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

Family Foundation, was delighted when the

board approved a grant of $25,000 to his

favorite charity, the local symphony. He was

confused, though, when a package of four

season tickets for the foundation appeared in

his mailbox. Could he use the tickets to attend

the symphony? Could he bring his wife and

children? If he made his own contribution to

the symphony and received another set of

tickets, to whom could he give the

foundation's tickets?

Reviewing her morning mail, Doe Nation, the

manager of the new corporate foundation at

XYZ Corporation, paused over the invitation

to a fundraising dinner for a local charity. A

table for ten at the benefit would cost the

foundation $10,000-$1,000 for the dinner and

$9,000 for a charitable contribution. Nation

wondered whether the foundation should

make a practice of funding dinner events.

Should the foundation send a check for the

cause but refuse the table and dinners? If the

foundation accepted the dinners, could

corporate executives take the seats and bring

some valued customers? Could the

corporation's name be listed in the dinner

program?

Grant Maker, the corporate contributions

manager at QRS Industries, considered an

appeal from the local art museum. A $20,000

contribution would entitle the corporation to

use the museum for an evening reception and

provide free admission and a discount at the

museum store for all corporate employees.

Should the grant come from the corporate

foundation or the corporate giving budget?

Anne Dowment, director of the community

foundation, was concerned. She had received

16 requests in one week for $500 gifts to be

made from donor-advised funds to the local

children's hospital. Now she knew why: in her

morning mail was an invitation to a gala

dinner dance for the hospital. Tickets cost

$500-$100 for the meal and $400 for the

charitable contribution.

As these examples suggest, accepting tangible

benefits opens a Pandora's Box for foundations

and prompts many requests for information

from the Council on Foundations. Following is

how the general Tax Code rules address these

situations for family and community

foundations, corporate foundations and giving

programs, and public charities.

Tickets are Tangible Economic Benefits

Whether they are tickets to a dinner, a

performance or simply for general admission

to a facility, tickets have economic value,

generally the fair market value of the goods

and services provided. The importance of this

tangible economic value is that individuals and

corporations (we'll come to foundations in a

moment) must generally reduce the amount of

any charitable income tax deduction taken in

connection with a gift that yields benefits with

economic value by the amount of that value. If

a corporate giving program pays $500 for a

That’s the Ticket

table at a fundraising dinner, and the economic

value of the dinners provided to attendees is

$100, the corporation may take a charitable

income tax deduction of $400 ($500 less $100).

It's perfectly legitimate for a corporation or

individual to accept tickets in exchange for a

charitable contribution, but it is important to

report the transaction properly. Tax rules

dating from 1993 that require charities to

disclose the value of tangible economic

benefits provided to contributors are designed

to aid compliance.

For public charities such as community

foundations, the tangible economic value of

tickets means that it is important to monitor

distributions from donor-advised funds. To the

extent that a donor advisor might receive

tickets as a result of a distribution from a fund

at the community foundation, the community

foundation could be viewed as providing

benefits to private individuals. To the media

and the public, a pattern of this sort of activity

may make the community foundation appear

to be helping people avoid taxes (donors take a

deduction for the full amount given to the

donor-advised fund and presumably would

not reduce that deduction by the value of the

later-acquired tickets). To the IRS, a pattern of

this sort of activity might suggest that the

community foundation is not operating

exclusively for charitable purposes as required

to retain its tax exemption. Again, there is no

problem with individuals making direct gifts

to charities and receiving tickets or other

tangible benefits in return; the problem only

arises when the community foundation's funds

are used to gain these goods and services for a

donor.

The tangible economic value that tickets have

poses a large problem for private foundations.

The private foundation rules in the Tax Code

generally provide that it is an act of self-

dealing for disqualified persons to receive

tangible economic benefits that flow from

foundation grants. Disqualified persons are

foundation managers, substantial contributors

to the foundation, and the families of both of

these. In the corporate foundation context, the

corporation that funds the foundation is clearly

a disqualified person. There is no IRS guidance

on whether all corporate employees are

disqualified persons or if only certain

managers or executives fall into this category.

The conservative approach would be to

consider all employees disqualified persons.

Thus, the private foundation rules generally

bar disqualified persons from using tickets that

are made available on account of foundation

grants.

Reasonable and Necessary

The self-dealing rule's bar on the provision of

tangible benefits has an important exception:

Treasury Regulations allow a foundation to

provide benefits to a disqualified person so

long as those benefits are reasonable and

necessary to his or her performance of

functions that carry out the exempt purposes

of the foundation. An IRS technical advice

memorandum (TAM 8449008) states that when

it is necessary for a disqualified person to

attend an event to monitor how the

foundation's funds have been spent, he or she

may accept tickets provided by the foundation

and use them. (Note: A technical advice memo

only applies to the parties involved in the

particular case, but it does provide an

indication of the IRS' thinking on this matter.)

There is no IRS guidance on whether a

foundation board or staff member could

legitimately "monitor" a grantee's activities for

an entire season of concerts or whether just one

visit is appropriate.

Note that whether or not a private foundation

staff or board member attends a function, the

value of the tickets need not be deducted from

the amount as listed under "Contributions,

That’s the Ticket

gifts, [and] grants paid" on the foundations

Form 990-PF. If a foundation wishes to, it may

list as an administrative expense the value of

any tickets used by a staff or board member

who attends in a monitoring or administrative

capacity and put the balance of the grant under

"Contributions," but this type of accounting is

not generally required.

A final thought on this topic is that goodwill

and publicity are not tangible economic

benefits. A foundation, including a corporate

foundation, is free to have itself listed in a

dinner program or a banner. If support for a

particular event comes from both the corporate

foundation and the corporation, the two may

be listed together.

Dividing Ticket Value into "Charitable" and

"Noncharitable" Components Doesn't Work

For the purpose of the self-dealing rule, the IRS

takes the position that it is not possible to

separate the price of a ticket into its charitable

and noncharitable components. In other

words, a private foundation cannot avoid the

self-dealing problem by having a disqualified

person (who has no monitoring or

administrative duties to justify his or her

attendance at a function) pay for the cost of the

dinner ($100) or other tangible benefit and

having the foundation pick up the charitable

portion ($400) of the ticket. The reasoning

behind this IRS position appears to be that the

disqualified person would not be in a position

to pay the $100 for the dinner unless the

foundation paid the $400; the foundation is

freeing a disqualified person of a financial

obligation that he or she (or, in the case of a

corporation, it) would otherwise incur. In a

March 1, 1990, private letter ruling involving a

corporate foundation (PLR 9021066), the IRS

states that such "bifurcation" would constitute

self-dealing, as would "any funding approach

whereby [the corporate foundation's] funds

were used to permit [the corporations']

executives to attend." Again, the ruling applies

only to the taxpayer that requested it but

provides evidence of the IRS' general attitude.

For public charities such as community

foundations, the idea that the charitable and

noncharitable components of a ticket are

inseparable suggests that the donor advisor

cannot correct the private benefit problem

posed when fund distributions pay for tickets

by offering to pick up the "noncharitable"

portion of the tab. Again, the donor advisor

would not be in a position to pay for the

dinner if the community foundation's funds

were not covering the donation, and the

community foundation may be seen as

discharging an individual's obligation and thus

serving private interests.

Tickets May be Refused or Otherwise

Disposed of to Prevent Problems

Individuals and corporations seeking to

maximize their charitable deductions and

grantmakers wishing to avoid the issues

potentially raised by tickets may refuse them.

As far back as 1967, the IRS provided rules for

how benefits might be refused (see Rev. Rul.

67-246, 1967-2 C.B. 104). Options include

indicating on a contribution form that no

tickets are to be sent and refusing to accept the

tickets if they are sent.

Revenue Ruling 67-246 emphasizes that simply

not using the tickets does not constitute a

refusal or disposition of them that restores the

full value of an individual or corporation's

charitable contribution; as long as the taxpayer

still has the tickets, he or she has the right to

attend the event and that right has economic

value. However, in a later ruling, the IRS held

that a taxpayer who donated the tickets back to

the charity for resale was entitled to a

charitable deduction equal to his cost of the

ticket (see Rev. Rul. 74-348, 1974-2 C.B. 80).

Some corporations make a practice of donating

That’s the Ticket

tickets back to the charity that issues them.

Another option may be to donate the tickets to

another charitable group that can put them to

good use.

From the General to the Specific

For family foundations, tickets for fundraisers

and other events should be used only by

foundation staff and directors who have

monitoring and administrative responsibilities

for the relevant grants. Spouses of these

disqualified persons are not covered by the

exception to the self-dealing rules, and should

not be using foundation-sponsored tickets.

Some lawyers suggest that one way of making

it possible for spouses to attend fundraisers is

to treat the full cost of their tickets (both

charitable and noncharitable components) as

compensation to the disqualified person who

is attending in a monitoring or administrative

capacity. If family members want to support

and attend a fundraising event, the best course

is for them to make their contribution out of

their own pocket, not the foundation's.

For Phil N. Thropy, recipient of the symphony

tickets on account of the Thropy Foundation's

gift, the rules mean that he and perhaps other

board members (or staff) may use one or more

of the tickets sent by the symphony. Unless his

wife and children play a role in the foundation,

they should not be using the tickets. Mr.

