Eldon D. Brinley and Mary Alice Brinley v. Commissioner of Internal Revenue

ROBERT MADDEN HILL, Circuit Judge,

dissenting.

Although I am mindful that the practice of making charitable contributions is a most worthy attribute of our society and should be encouraged since it aids in the accomplishment of many social goals which our federal and local governments otherwise cannot or will not accomplish, I nevertheless am of the opinion that the majority here has expanded the concept of charitable contribution beyond that provided for in our tax laws. Accordingly, I must respectfully dissent.

The majority, following the lead of the Tenth Circuit in White v. United States, 725 F.2d 1269 (10th Cir.1984), has concluded that a taxpayer who pays the unreimbursed expenses incurred by another (in this case a dependent son) in the performance of services to a charity is entitled to deduct such payments from taxable income as a charitable contribution. In doing-so, the majority not only adopts a primary benefit test as an appropriate standard in determining whether the challenged payments are charitable contributions, but goes on to conclude that under a liberalized control test the challenged payments may also be eligible for classification as charitable contributions. I am compelled to conclude, as did the Tax Court in this case,1 that the primary benefit test cannot be utilized to test the validity of payments made to cover the unreimbursed expenses of another, but rather that the control test must be used, and that even under an expansive reading of the control test the *1337payments made by the Brinleys to their son cannot be deemed charitable contributions.

I.

The starting point for the resolution of this case begins with the provisions of the Code authorizing the deduction of charitable contributions and with the relevant Treasury Regulations on Income Tax. Section 170 of the Code2 provides that there shall be allowed as a deduction a “gift or contribution to or for the use of” an organization formed and operated exclusively for charitable purposes.3 To ensure that a contribution is designed to benefit a worthy charitable purpose and not, instead, the taxpayer, section 262 of the Code provides that “no deduction shall be allowed for personal, living and family expenses.” Relief from the strictures of section 262 is found in sections 1.262-l(b)(5) and (c)(5) of the Treasury Regulations on Income Tax (Regulations).4 This section provides that expenses deductible under section 1.170A-1(g) of the Regulations are not subject to the prohibition language of section 262 of the Code. Section 1.170A-l(g) provides that “no deduction is allowed ... for a contribution of services” to a charitable organization; however, it goes on to recognize that “unreimbursed expenditures made incident to the rendition of services to an organization, contributions to which are deductible, may constitute a deductible contribution,” as well as “out-of-pocket transportation expenses necessarily incurred in performing donated services____” Additionally, it provides that “[reasonable expenditures for meals and lodging necessarily incurred while away from home in the course of performing donated services are also deductible.”

Thus, under the applicable provisions of the Code and Regulations, a taxpayer may deduct as a charitable contribution payments made “to or for the use of” a qualified charity including “unreimbursed expenditures” which are incurred by the taxpayer in connection with his rendering of services to the charity.

II.

The majority holds that the payments made by the Brinleys to their son may be properly classified either as unreimbursed expenses in connection with the rendering of services or as contributions made to the church. The majority further holds that different standards apply in determining the deductibility of unreimbursed expenses and of contributions. While I agree with the majority’s basic proposition that a primary benefits analysis applies to unreimbursed expenses and that a control analysis applies when taxpayers argue that a contribution benefiting a named individual qualifies as a contribution made to a charitable organization, I disagree with their assumption that payments made to a third party may be properly characterized as unreimbursed expenses. In my opinion, a taxpayer who makes payments to a third party must meet the control test in order to qualify for a charitable deduction.

