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.

Gregory lives on the East Coast but wants to give $100,000 to a non-profit zoo on the West Coast. Unfortunately, it is already December 30 and Gregory is worried his check will not reach the zoo before year-end. However, for tax planning reasons, Gregory wants his charitable contribution to be deductible for this year.

Question:

Despite the time constraints, can Gregory complete the gift for federal tax purposes this year? What rules govern the timing of gifts by check?

Solution:

The basic rule is that a gift to a charity 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 state laws. One such specific circumstance deals with gifts by check.

Even though the final transfer to charity is not actually made until the check clears the banking institution, checks are usually deductible on the date of unconditional mailing or delivery through U.S. Mail. See Sec. 1.170A-1(b). Therefore, so long as the check clears in the normal course of business, the charitable deduction will be allowable in the year the donor mailed or delivered the check. This is true despite the fact donors could hypothetically stop payment on the check and negate the actual gift.

Gregory is very pleased with this flexibility and this “mailbox” rule. Consequently, Gregory elects to send the $100,000 check to the zoo on December 30 by U.S. Mail. To be safe, Gregory makes sure the envelope is properly postmarked this year. The check reaches the zoo on January 3 and clears on January 7. The zoo saves a copy of the postmarked envelope as a record that the gift was made the prior year. Pursuant to the tax regulation, Gregory’s gift is complete on December 30. Gregory may therefore deduct $100,000 on his Form 1040 for the previous year.