That’s the Ticket

By Jane C. Nober*

Accepting and using tickets and other tangible benefits of more than minimal value raises questions for foundation managers. Here's what the general Tax Code rules say is acceptable.

Phil N. Thropy, the president of the Thropy museum store for all corporate employees. Family Foundation, was delighted when the Should the grant come from the corporate board approved a grant of $25,000 to his foundation or the corporate giving budget? favorite charity, the local symphony. He was confused, though, when a package of four Anne Dowment, director of the community season tickets for the foundation appeared in foundation, was concerned. She had received his mailbox. Could he use the tickets to attend 16 requests in one week for $500 gifts to be the symphony? Could he bring his wife and made from donor-advised funds to the local children? If he made his own contribution to children's hospital. Now she knew why: in her the symphony and received another set of morning mail was an invitation to a gala tickets, to whom could he give the dinner dance for the hospital. Tickets cost foundation's tickets? $500-$100 for the meal and $400 for the charitable contribution. Reviewing her morning mail, Doe Nation, the manager of the new corporate foundation at As these examples suggest, accepting tangible XYZ Corporation, paused over the invitation benefits opens a Pandora's Box for foundations to a fundraising dinner for a local charity. A and prompts many requests for information table for ten at the benefit would cost the from the Council on Foundations. Following is foundation $10,000-$1,000 for the dinner and how the general Tax Code rules address these $9,000 for a charitable contribution. Nation situations for family and community wondered whether the foundation should foundations, corporate foundations and giving make a practice of funding dinner events. programs, and public charities. Should the foundation send a check for the cause but refuse the table and dinners? If the Tickets are Tangible Economic Benefits foundation accepted the dinners, could Whether they are tickets to a dinner, a corporate executives take the seats and bring performance or simply for general admission some valued customers? Could the to a facility, tickets have economic value, corporation's name be listed in the dinner generally the fair market value of the goods program? and services provided. The importance of this tangible economic value is that individuals and Grant Maker, the corporate contributions corporations (we'll come to foundations in a manager at QRS Industries, considered an moment) must generally reduce the amount of appeal from the local art museum. A $20,000 any charitable income tax deduction taken in contribution would entitle the corporation to connection with a gift that yields benefits with use the museum for an evening reception and economic value by the amount of that value. If provide free admission and a discount at the a corporate giving program pays $500 for a

Council on Foundations. Copyright 2010. All Rights Reserved. Page 1 That’s the Ticket table at a fundraising dinner, and the economic tangible economic benefits that flow from value of the dinners provided to attendees is foundation grants. Disqualified persons are $100, the corporation may take a charitable foundation managers, substantial contributors income tax deduction of $400 ($500 less $100). to the foundation, and the families of both of It's perfectly legitimate for a corporation or these. In the corporate foundation context, the individual to accept tickets in exchange for a corporation that funds the foundation is clearly charitable contribution, but it is important to a disqualified person. There is no IRS guidance report the transaction properly. Tax rules on whether all corporate employees are dating from 1993 that require charities to disqualified persons or if only certain disclose the value of tangible economic managers or executives fall into this category. benefits provided to contributors are designed The conservative approach would be to to aid compliance. consider all employees disqualified persons. Thus, the private foundation rules generally For public charities such as community bar disqualified persons from using tickets that foundations, the tangible economic value of are made available on account of foundation tickets means that it is important to monitor grants. distributions from donor-advised funds. To the extent that a donor advisor might receive Reasonable and Necessary tickets as a result of a distribution from a fund The self-dealing rule's bar on the provision of at the community foundation, the community tangible benefits has an important exception: foundation could be viewed as providing Treasury Regulations allow a foundation to benefits to private individuals. To the media provide benefits to a disqualified person so and the public, a pattern of this sort of activity long as those benefits are reasonable and may make the community foundation appear necessary to his or her performance of to be helping people avoid taxes (donors take a functions that carry out the exempt purposes deduction for the full amount given to the of the foundation. An IRS technical advice donor-advised fund and presumably would memorandum (TAM 8449008) states that when not reduce that deduction by the value of the it is necessary for a disqualified person to later-acquired tickets). To the IRS, a pattern of attend an event to monitor how the this sort of activity might suggest that the foundation's funds have been spent, he or she community foundation is not operating may accept tickets provided by the foundation exclusively for charitable purposes as required and use them. (Note: A technical advice memo to retain its tax exemption. Again, there is no only applies to the parties involved in the problem with individuals making direct gifts particular case, but it does provide an to charities and receiving tickets or other indication of the IRS' thinking on this matter.) tangible benefits in return; the problem only There is no IRS guidance on whether a arises when the community foundation's funds foundation board or staff member could are used to gain these goods and services for a legitimately "monitor" a grantee's activities for donor. an entire season of concerts or whether just one visit is appropriate. The tangible economic value that tickets have poses a large problem for private foundations. Note that whether or not a private foundation The private foundation rules in the Tax Code staff or board member attends a function, the generally provide that it is an act of self- value of the tickets need not be deducted from dealing for disqualified persons to receive the amount as listed under "Contributions,

