Contents of Main Description

Introduction
   Making a Pledge Enforceable
   Preserving the Voluntary Nature of a Contribution
   Achieving a Meeting of Minds
   Suite of Guides and Models
      Guides
      Model Documents
Maximizing Enforceability in a Donation Agreement
   Consideration and Substitutes for Consideration
      Substitutes for Consideration
      Recitation of Consideration
      Reliance
   Original Promise Voluntary; Reliance Makes it Binding
The Collaboration
   Key Principles
   Using Conditions Rather than Covenants
      Examples of Covenants
      Examples of Conditions
Extending Contributions over Time
   Deferred Contributions
Pledging Shares of Stock
   Lower After-Tax Cost of Stock Donation
   Collecting Stock Pledges; Arrangements for Delivery
Soliciting Donations: What if the Project is Abandoned?
Charitable Contributions and the Federal Tax Code
   The Excess Value Test
   Quid Pro Quo Rule
   Comparison of Excess Value Test and Quid Pro Quo Rule
      Clarifying the Quid Pro Quo Rule
         Scheidelman
         Kaufman
         Similar Facts, Different Outcomes
   Accounting for Services
   Circumstances Where Quid Pro Quo Rule Prevails
   Request Counsel Opinion
Pennsylvania Context

Introduction

Making a Pledge Enforceable

A conservation organization may ask a donor to pledge an annual contribution or special gift with the understanding that, if the donor cannot or will not pay, the conservation organization will not press the issue. But when a conservation organization is requested by a donor to invest time and resources into a project, then the situation is different. The conservation organization may decline to become involved in the project without reasonable assurance that the donor is also committed to invest in the project.

This guide offers suggestions on ways to create a legally enforceable promise to make a gift. The desired outcome is to increase the likelihood that donors will honor their commitments without the need for litigation.

Preserving the Voluntary Nature of a Contribution

The donor may be concerned that a legally binding commitment will nullify any possibility that contribution will qualify as a charitable donation for federal income tax purposes. Gifts must be wholly voluntary to be deductible as a charitable contribution.

The guide offers suggestions on ways to preserve the voluntary nature of the donor’s investment in the project. The Model Donation Memorandum that accompanies this guide demonstrates one strategy aimed at achieving this outcome. The goal is to structure the investment in the project in such a way that the donee conservation organization may, in appropriate circumstances, acknowledge donor’s investment in the conservation project as a contribution.

Acknowledgment of the gift, and whether any goods or services were received in connection with the gift, is a necessary first step that allows for the possibility of the donor claiming a deduction for federal tax purposes. It does not guaranty that outcome. Donors must consult with their tax advisors to determine the tax deductibility of any contribution, after review of all the pertinent facts and circumstances, which is a subject outside the scope of this guide.

Achieving a Meeting of Minds

Whether or not enforceability and tax deductibility are concerns, the conservation organization and donor may want to minimize the potential for misunderstandings before investing in a conservation project. A carefully crafted donation document can insure that there is a meeting of the minds between donor and donee as to the nature and extent of their collaboration in the proposed conservation project.

Suite of Guides and Models

The Pennsylvania Land Trust Association has assembled a suite of guides as well as model documents and commentary to assist landowners ("Owners") and conservation organizations in structuring and documenting the terms under which gifts are proposed to be given and accepted. Users can review and download these materials at ConservationTools.org.

Guides

Donations by Will focuses on the tax and estate planning advantages of incorporating a cash or conservation easement gift in a will.

Pledges and Donation Agreements (this guidance) addresses the challenges of creating a legally enforceable obligation to make a future donation while maximizing the potential for tax-deductibility.Stewardship Fees: Binding Present Owners to Future Promises discusses the challenges of enforcing promises of present owners against future owners of conserved land.

Model Documents

The Model Donation Memorandum and Commentary evidences the terms under which a conservation easement may be donated and accepted, but without any obligation to do so.

The Model Conservation Funding Covenant and Commentary is a companion piece to Stewardship Fees that provides a number of alternatives to provide funding for stewardship over time and mechanisms to bind future owners of conserved land to fulfill those obligations.