First, like the Tax Court, I am of the opinion that applying the primary benefits test to expenses incurred by an individual other than the taxpayer creates incentives *1338for taxpayer abuse. In ascertaining the deductibility of unreimbursed expenses the nexus between the services rendered and the expense incurred is a vital factor. There is a restraining influence on the nature and the amount of expenses caused by the nexus requirement when the right to deduct an expense is limited to the individual performing the services. If the individual incurring an expense is to be reimbursed by another, then the motive that individual might have in incurring reasonable expenses is diminished. The risk of abuse is heightened when the taxpayer is making payment to an individual he would be supporting anyway as there is no internal check, insuring that the costs are incurred solely in connection with the charitable work. Moreover, when the taxpayer deducts another person’s expenses, a shifting of deductions occurs that does not occur when the taxpayer deducts his own expenses. Taxpayer parents in high income tax brackets may be tempted to shift their lower income bracket children’s deductions to themselves. Without the oversight of the charitable organization, parents could contribute larger than necessary amounts to their missionary child and claim the money was contributed to support charitable activities. If the donor can contribute directly to the missionary, the IRS will be forced to investigate the adequacy of the organizational oversight provided by the charity; this places a heavy burden on an already overwhelmed IRS facing reduced investigatory resources. However, if the money must first go to the charity, the charity will see that the money is spent for the benefit of the charity and not an over-contribution for the child’s benefit. This small increase in the administrative burden on the charity is far outweighed by the increased administrative burden the majority places on the IRS. Thus, the Church will and should conduct the oversight that the majority is now forcing the IRS to conduct.

As the majority admits in its opinion, the use of the primary benefit test also causes an increased chance of improper double deductions. Both the donor patient and the missionary child may.attempt to deduct the expenses incurred by the child. However, if the money is given to the Church, this potential problem is avoided because the missionary cannot take the deduction since the expenses will not be unreimbursed. Under the majority’s position, the IRS will be forced to compare the tax returns of parents and missionary children to determine if double deductions are impermissibly occurring.

Lastly, Í believe that application of the primary benefits test is unsupported by existing case authority. With the exception of the majority’s opinion and that of the Tenth Circuit in White, the case law, including this circuit, has consistently employed the primary benefit test only in those instances where the taxpayer has sought a charitable deduction for his own expenses.5 See, e.g. Babilonia v. Commissioner, 681 F.2d 678, 679 (9th Cir.1982); Sheffels v. United States, 264 F.Supp. 85, 89 (E.D.Wash.1967), aff'd., 405 F.2d 924 (9th Cir.1969); Orr v. United States, 343 F.2d 553, 557 (5th Cir.1965); Green v. Bookwalter, 207 F.Supp. 866, 880 (W.D.Mo. 1962), aff'd., 319 F.2d 631 (8th Cir.1963); Seed v. Commissioner, 57 T.C. 265, 276 (1971); Fausner v. Commissioner, 55 T.C. 620, 624 (1971); and Saltzman v. Commissioner, 54 T.C. 722, 725 (1970). In those instances where the taxpayer had made a payment to another individual as a representative of a charity or has been identified by the taxpayer as the intended beneficiary, the control test has been applied. See, e.g., Winn v. Commissioner, 595 F.2d 1060, 1065 (5th Cir.1979); Tripp v. Com*1339missioner, 337 F.2d 432, 435-36 (7th Cir. 1964); Peace v. Commissioner, 43 T.C. 1, 7-8 (1964); and Thomason v. Commissioner, 2 T.C. 441, 443 (1943). In my opinion no valid reason has been expressed in the majority’s opinion to deviate from the traditional application of the control test here.?

III.

My second point of disagreement with the majority opinion relates to its formulation of the control test. Under the control test the issue is whether the charity possessed control of the contribution so as to have discretion as to its use. This was the issue in Winn v. Commissioner, supra, wherein we held deductible as a charitable contribution a contribution in response to an appeal by a church to assist a certain person in her church missionary work. In so finding, however, we noted as a basis for our holding that even though the donor made the contribution payable to a fund named for the person the subject of the appeal, “an officer of that church took the funds donated and dealt with them as the church wished.” 595 F.2d at 1065.6 7 Other cases have also applied the control test in the same fashion where donors made contributions under a similar factual background. See, e.g., Tripp v. Commissioner, 337 F.2d at 435-36 (payments earmarked for a particular individual’s education not deductible where payments were “not to a general scholarship fund to be used as the college saw fit____”).