Council on Foundations. Copyright 2010. All Rights Reserved. Page 2 That’s the Ticket gifts, [and] grants paid" on the foundations executives to attend." Again, the ruling applies Form 990-PF. If a foundation wishes to, it may only to the taxpayer that requested it but list as an administrative expense the value of provides evidence of the IRS' general attitude. any tickets used by a staff or board member who attends in a monitoring or administrative For public charities such as community capacity and put the balance of the grant under foundations, the idea that the charitable and "Contributions," but this type of accounting is noncharitable components of a ticket are not generally required. inseparable suggests that the donor advisor cannot correct the private benefit problem A final thought on this topic is that goodwill posed when fund distributions pay for tickets and publicity are not tangible economic by offering to pick up the "noncharitable" benefits. A foundation, including a corporate portion of the tab. Again, the donor advisor foundation, is free to have itself listed in a would not be in a position to pay for the dinner program or a banner. If support for a dinner if the community foundation's funds particular event comes from both the corporate were not covering the donation, and the foundation and the corporation, the two may community foundation may be seen as be listed together. discharging an individual's obligation and thus serving private interests. Dividing Ticket Value into "Charitable" and "Noncharitable" Components Doesn't Work Tickets May be Refused or Otherwise For the purpose of the self-dealing rule, the IRS Disposed of to Prevent Problems takes the position that it is not possible to Individuals and corporations seeking to separate the price of a ticket into its charitable maximize their charitable deductions and and noncharitable components. In other grantmakers wishing to avoid the issues words, a private foundation cannot avoid the potentially raised by tickets may refuse them. self-dealing problem by having a disqualified As far back as 1967, the IRS provided rules for person (who has no monitoring or how benefits might be refused (see Rev. Rul. administrative duties to justify his or her 67-246, 1967-2 C.B. 104). Options include attendance at a function) pay for the cost of the indicating on a contribution form that no dinner ($100) or other tangible benefit and tickets are to be sent and refusing to accept the having the foundation pick up the charitable tickets if they are sent. portion ($400) of the ticket. The reasoning behind this IRS position appears to be that the Revenue Ruling 67-246 emphasizes that simply disqualified person would not be in a position not using the tickets does not constitute a to pay the $100 for the dinner unless the refusal or disposition of them that restores the foundation paid the $400; the foundation is full value of an individual or corporation's freeing a disqualified person of a financial charitable contribution; as long as the taxpayer obligation that he or she (or, in the case of a still has the tickets, he or she has the right to corporation, it) would otherwise incur. In a attend the event and that right has economic March 1, 1990, private letter ruling involving a value. However, in a later ruling, the IRS held corporate foundation (PLR 9021066), the IRS that a taxpayer who donated the tickets back to states that such "bifurcation" would constitute the charity for resale was entitled to a self-dealing, as would "any funding approach charitable deduction equal to his cost of the whereby [the corporate foundation's] funds ticket (see Rev. Rul. 74-348, 1974-2 C.B. 80). were used to permit [the corporations'] Some corporations make a practice of donating