Maximizing Enforceability in a Donation Agreement

Consideration and Substitutes for Consideration

"Consideration” is a legal term that means something of value received for a promise. When a person making a promise receives nothing in return, the law does not require him to keep his promise unless the court finds a legally sufficient substitute for consideration. To maximize enforceability of a promise, the donation document should include at least one, and preferably all, of the following substitutes for consideration:

Substitutes for Consideration

• Add the word “Seal” next to the signature lines.
• Add the phrase “intending to be legally bound” above signature lines to bring the agreement into the protection of the Uniform Written Obligations Act.

Recitation of Consideration

• Nominal: Add the phrase “in consideration of $10.00” to the opening of the agreement. Do not use the commonly used phrase “in consideration of $10.00 and other good and valuable consideration”. Although widely understood as a legal formula to make a promise binding, a 2011 Tax Court opinion disallowed a donation because, in its acknowledgment, the donee failed to deduct the recited consideration of $10 and did not explain the “other good and valuable consideration”. Thus, until other guidance is available, omit references to “other consideration” and account for the recited consideration when acknowledging the donation.)
• Reciprocal: Add a phrase describing the actions that conservation organization has taken or will take in consideration of the promise; for example: “in consideration of the mutual promises of conservation organization to accept responsibility for administration of a conservation easement on donor’s property and the promises of donor to make the stewardship funding available as and when required under this Agreement.”

Reliance

• Add to the agreement a description of the ways conservation organization is relying on donor’s promise to the detriment of the conservation organization. For example, “conservation organization would not have accepted the conservation easement on donor’s property but for donor’s promise to make the contributions to conservation organization’s stewardship fund set forth in this agreement.”

Original Promise Voluntary; Reliance Makes it Binding

Care must be taken in crafting a donation document so that the original promise of the donor retains, to the greatest degree possible, its voluntary character if donor desires to preserve the possibility of qualifying as a charitable contribution for federal tax purposes. To achieve this objective, while protecting the conservation organization’s interest in having promises that it can rely upon, the donation document should recite facts that explain why donor’s voluntary promise will induce conservation organization to take action in reliance upon it and that it is this reliance that makes the promise legally binding.

• That the donor has volunteered to make a certain contribution under the conditions (if any) set forth in the donation document;
• That the conservation organization is willing accept the contribution subject to the conditions (if any) set forth in the donation document;
• That, as a result of and in reliance upon donor’s promise, conservation organization will take certain steps described in the donation document; and
• That, at a certain point in time (acceptance of a conservation easement, for example) donor’s promise is irrevocable.

The Collaboration

Key Principles

When an owner and a conservation organization desire to pursue a conservation project – whether a gift of land, money to acquire land, or a gift of a conservation easement – they need to consider what each of them intends to contribute towards the success of the project. The conservation organization will analyze and quantify its investment of time and money in the project (both short and long term) and develop potential sources of funding that investment. Likewise, owners will analyze and quantify the property rights they are willing to donate, in whole or in part; the amount of money they are willing to invest in the project; and the timing of that investment over the long term and short term. The Pennsylvania Land Trust Association has made available a Model Donation Memorandum to assist in structuring the collaborative relationship between owner and conservation organization before they proceed with the conservation project. Listed below are some of the key principles incorporated into the model:

• The conservation organization is willing to proceed with the conservation project to further its own mission and strategic plan. It has not been engaged by, and is not providing any services to or for the benefit of, the landowners. It is not obligated to proceed with the project except in tandem with owners’ investment as described in the Donation Memorandum. It has identified the goods and services that will be furnished by the conservation organization for its own benefit in preparing for the donation. If owners want to engage conservation organization to provide goods or services identified in the Donation Memorandum as owners’ responsibility, these will provided, if at all, on a fee for services basis.
• Landowners are never obligated to proceed with the conservation project and may cancel at any time. If they proceed, they understand that the project will only move forward if they fulfill their part of the collaboration described in the Donation Memorandum. They take responsibility to provide and pay for all items primarily benefiting them including all items related to qualifying the donation as a charitable contribution for tax purposes.

Using Conditions Rather than Covenants

The Model Donation Memorandum structures the conservation project as a collaboration. Neither party is obligated to move forward with the project but, if landowners decide to do so, they show their commitment by providing a notice to proceed accompanied by the initial requested contribution. That action triggers an obligation on the part of the conservation organization to proceed. The legal term that describes this triggering mechanism is a “condition”. The preference for using conditions, rather than covenants, in a donation document is to underscore the voluntary character of the owners’ participation in the project. At each decision point, owners are free to decide whether to trigger further performance by the conservation organization or not to proceed further.

Examples of Covenants

A covenant is a contractual promise that obligates a party to do, or refrain from doing, a particular action. Covenants typically use terms such as “must”, “shall”, “is obligated to” or “agrees to”. A donation document can describe the arrangements between donor and conservation organization as a series of obligations; for example:

• Donor shall make an initial donation of $1000.
• Conservation organization shall prepare baseline documentation, engage counsel to prepare conservation easement, etc.
• Donor shall make a final donation of $10,000 at which time conservation organization shall accept the conservation easement.

The problem with this formulation is that, even if the donor’s contributions were wholly voluntary, the Internal Revenue Service may seize upon the word “shall” in the donation document to bolster its position that the deduction should be disallowed. Thus, a strategy that avoids this possibility is to be preferred.

Examples of Conditions

The same understanding can be stated as a series of conditions -- the approach taken by the Model Donation Memorandum. Neither party is obligated to take further steps unless the other, without any obligation to do so, takes certain actions; for example:

• Neither conservation organization nor donor is obligated to make, or accept, the contribution of a conservation easement on certain property.
• If donor, without any obligation to do so, makes the “Requested Initial Contribution” of $1000, then conservation organization will proceed to invest its time into preparation of baseline documentation and a draft conservation easement to see if donor and conservation organization can agree upon the terms of the conservation easement.
• If, without any obligation to do so, donor and conservation organization agree upon the terms of the conservation easement and donor makes the “Requested Closing Contribution” of $10,000, conservation organization will, if other conditions are met, accept the conservation easement and agree to enforce in perpetuity.
• If donor elects not to deliver the “Requested Closing Contribution”, conservation organization may, but is not obligated to, accept the conservation easement.

Extending Contributions over Time

Deferred Contributions

The donation document may provide for one or more contributions deferred into the future to make a planned gift more affordable. For an in depth discussion of a variety of ways that contributions may be deferred until after a conservation easement is accepted, see Stewardship Fees: Binding Present Owners to Future Promises as well as theModel Conservation Funding Covenant and Commentary.

Pledging Shares of Stock

Lower After-Tax Cost of Stock Donation

Donating shares of stock or other marketable securities is an attractive alternative to a cash contribution when the donor has a tax basis in the shares that is lower than current market value. Take, for example, a donor who owns $120 in stock that was originally purchased for $20 (the tax basis) and now wishes to use this asset to benefit a conservation organization:

• If the donor sells the stock shares prior to donation: Donor pays $15 to the U.S. Treasury and $3.07 to the Commonwealth of Pennsylvania on the capital gain of $100, leaving $101.93 for donation to the conservation organization.
• If the donor donates the shares directly to the conservation organization: Conservation organization may sell the shares and receive the full $120 value. No tax is due on the transaction so long as the donation otherwise qualifies as a charitable contribution. Donor avoids taxes on the capital gain and conservation organization is exempt from the taxes.

Collecting Stock Pledges; Arrangements for Delivery

Funding a conservation acquisition by delivery of stock in lieu of cash donations requires advance planning. The pledge or other donation document must specify:

• What kind of securities qualify; for example, only unrestricted, marketable securities traded on the New York Stock Exchange (NYSE).
• When the shares are to be delivered; for example, within two business days (i.e. days when the NYSE is open for not less than six hours) after call by the conservation organization to be made by e-mail or telefax.
• How the shares are to be delivered; for example, by electronic transfer to the account of conservation organization established for the transaction at a registered securities dealer pursuant to the instructions set forth in the call notice.
• When the value of shares is to be established; for example, as of close of NYSE on day of delivery to account of conservation organization.

Soliciting Donations: What if the Project is Abandoned?

Whether funded by delivery of stock or cash, a donation document that sets up a structure to fund a conservation acquisition needs to address whether, and under what circumstances, delivered funds may be refunded if the project does not close as anticipated.

• If the funds are delivered conditionally, then the donation document should explain that delivered funds remain the property of donors; that the funds will be invested in a restricted account for use only in connection with the acquisition project; and that the conservation organization is merely acting as custodian of the account until such time as the funds are transferred into closing of the acquisition. At that point, the conditional donation becomes final, the funds become the property of conservation organization, and conservation organization acknowledges donor's charitable contribution for the tax year in which the transfer occurs. The donation document also needs to explain what happens if the closing does not occur as anticipated -- how long can conservation organization continue to hold the funds? At what point can donor request return of the funds deposited? Is donor entitled to interest or earnings on the refunded amount? Can donor apply donated funds to defray its costs and expenses in connection with the project before refunding the balance to donors on a pro rata basis? Can donor elect to make the donation irrevocable so as to allow the conservation organization to acknowledge the donation as made in the current tax year?
• If the funds are delivered unconditionally, then acknowledgment of the donation is issued upon receipt and, to avoid misunderstanding, the donation document must make clear that the conservation organization cannot refund a charitable contribution once it is acknowledged. Since representations may have been made that donations were being collected for a particular project, the donation document should explain how the funds will be used for if the project is abandoned.

Charitable Contributions and the Federal Tax Code

The Excess Value Test

To be recognized as a charitable contribution for federal tax purposes, donors must at a minimum demonstrate that they purposely transferred money or property to a qualifying charitable organization in excess of the value of any benefit received in return. That is the standard (the "excess value test") set by the United States Supreme Court in the 1986 American Bar Endowment (the "ABE") decision, which described the sine qua non of a charitable contribution as a transfer of money or property without adequate consideration. The excess value test was a significant departure from the previous standard: a voluntary transfer of property by the owner to another without consideration. The ABE decision adopts the view that:

• Receipt of consideration for the transfer of property to a charity does not automatically disqualify it from deductibility.
• A binding obligation to make the gift does not automatically disqualify it as a deductible contribution.
• The test for deductibility is whether the transferor purposely transferred to the charitable organization more than the value received in return (or more than the cost of goods and services provided by the charitable organization).

Quid Pro Quo Rule

Before the ABE decision, there was a line of cases holding that a contribution could be disallowed in full if the transaction was, essentially, an exchange of value. The contributor expects to receive something of value (other than a tax deduction) in return for the payment. A 1989 decision by the United States Supreme Court confirmed that the quid pro quo test continues to survive as grounds for disallowance of a charitable contribution. The ABE decision mentions the quid pro quo rule (without disapproval or qualification) but fails to explain how it works alongside the excess value test.

For further information on the quid pro quo rule, see IRS Publication 526 (“Contributions from which you benefit”) and IRS Publication 1771 (discussion of quid pro quo transactions).

Comparison of Excess Value Test and Quid Pro Quo Rule

The following two examples illustrate how the two rules can be applied to differentiate a commercial transaction from a charitable contribution:

• Conservation organization is selling framed photos of its preserve sites for $100 each to raise funds for a project. Adam buys one then requests an acknowledgment of a $50 donation because he estimates that the labor and materials that went into developing and framing the photos were worth only about $50; thus, he reasons, he has made a $50 contribution.
• Conservation organization is soliciting donations for a project and offers a framed photo of its preserve for every donation of $100 or more. Adam makes a $100 donation and receives an acknowledgment of a net charitable contribution of $50 inasmuch as the reasonably estimated value of the goods and services received by the donor was $50.

Issuance of an acknowledgment by the conservation organization in the first example would be inappropriate under the quid pro quo rule. It would be appropriate under the second example applying the excess value test.

Clarifying the Quid Pro Quo Rule

Scheidelman

A 2010 Tax Court decision (Scheidelman) disallowed a deduction for the contribution of a façade easement as well as the monetary contribution that accompanied the façade easement. The portion of the opinion pertaining to the cash contribution focuses on its being required at the time of the easement donation; thus, the court reasoned, it was not voluntary. The holding of the case, however, was that the taxpayers failed to sustain their burden of proof that no benefit was received from the transaction. The summary of facts indicated that at least some of the tasks performed by the preservation organization were primarily for the benefit of the donors. What then was the basis for the disallowance? The fact that taxpayers benefitted from some services? Or the fact that the façade easement would not be accepted unless accompanied by a cash donation?