Likewise, the Tax Court has applied the control test in determining the deductibility of contributions to a charity earmarked for a particular individual and in determining the deductibility of contributions to an individual representing a charity. See, e.g., Peace v. Commissioner, 43 T.C. at 7-8 (funds donated to church mission society on condition that specific amounts go to four designated missionaries are deductible since taxpayer intended contribution was to “go into common pool to be distributed only as mission itself determined.”); Thomason v. Commissioner, 2 T.C. at 443 (contribution to qualified welfare agency to pay for a specific individual not deductible because it amounted to a gift to the individual: “Charity begins where certainty in beneficiaries ends.”).

The control test is nothing more than an outgrowth of the basic definition of a charitable contribution. The essential characteristics of a charitable contribution is its “indefiniteness.” Russell v. Allen, 107 U.S. 163,167, 2 S.Ct. 327, 330, 27 L.Ed. 397 (1882). This principle was enunciated by the Tax Court in Thomason v. Commissioner, supra: “Whenever the beneficiary is designated by name and his merit alone is to be considered, the bequest is private and not public and ceases to have the particular merit of a charity.” 2 T.C. at 444. In those instances, then, where a contribution is not made to a charity or is made to a charity for a particular individual, clearly there is that lack of “indefiniteness” in connection with the contribution that will result in its ineligibility as a charitable contribution under our tax laws. • The unfettered control by a charity of a contribution is the hallmark of a charitable contribution because it brings in to play that element of indefiniteness essential to the contribution being deemed charitable; where the control over a contribution is restricted to a certain individual, then that essential element of indefiniteness is lacking.

*1340The majority acknowledges that control over donated funds to a charity means that the charity “is to have discretion as to their use.” Maj. op. at 1334. This is the result when the charity has possession of the contribution without restriction as to use. See Tripp v. Commissioner, supra. The majority concludes, however, that discretionary possession by the charity of a contribution, and thus control of the contribution, is met where the charity solicits funds for a specific charitable purpose. The reasoning is that “[i]n these circumstances the charity has control and discretion because it has created a specific charitable cause and has solicited funds in support of the cause.” Maj. op. at 1334. For support of this unique theory the majority relies upon our holding in Winn.

The majority concludes that the fact that an officer of the church had possession of the contribution was not crucial to the holding in Winn that the church had control. Thus, if it was not essential that the church have had possession in order for the church to have had control, then control can be established under other guidelines. I disagree. The language of Winn makes it quite clear that possession of the contribution in issue there by an official of the church, albeit the father of the individual who was the subject of the church’s solicitation, is crucial to its holding that the church had control of the contribution:

Proof that the church in Benoit sponsored “Sara Barry Days” for the express purpose of collecting funds for this part of its work, that an officer of that church took the funds donated and dealt with them as the church wished, and that the funds went to the support of the work the church intended is sufficient to establish that the funds were donated for the use of the Benoit Presbyterian Church.

595 F.2d at 1065 (emphasis added).8

Relying on its conclusion that possession by the Church of the funds contributed by the Brinleys to their son was not essential in the control test equation, and rejecting also the Brinleys’ argument that their missionary son is an agent of the Church and thus that the Church had control over their contributions to him, the majority proceeds to conclude that the essential element of control can be found based on two factors: (1) the Church had a world-wide missionary program and (2) it solicited funds in support of that program. Thus, reasons the majority, the Brinleys are entitled to a charitable deduction in this case if they can “match” their contribution to their son with a corresponding request from the Church. Such a holding simply ignores the basic thesis that a contribution made with the intent to favor a particular individual, whether earmarked in a contribution to a charity or made to the individual directly, lacks that indefiniteness that qualifies it as a charitable contribution. The contribution made by the Brinleys simply does not meet the eligibility requirements for deductibility under a proper application of the control test.

