Case:

Gregory, 60, is a very control-oriented businessman. In fact, his business philosophy is best summed up as "my way or the highway." While sometimes difficult to work with, Gregory nevertheless has achieved substantial business success in his life. His quick decision-making skills and solid commitment to a plan has catapulted his company onto the Fortune 1000 list. It seems Gregory's "way" proved financially fruitful over the past 20 years.

Gregory likes to control many other aspects of his life as well, including his charitable giving. Gregory gives $100,000 to charity annually. While very philanthropic, Gregory is extremely selective with his charitable giving. Specifically, Gregory looks for a well-run charity with minimal overhead costs. Gregory wants to see his dollars effectively used and not dissipated on excessive expenses.

This year, Gregory wants to contribute $50,000 toward the construction of a new religious center, which will seat over 5,000 people. In addition to its enormous size, the center will be constructed with a giant gold dome as its centerpiece. The gold dome is expected to draw thousands of visitors each year. The final construction is near completion, but the building is still in need of some final funding. Specifically, the religious center requires funding to complete the enormous gold dome.

The religious center board would like to have the work done by the end of this year. Gregory wants to help achieve that goal. Unfortunately, it is already December 20 and Gregory is worried his check will not reach the charity in time because Gregory is on the East Coast and the religious center is on the West Coast. In addition, Gregory wants his $50,000 charitable contribution deductible this year.

Question:

Gregory wonders if he could make the gift using his credit card. If so, when is the gift complete for federal tax purposes? Is the gift deductible when the charge is made or when the $50,000 is paid to the church?

Solution:

The basic rule is that a gift to a charity, charitable trust or gift annuity is deductible when the property or cash is delivered to a charity. Because state law normally governs title to property, delivery is usually complete under state law when the charity has legal ownership of the property. However, in some specific circumstances, there are examples in the income tax regulations that supersede the state laws. One such specific circumstance deals with gifts by credit card.

Credit cards are deductible in the year when the charges are made on the card owner's account. Since credit card charges are normally immediately created by electronic debit on an account, the credit card gift is immediately deductible. Furthermore, because a legal obligation is immediately created, the Treasury does not consider this a mere promissory note or promise to pay. However, a more appropriate analogy is that the taxpayer has created a legal debt and is now using borrowed funds to make the gift immediately. See Rev. Rul. 78-38. Thus, a donor could make a gift by credit card on December 31 of year one and pay the bill the following January 30 in year two. The credit card donation, nevertheless, would be deductible in year one.

Gregory is very pleased with this flexibility and this rule. Consequently, Gregory decides to charge the $50,000 gift to his credit card on December 20. As a multi-millionaire and CEO of a Fortune 1000 company, Gregory's credit limit is large enough to accept such a charge. Using the gift for collateral, the religious center can continue its work and complete the gold dome on schedule. Therefore, in the end, Gregory made a major charitable gift this year, contributed greatly to a cause he cares about and saved taxes.