Reporting Refunds of Charitable Contributions

A donation to a charitable organization is an irrevocable gift, and even if the donor changes his or her mind about the gift, they generally have no legal basis on which to seek a return or refund of the donation. Furthermore, even if the charity desired to return the gift, the rules under the Internal Revenue Code are such that it should be hesitant to do so. For a good summary of these issues, see Richard R. Hammar's article, Refunds of Charitable Contributions.

If a charity nevertheless decides to refund a charitable donation, the question of whether it must then issue an IRS Form 1099 to the donor arises. In general, businesses must file a Form 1099 to report many types of income; the requirement also applies to charities.

It is clear that a taxpayer who receives the full tax benefit of a charitable donation in one year and who receives a refund of that donation in another year is required to include in gross income the amount previously deducted. In this situation, it makes sense that a charity should issue the former donor a Form 1099.

However, if the donor only received a partial tax benefit or no benefit for the donation, the charity would be placing the donor in an unfair position by issuing a Form 1099. Fortunately, the Internal Revenue Code contemplates this and does not require the charity to issue a 1099 when it refunds a charitable donation.

IRC § 6041(a) imposes the 1099 filing requirement where an organization makes a payment of, among other things, "fixed or determinable gains, profits, and income... of $600 or more." PLR 200704004 interprets this provision as follows:

While any accession to wealth can be income, not all income is fixed or determinable. Income is “fixed” when it is to be paid in amounts definitely predetermined [and] is “determinable” when there is a basis of calculation by which the amount to be paid may be ascertained. Because section 6041(a) is conditioned on a payor knowing that a payment to a payee is in the nature of income and the amount of income, if a payor cannot determine either that a payment is in the nature of income or in what amount, then the payor is not required to file an information return under the section...

The effect of the tax benefit rule can be seen in a number of contexts, for example, casualty losses, real estate tax refunds, and charitable contributions... If by its nature a payment to a taxpayer would not be an item of gross income unless the tax benefit rule applies, and the payor has no way of knowing one way or the other, then the payment is not “fixed or determinable” income falling within section 6041(a).
Accordingly, a charity should not need to report refunded charitable donations on Form 1099.

0 comments: