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Making Restricted Gifts

Impacts of Restrictions on Charitable Tax Deductions


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Donors of land, cash, or other property may desire to place restrictions on a gift to ensure it is used only for specific purposes. To what extent might such restrictions limit or disallow a charitable tax deduction? What should a donor consider before making a restricted gift?


When a private individual or corporation donates to a tax-exempt charitable organization, the Internal Revenue Code allows the donor to claim an income tax deduction based on the value of the gift. For a variety of reasons, donors may seek to earmark their contribution for a particular purpose. This practice raises issues that both donors and donees should consider. Concerns of donees and the matters of communicating and documenting intended restrictions are discussed in the guide Restricted Gifts: Considerations in Accepting, Managing, and Soliciting Gifts for a Specific Purpose. This guide focuses on a more specific issue of concern to donors: to what extent do restrictions on gifts impair the ability of a donor to realize tax benefits?

Donors may have sensible intentions in seeking to place restrictions on gifts, but avoiding such restrictions might be in a donor’s interests. This guide explores two questions that donors and their tax advisors will want to consider prior to making a restricted gift, especially a restricted gift of land:

  1. When might a restriction result in disallowance of a tax deduction?
  2. How might a restriction affect the value of a gift for tax purposes?

The guide also briefly looks at alternatives to restricted gifts and related matters.

Restrictions Can Undermine Tax Deductibility

For federal tax purposes, a contribution is deductible only if it is made “to or for the use of” a charitable organization.8[i] In general, this means that the donation must be a complete and unconditional transfer of all of donor’s interest in the donated property, leaving the nonprofit in control of the donated funds or property.[ii] The practice of restricting donations for particular purposes is well-established and will not, in many cases, result in issues for donors claiming tax deductions. Sometimes, however, restrictions go too far.

Any enforceable condition placed on a gift—whereby some future event could impair or terminate the donation—creates risk that a deduction will be disallowed. However, if the actual risk that a restriction could impair the gift at a future date “is so remote as to be negligible,” deduction will be allowed.[iii]

No Code provision or Treasury regulation defines “so remote as to be negligible,” for these purposes, but courts and the IRS have interpreted the language in a manner that emphasizes the stringency of the standard. In one case, the Tax Court described the standard to mean “a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction,” and similarly, “a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance.”

Whether a given donor restriction goes “too far” in the view of the IRS may be difficult to predict. The answer can turn on many factors including the nature of the restriction and the charitable purposes of the donee. The following illustration is paraphrased from the Treasury regulations:[iv] 

A landowner transfers land to a municipality, subject to a requirement that the land be used only as a public park. The municipality intends to use the land as a park, and the possibility that it will use it for another purpose is so remote as to be negligible. Accordingly, deduction is allowed.

(While the Treasury regulations portray this possibility as remote, it is not unheard of for local governments to seek to repurpose donated public parkland. The WeConservePA’s guide Ensuring the Permanence of Parks and Other Public Open Space: Safeguards for Lands Entrusted to Local Government reviews measures local government officials can take to guard against future repurposing of public lands.)

Revenue and tax court rulings also provide useful examples:

  • A landowner donated agricultural land to an agricultural college subject to a restrictive covenant requiring that the land be used only for agricultural purposes. Though the landowner retained an enforceable right that could impair the gift if the college used the land otherwise, the donor’s intent aligned with the charitable purposes of the college (and its specific intention for the land), so the possibility of the college using the land for another purpose was deemed negligible. The deduction was allowed.[v] (However, as noted in the next section, the restriction reduced the deductible value of the gift.)  
  • A landowner transferred land to a newly formed nonprofit corporation but imposed detailed conditions prohibiting the sale or mortgaging of the land, dictating the purposes and functions of the organization, and imposing specific requirements for management and leadership of its board. It was likely that the donee organization would be unable to comply with the donor’s conditions. The deduction was not allowed.[vi]

Donors considering gift restrictions are urged to consult their tax advisors to navigate this uncertainty.

Restrictions Can Reduce the Tax Deduction

If a deduction for a restricted gift survives the previous deductibility analysis, questions about the value of the deduction follow.

For money gifts, valuation is mostly straightforward.[vii] The value of a donation will be reduced by the value of any goods or services received by a donor in return for the donation, though donor recognition or insubstantial items are generally disregarded.[viii]

For non-cash donations of personal or real property, valuation becomes more complex. Take, for example, a prospective donor who wants to donate their land to a land trust for the specific purpose that the land be managed as a nature preserve. In gifting the land, the donor may look to place a deed restriction on the property, restrict its use in a trust agreement, or obtain a written commitment from the organization to guarantee the land’s permanent status as a preserve.

Any of these approaches to restricting the gift, even if wholly consistent with the anticipated use of the property by the donee, may diminish the value of the donor’s income tax deduction.

The basic principle is that a deduction is limited to the fair market value of the property in the condition in which the property is received by the charity.[ix] If there are restrictions attached to a gift of property that would affect the price a typical buyer would be willing to pay for that property, those restrictions will have the same effect on the value of the gift for purposes of tax deductibility.

Treasury regulations require a donor of property to maintain records substantiating the amount of any claimed deduction, including any restrictions on a donee’s use of the property.[x] Any claimed deduction of an amount greater than $5,000 must be substantiated with an appraisal prepared by a qualified appraiser that specifically factors in any restrictions or earmarks imposed upon donee’s use of the property.[xi]

For example, in the case of the donation of deed-restricted agricultural land donated to an agricultural college (described in the preceding section), the IRS found that the gift must be valued at the land’s restricted agricultural value rather than its unrestricted value.

This finding was affirmed by the IRS in a 1986 private letter ruling.11F[xii] The IRS determined that land that was to be gifted with donor-imposed restrictions regarding mining and building heights (and that provided the donor with a right of first refusal if the land were to be sold by the charity to other than a charitable organization) had to be valued in light of the restrictions for charitable deduction purposes.

Alternatives to Restricting Gifts

Given the tax-adverse consequences of restricting a gift, the donor of land may consider alternatives.

Trust-Based Approach

The first alternative involves the donor trusting that the donee will respect the donor’s wishes even in the absence of an obligation to do so:

  • Donors advised by tax counsel often use the phrase “request but do not require” to make their intentions known and reach an understanding with the donee (albeit legally unenforceable) as to the future use of the gift. Reputable charitable organizations that wish to maintain their reputations and attractiveness to donors are going to exercise extreme caution in considering any action contrary to a donor’s wishes—enforceable or not.
  • The donor could make a straightforward unrestricted gift, recognizing that: (1) the organization relies on its solid reputation for continuing support from its donors, (2) con-servation is central to the organization’s mission and existence, and (3) any charitable gift must be used to further the charity’s stated purposes.

If conservation is in fact the sole or central purpose of the organization, the organization is unlikely to treat the gifted property poorly. If, however, con-servation is only one of multiple purposes of an organization or a secondary purpose, the donor will want to consider that an unrestricted gift is far more likely to eventually be applied to one of the organization’s other purposes.

A local municipality is an organization with many purposes with priorities ebbing and flowing with each elec-tion. As such, when making a gift to local government, a trust-based approach is particularly vulnerable to a future repurposing of the gift.

Split Donation Into Land and Easement

The second alternative requires no trust but involves complexity and added expense: The landowner could first donate a conservation easement, which restricts use of the land for conservation purposes, to one land trust and then donate title to the land to a second charity (which may also be a land trust) or government entity. Both donations may qualify as a charitable donation for federal tax purposes. For federal tax purposes, the aggregate value of the two gifts is likely to be similar to the value of an unrestricted gift of land. A chief disadvantage to this approach is that it requires much higher outlays due to additional appraisal, legal, and other real estate transaction costs and the need for a substantial stewardship fund or endowment contribution to the easement-receiving land trust, which will be taking on an obligation to monitor and enforce the easement in perpetuity.

Conditions on Gift Offer and Acceptance

The types of restrictions discussed above affect the charitable organization’s (or government’s) use of a gift after it’s been made to the entity. Separate tax deduction issues may arise where the donor or donee impose conditions on when a gift will be made effective. For example:

  • The donor may want to condition delivery of the gift (or the amount of the gift) on certain occurrences, such as receipt by the donee of matching funds.
  • Before accepting a gift, the donee may require satisfactory inspection of the physical condition of the property and the title being conveyed; issuance of permits and approvals for the intended use; and receipt of necessary funding required from other sources.

These conditions will not directly impact the allowability or amount of a deduction but will affect the year in which a tax deduction may be available to the donor.6F[xiii]  

Conservation Easements

A gift of a conservation easement is not, in and of itself, a restricted gift; rather, it is a gift of a real property interest that empowers the recipient to block uses of the land inconsistent with the easement’s objectives (purposes) and the restrictive covenants established to support those objectives.[xiv]

For federal tax purposes, conservation easements are regarded differently from other forms of donated property. Despite a general rule that donations of partial interests in property do not give rise to a tax deduction, gifts of a “qualified conservation contribution” are a specified exception.[xv] This matter is addressed in detail in the guide Federal Tax Deductibility of Conservation Easements.


[ii] See §170(f)(3) Internal Revenue Code, and 26 CFR § 1.170A-1(e).

[iii] See Treas.Reg. §1.170A-1(e). See also Briggs v. Commissioner, 72 T.C. 646 (1979) (defining “so remote as to be negligible” to mean “a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction,” and similarly, “a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance”) (internal citations omitted).

[iv] The example in the Treasury regulations appears to reflect the facts of the case Deukmejian v. Commissioner, 41 T.C.M. (CCH) 738, 1981 TC Memo 24 (T.C. 1981).

[v] See I.R.S. Gen. Couns. Mem. 39,380 (Apr. 13, 1983), (relating to Rev. Rul. 85-99, 1985-29 I.R.B. 7).

[vi] Briggs v. Commissioner, 72 T.C. 646 (1979).

[vii] With any charitable gift, there are potentially complex issues involving the applicable limitation percentage, ability to carry excess amounts forward, etc. Those issues are beyond the scope of this guide.

[viii] Treas.Reg. §. § 1.170A-13(f)(8)(A).

[ix] 26 CFR § 1.170A-1(c)(1),(2) (“If a charitable contribution is made in property other than money, the amount of the contribution is  . . . the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”); See also Deukmejian (“It is well settled that the donor is entitled to a deduction for a charitable contribution of property equal to the fair market value of the contributed property or interest therein subject to any restrictions on marketability on the date of the contribution.”).

[x] 26 CFR § 1.170A-13(b).

[xi] 26 CFR § 1.170A-13 (c)(3)(ii).

[xii] Ltr. Rul. 8641017.

[xiii] “A charitable deduction will also be disallowed if a transfer is dependent on the performance of some act or the happening of an event before the transfer becomes effective, unless the possibility that the event will not occur meets the ‘so remote as to be negligible’ test.” Alan F. Rothschild, Jr., “Planning & Documenting Charitable Gifts,” Probate & Property, July/August 2006, 54. This however does not damage the possibility of the donor receiving a tax deduction in the year the transfer becomes effective. In any case, advice of tax counsel is recommended.

[xiv] The objectives and restrictive covenants make up the heart of the conservation easement. They define the easement rather than restrict the easement’s use. One could theoretically make a restricted gift of a conservation easement by, for example, placing the easement in a charitable trust. The tax implications of such a speculative action are beyond the consideration of this guide.

[xv] 26 U.S. Code § 170 (f)(3)(B).