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This is a question about Step Transactions. IRS, USA.

Suppose I am retired and of limited income, so my tax bracket is about 10% and I don't itemize.

I want to give $10,000 to a 501(c)(3) charity. But I won't get any tax benefits if I do, because that won't overcome the new itemization threshold of $12,000.

My plan is to give the money to Judy, who will then give it to the Nature Conservancy. Judy is in a 32% tax bracket, so will get back $3200 of net tax benefits. My gift isn't taxable income to Judy, since it's under the $15,000 gift tax exclusion.

Judy's onward gift is not optional. She must agree to donate it or no deal.

Does this violate the "Step Transaction Doctrine"? Effectively Judy is getting $3200 knocked off her taxes that I am not eligible to take.

Second scenario. Suppose I am an old-school conservative and believe in conservation, but the new conservatives would be gravely offended to see me donating to the Nature Conservancy. That would hurt my planned State Senate run. This motivation is entirely innocent, and the tax benefit is an unexpected side-effect. Does that change the picture?

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  • The Sierra Club is not a 501(c)(3) charity; gifts to the Sierra Club are not tax deductible.
    – phoog
    Commented Apr 8, 2019 at 3:41
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    @phoog and, fixed.
    – Harper - Reinstate Monica
    Commented Apr 8, 2019 at 4:47
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    "My gift isn't taxable income to Judy, since it's under the $15,000 gift tax exclusion." Gifts are never taxable income.IRC Section 102. A gift tax return, i.e. Form 709, which would typically not give rise to gift taxation itself, would have to be filed if its over $15,000. But, the 709 would probably have to be filed anyway since tax relief is not a present interest in property which is required for the gift tax exclusion.
    – ohwilleke
    Commented Apr 8, 2019 at 18:01
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    Note, the comment about the gift tax return above assumes that the form of the transaction is honored which it probably will not be.
    – ohwilleke
    Commented Apr 8, 2019 at 18:07

2 Answers 2

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Judy's onward gift is not optional. She must agree to donate it or no deal.

This is where the problem lies - you are not giving her a gift because a gift carries no obligations, you are contracting with her to make a $10k donation for which you will pay her $10k. As such, this is assessable income to her.

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  • Is OP paying Judy $10k for her to take a an action that costs a non deductible $10k? Or is OP paying Judy $10k to perform an action that costs her $10k, which is a deductible business expense? Or is OP paying Judy $0 to make a donation of a provided sum of money that is never owned by Judy?
    – Matt
    Commented Apr 8, 2019 at 1:03
  • @Matt under the new tax laws most "business expense" are no longer deductible.
    – User37849012643
    Commented Apr 8, 2019 at 3:15
  • @StephanS Are you telling me that business in 2018 and on are taxed on gross revenue rather than net earnings? If someone paid me $10k to give a car valued at $10k (that I purchased for $10k) to someone else, is that taxed differently than if I had sold the car directly to the payer? Such a scenario is what I attempted to get at in my second question. I believe I pay no income tax in this case.
    – Matt
    Commented Apr 8, 2019 at 3:38
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    @Matt, as described by Dale, Judy is working as an agent of the OP, this would make her a de facto contractor governed by the terms of a verbal agreement, if the OP was to give Judy this money without any conditions of what Judy has to do to receive the money then it would be a gift, but for Judy to receive the 10K dollars she must agree to do what the OP wants her to do with it.
    – User37849012643
    Commented Apr 8, 2019 at 8:35
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    I agree that you identify the critical factor, but I think that you draw the wrong conclusion. If Judy is bound to make the donation per the instruction of OP, then Judy is an agent or nominee of OP and the donation is deemed made by him under agency law before you even get to the step transaction doctrine which might apply if she required to do so but did so anyway as part of a plan of OP and Judy acting together.
    – ohwilleke
    Commented Apr 8, 2019 at 18:04
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As op mentioned, this a simple and straightforward step transaction case. Judy isn't making any charitable contribution - op is. Judy's claim of tax deduction in this case would be inappropriate and even borderline fraudulent.

If I were in Judy's place, I would check with someone knowledgeable about this before I do something rash.

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