A charity’s gala dinner for friends and supporters involves two very important federal tax issues:
- How should the value of the benefit provided to an attendee be calculated?
- Who may pay for an individual’s place at the dinner?
Calculating the value of an individual’s benefit.
It’s clear, for example, that if an individual place at the dinner costs $10,000, and the value of the benefit (meal, entertainment, etc.) allocated to an individual place is $3,100, the deductible portion of $10,000 paid for a place at the dinner is $6,900. The question is, how is the $3,100 figure in our example to be calculated?
IRS has made crystal clear that the value of the benefit for tax purposes is the cost of an identical benefit package at a comparable venue.
Note carefully that the value of the benefit is not simply the per-person out-of-pocket cost to the charity of putting on the gala dinner. This means, for example, that it’s irrelevant to attendees for tax purposes that a corporate sponsor underwrites the entire cost of the dinner.
Who may pay for the dinner?
The better question is, who may not pay for the dinner?
Let’s cut to the chase. IRS rules are clear that an individual’s private foundation may not pay any portion, not even the deductible portion, of the cost for the individual to attend the dinner. IRS says such a payment is self-dealing by the foundation.
Sure, this rule is violated frequently—sometimes out of ignorance, sometimes willfully. So are traffic laws and other laws. Frequency of violation is no excuse for, no defense to, an IRS charge of self-dealing.
What are the consequences if the IRS make such a charge? The IRS can order the offending foundation to recover the amount paid improperly under threat of penalties. No one wins here … except the IRS.
For more information on gala dinners, check out IRS Publication 1771.
An article in the October 2015 Give & Take looks at token donor gifts and charitable deductions. Read it here.
by Jon Tidd