, Party B was not entitled to a charitable deduction for the payment.
• Party A was entitled to the charitable deduction for the payment.

Note how the IRS re-configures the transaction for federal income tax purposes. Is the IRS allowed to do this? The answer is yes. In fact, the reconfiguration of transactions according to their substance is one of the IRS’s primary tools.

This ruling, all by itself, appears to throw cold water on third-party payment of enforceable pledges.

• Yet the IRS has said it’s OK to use an “IRA rollover” distribution to pay an enforceable pledge.
• And at the very end of 2017, the IRS announced it was leaning toward allowing DAF distributions to be used to pay enforceable pledges.

Stay tuned.

by Jon Tidd, Esq

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