Council on Foundations. Copyright 2010. All Rights Reserved. Page 3 That’s the Ticket tickets back to the charity that issues them. Corporate foundations, too, would be well Another option may be to donate the tickets to advised to look for another source of funding another charitable group that can put them to for contributions that will yield tickets or other good use. tangible benefits. If there is a corporate giving program, it is the ideal funder, since the self- From the General to the Specific dealing rules do not apply when the corporate For family foundations, tickets for fundraisers foundation is not used. If the corporate and other events should be used only by foundation does provide funding that results foundation staff and directors who have in tickets, the key to good compliance is monitoring and administrative responsibilities keeping in mind who disqualified persons are: for the relevant grants. Spouses of these the foundation's managers, board members, disqualified persons are not covered by the the corporation and, potentially, all of its exception to the self-dealing rules, and should employees. None of these people should be not be using foundation-sponsored tickets. using tickets unless they are attending on Some lawyers suggest that one way of making behalf of the foundation in an administrative it possible for spouses to attend fundraisers is or monitoring capacity. As with family to treat the full cost of their tickets (both foundations, spouses are not covered by the charitable and noncharitable components) as exception for monitoring and administration. compensation to the disqualified person who In the corporate context, it may be tempting to is attending in a monitoring or administrative invite corporate clients or other business capacity. If family members want to support associates to sit at a corporate foundation table, and attend a fundraising event, the best course but this should be avoided. is for them to make their contribution out of their own pocket, not the foundation's. For Doe Nation, the rules mean that the XYZ Corporation Foundation needs to make a For Phil N. Thropy, recipient of the symphony policy choice on the issue of whether it will tickets on account of the Thropy Foundation's support fundraisers and other events that gift, the rules mean that he and perhaps other result in tangible economic benefits. If the board members (or staff) may use one or more decision is that it will not, Ms. Nation may of the tickets sent by the symphony. Unless his pass on such requests to the direct corporate wife and children play a role in the foundation, giving program. If the foundation opts to they should not be using the tickets. Mr. support these events, it must decide whether it Thropy may return unused tickets to the will accept tables and to whom it will symphony or perhaps give them to another distribute tickets. Whether or not the charitable organization, but there is no foundation accepts tables, it may be listed in requirement that he do so and no tax or other the dinner program as a sponsor. The penalty for the foundation if he does not. On foundation is free to list the value of tickets the foundation's tax return, the full $25,000 used as an administrative expense on its 990- may be shown as a contribution to the PF, but need not do so. symphony, although the foundation is free to list the value of tickets used as an What Becomes of a Ticket Kept? administrative expense. There's no clear Both family and corporate foundation answer to the question of whether it is managers might well wonder to whom-other appropriate for Mr. Thropy to use the entire than foundation personnel with administrative season's worth of tickets or just one. and monitoring responsibilities-they may

Council on Foundations. Copyright 2010. All Rights Reserved. Page 4 That’s the Ticket legally give tickets if accepted. There's no clear dealing with fundraising tickets. The wise answer in the law, but returning them to the community foundation alerts donor advisors issuing charity or another charitable group is from the outset that it will not make usually a safe option. Giving the tickets to recommended distributions that will result in truly unrelated persons, including other tangible benefits accruing to them. If donors potential contributors to the charity who may are given forms on which to request benefit from an opportunity to learn about its distributions, it is helpful to have an work, is another possibility. acknowledgment or recital that the suggested grants do not represent the payment of a Corporate giving programs that acquire tickets pledge or other financial obligation nor will have much more flexibility in distributing the donor advisor receive any personal benefit them. So long as the corporation reduces the from this charitable distribution. amount of its charitable deduction by the value of any goods and services received, it may Community foundation executive Anne send executives or other employees, customers Dowment faces the unenviable task of and other business contacts to an event. Note, contacting her donor advisors and asking each too, that under certain circumstances, one gently whether he or she is requesting a corporate contributions need not be reduced distribution in order to buy tickets for the by the value of benefits received; the 1993 tax Children's Hospital benefit dinner dance. If the rules provide that if a corporation makes a gift answer is yes, she should tactfully inform him to a charity and receives in return benefits for or her that such a gift should come from its employees that are identical to membership personal, not community foundation, funds. If privileges that an individual might receive for a donor advisor mentions that he would like to a gift of $50 or less, the value of the these make a contribution but is not planning to benefits need not be taken into account. attend the dinner dance, however, the community foundation can make the Thus, Grant Maker, who's been offered a contribution and indicate that tickets should package of benefits for QRS Industries' not be sent. Ms. Dowment may wish to think employees in exchange for a large corporate about revising the community foundation's gift would be well advised to make the materials for donor advisors to make the contribution to the local art museum from the prohibition on personal benefits more corporate giving program, not the corporate prominent. foundation. He will need to verify that the package of benefits available to QRS Tickets and other tangible benefits pose employees is identical to that offered to complicated legal and policy challenges for all museum members who pay $50 or less. If the types of grantmakers, and the guidelines set donation comes from the corporate out here are no substitute for expert counsel foundation, and the admission benefits are from a lawyer familiar with the grantmakers' offered, it may be an act of self-dealing for QRS activities. But understanding the issues and Industries employees to use them. knowing when to call on counsel is an Public charities such as community important part of complying with the rules in foundations need to exercise caution when this area.

*Jane C. Nober is former special counsel at the Council on Foundations. – Updated by Council legal staff in 2010.

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