Kaufman

A 2011 Tax Court opinion (Kaufman) found that the requirement of a cash contribution as a condition of acceptance of a façade easement did not, by itself, result in a finding that the payment was non-deductible as part of a quid pro quo transaction.  Kaufman established a two-prong test: To support a finding of a quid pro quo, evidence must show, first, that the taxpayer received from the donee services of substantial value and, second, that the payment from taxpayer to donee reciprocated the donee’s undertakings.

Similar Facts, Different Outcomes

The cash donations in Scheidelman and Kaufman were remarkably similar. Both were in connection with façade easements, which were disallowed; both were calculated based upon a percentage of the anticipated tax deduction; both organizations performed services (filing applications, handling paperwork, obtaining subordination) that benefited the taxpayer but did not deduct the value of those services from the acknowledged donation amount; both organizations have a policy of soliciting cash donations both to defray expenses and to fund long-term stewardship.

The difference in outcomes is explained in Kaufman as simply evidentiary. Putting aside legal technicalities, the important lesson to be learned is that donors will prevail if they produce convincing evidence that they provided, or separately paid for, all tasks involved in the easement preparation process that accrued primarily to their benefit.

Accounting for Services

The cases discussed above, and Professor Hutton’s “Costs of the Easement Planning Process: Landowner Benefits and Land Trust Risks”, emphasize the importance of differentiating tasks performed in the process of easement preparation based upon the primary beneficiary. The Donation Memorandum, with accompanying schedule, is structured to allocate between the landowner and the conservation organization the items required to complete the grant and acceptance of the conservation easement.

If the conservation organization provides any services primarily for the benefit of the landowner, the time and expense should be recorded, as performed, in a way that captures the reasonable value of services performed for the landowner. There are several ways to proceed once an allocation of benefit has been made:

• Bill and collect the value of services performed for the landowner as a fee for service. That process supports a finding that the cash donation had no element of a quid pro quo: no services (substantial or otherwise) were reciprocated by the donation.
• Deduct the reasonable value of the services performed for the landowner from the acknowledged donation. This is a less desirable alternative because a claim of quid pro quo (the contribution included compensation for substantial services) remains available to the IRS.  
• Acknowledge as a charitable donation only the amount dedicated to long-term stewardship. The court in Kaufman did not see how a cash donation to fund long term stewardship benefited the donor other than in making possible the contribution of the façade easement and giving rise to an added charitable contribution deduction, which, the court noted was an acceptable benefit.

Circumstances Where Quid Pro Quo Rule Prevails

When the recipient of a conservation easement has reason to believe that it was given in connection with a business transaction, then, by application of the quid pro quo rule, neither the conservation easement, nor any cash contribution in connection with the conservation easement, should be acknowledged as a gift. Examples of circumstances where the donee should withhold acknowledgment of a gift are as follows:

• Zoning or other land use approval is conditioned upon the grant of the conservation easement.
• A promise to grant the easement has been included in an agreement of sale or other legally binding document.

Application of the quid pro quo rule can be expected to prevail in these circumstances absent evidence that a voluntary charitable contribution was made in addition to the business transaction. In that case, the donee could acknowledge a contribution to the extent of the excess value given above and beyond what was required. For example, the conservation easement granted in connection with zoning relief may extend to land beyond that required for the desired approval. Or the promise to grant the easement in the second example above may be the subject of a bargain-sale agreement, in which case it would be appropriate to acknowledge a contribution equal to the fair value of the property and any cash contribution received by purchaser/donee less the purchase price and any other goods and services tendered to the seller/donor.

Request Counsel Opinion

If the conservation organization has a reasonable doubt about whether or not a contribution has been compelled by some other agreement or condition of approval, and the donor requests that it issue an acknowledgment of the donation for federal tax purposes, the conservation organization can require, as a condition precedent to issuance of the acknowledgment, an opinion of donor’s counsel that, after reviewing all of the pertinent documentation, counsel has concluded that, at the time of the donation, his client was not legally bound to make the contribution to the conservation organization. The opinion should be addressed to the conservation organization and should permit the conservation organization to rely upon the opinion in issuing the substantiation letter and, if applicable, signing IRC Form 8283.

Pennsylvania Context

While Pennsylvania law is the context for this exploration of pledges and donation agreements, much of the content and analysis presented has relevance nationwide.

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