Thropy may return unused tickets to the

symphony or perhaps give them to another

charitable organization, but there is no

requirement that he do so and no tax or other

penalty for the foundation if he does not. On

the foundation's tax return, the full $25,000

may be shown as a contribution to the

symphony, although the foundation is free to

list the value of tickets used as an

administrative expense. There's no clear

answer to the question of whether it is

appropriate for Mr. Thropy to use the entire

season's worth of tickets or just one.

Corporate foundations, too, would be well

advised to look for another source of funding

for contributions that will yield tickets or other

tangible benefits. If there is a corporate giving

program, it is the ideal funder, since the self-

dealing rules do not apply when the corporate

foundation is not used. If the corporate

foundation does provide funding that results

in tickets, the key to good compliance is

keeping in mind who disqualified persons are:

the foundation's managers, board members,

the corporation and, potentially, all of its

employees. None of these people should be

using tickets unless they are attending on

behalf of the foundation in an administrative

or monitoring capacity. As with family

foundations, spouses are not covered by the

exception for monitoring and administration.

In the corporate context, it may be tempting to

invite corporate clients or other business

associates to sit at a corporate foundation table,

but this should be avoided.

For Doe Nation, the rules mean that the XYZ

Corporation Foundation needs to make a

policy choice on the issue of whether it will

support fundraisers and other events that

result in tangible economic benefits. If the

decision is that it will not, Ms. Nation may

pass on such requests to the direct corporate

giving program. If the foundation opts to

support these events, it must decide whether it

will accept tables and to whom it will

distribute tickets. Whether or not the

foundation accepts tables, it may be listed in

the dinner program as a sponsor. The

foundation is free to list the value of tickets

used as an administrative expense on its 990-

PF, but need not do so.

What Becomes of a Ticket Kept?

Both family and corporate foundation

managers might well wonder to whom-other

than foundation personnel with administrative

and monitoring responsibilities-they may

That’s the Ticket

legally give tickets if accepted. There's no clear

answer in the law, but returning them to the

issuing charity or another charitable group is

usually a safe option. Giving the tickets to

truly unrelated persons, including other

potential contributors to the charity who may

benefit from an opportunity to learn about its

work, is another possibility.

Corporate giving programs that acquire tickets

have much more flexibility in distributing

them. So long as the corporation reduces the

amount of its charitable deduction by the value

of any goods and services received, it may

send executives or other employees, customers

and other business contacts to an event. Note,

too, that under certain circumstances,

corporate contributions need not be reduced

by the value of benefits received; the 1993 tax

rules provide that if a corporation makes a gift

to a charity and receives in return benefits for

its employees that are identical to membership

privileges that an individual might receive for

a gift of $50 or less, the value of the these

benefits need not be taken into account.

Thus, Grant Maker, who's been offered a

package of benefits for QRS Industries'

employees in exchange for a large corporate

gift would be well advised to make the

contribution to the local art museum from the

corporate giving program, not the corporate

foundation. He will need to verify that the

package of benefits available to QRS

employees is identical to that offered to

museum members who pay $50 or less. If the

donation comes from the corporate

foundation, and the admission benefits are

offered, it may be an act of self-dealing for QRS

Industries employees to use them.

Public charities such as community

foundations need to exercise caution when

dealing with fundraising tickets. The wise

community foundation alerts donor advisors

from the outset that it will not make

recommended distributions that will result in

tangible benefits accruing to them. If donors

are given forms on which to request

distributions, it is helpful to have an

acknowledgment or recital that the suggested

grants do not represent the payment of a

pledge or other financial obligation nor will

the donor advisor receive any personal benefit

from this charitable distribution.

Community foundation executive Anne

Dowment faces the unenviable task of

contacting her donor advisors and asking each

one gently whether he or she is requesting a

distribution in order to buy tickets for the

Children's Hospital benefit dinner dance. If the

answer is yes, she should tactfully inform him

or her that such a gift should come from

personal, not community foundation, funds. If

a donor advisor mentions that he would like to

make a contribution but is not planning to

attend the dinner dance, however, the

community foundation can make the

contribution and indicate that tickets should

not be sent. Ms. Dowment may wish to think

about revising the community foundation's

materials for donor advisors to make the

prohibition on personal benefits more

prominent.

Tickets and other tangible benefits pose

complicated legal and policy challenges for all

types of grantmakers, and the guidelines set

out here are no substitute for expert counsel

from a lawyer familiar with the grantmakers'

activities. But understanding the issues and

knowing when to call on counsel is an

important part of complying with the rules in

this area.

*Jane C. Nober is former special counsel at the Council on Foundations.

– Updated by Council legal staff in 2010.