The more liberal control test sanctioned by the majority may also result in a hidden double deduction. The majority does not prohibit taxpayer parents from donating funds to their missionary child pursuant to the Church’s directions and thereby obtaining a full deduction for the child’s expenses and from also claiming a deduction for the child as a dependent because they are pro*1341viding more than one-half of the child’s support. Under a more strict version of the control test, this hidden deduction for a dependent child would not occur because the parents would first contribute to the Church, and the Church would then distribute the money to the child. The parents would not be able to take a deduction for the child being a dependent because the Church, and not the parents, is providing the child’s support.

IV.

The facts of the Brinleys’ case and those of the taxpayers in White invoke a great deal of empathy for the taxpayers in their effort to qualify their payments to their missionary son as a charitable contribution; application of the control test to deny a deduction for these payments would appear harsh on these facts. However, the courts must be mindful that the law that they establish in one case may be applied in many other cases. I am convinced that the law established by the majority today will lead to abuse by other taxpayers in the future and result in an administrative burden on our tax collecting officials. As I am also of the opinion that the test adopted by the majority was not intended by the Congress and is not supported by the case law, I respectfully dissent.

. Section 170 provides, in part, as follows:

(a) ALLOWANCE OF DEDUCTION.—
(1) GENERAL RULE. — There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.
******
(c) CHARITABLE CONTRIBUTION DEFINED. — For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of—
******

(2) A corporation, trust, or community chest, fund, or foundation—

(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.

. The Church qualifies as a charitable organization within the meaning of section 170. See IRS Publication No. 78, Cumulative List of Organizations 216 (1984).

. All reference to sections of the Treasury Regulations are under 26 C.F.R.

. Where parents themselves provide services to their church, as by driving their volunteer son to the place where he would perform charitable work, I see no reason why the primary benefits test would not apply to determine deductibility of expenses incurred incidental to the parents’ services. I also note that there is case authority applying the primary benefits test to expenses incurred by minor dependent children as well as parents when charitable services are provided by all members of the family working together. See e.g. McCollum v. Commissioner, 37 T.C.M. (CCH) 1817 (1978); Smith v. Commissioner, 60 T.C. 988 (1973).

. The majority presents the primary benefit and control tests as alternative tests permitting the charitable deduction when the taxpayer can meet either test; however, the tests are far from equal as far as the taxpayer is concerned. A taxpayer who meets the majority’s control test will be able to deduct all the money contributed, including money that is used to meet the third party’s living expenses. Under the primary benefit test, however, the same taxpayer, because of the majority’s application of the "away from home” requirement, will not be able to deduct the money used for the third party’s living expenses. This anomalous result under the two tests further indicates the inappropriateness of the primary benefit test when the deductible expenses are incurred by a third party.

. The majority opinion holds that in Winn a control test was applied but that the case stands for the principle that under the control test the charity need not have full control over the contribution. Maj. op. at 1330. This issue is addressed infra at 1340.

. One student note has suggested that Winn was improperly decided. Note, Does Charity Begin at Home.? The Tax Status of a Payment to an Individual as a Charitable Deduction, 83 Mich.L. Rev. 1428 (1985).

There is little, if any, difference between the church in Winn holding a special benefit event for Sara Barry and having her father accept a check from her cousin which he deposited into her personal bank account, and the church in Brinley writing a letter to Derry’s parents requesting payment of his expenses, which payment is then deposited directly into his personal bank account. In retrospect, the agency argument is no stronger in Winn than in the Mormon cases, and Winn was probably incorrectly decided, even though on its facts it is clear that in channeling money directly to Sara Barry without having to go through the church’s bank account, deception of the church by the taxpayer was neither intended nor accomplished.

Id. at 1438 n. 57.