Legal Commentary

Over at The Conglomerate, Christine Hurt discusses the tax treatment of "The Good Card," available from Network for Good:

You...give someone a gift card, which they can then use to donate to the charity of their choosing. It's not quite like a universal gift card -- it has to be used for a charitable donation. This could be a little easier than making a donation in someone's name, especially if you don't know which charities that person supports....Who gets the deduction?....[T]he gift card buyer gets the deduction, which I think is the best incentive policy, if you want people to buy the gift card. The gift card recipient either uses or looses the earmarked funds, so they need no further incentives.

From a tax law perspective, here's why (I think) the gift card buyer gets the deduction. (This is based on information from Network for Good's website; I have no particular knowledge of this organization.)

When you buy a Good Card, you are making a donation to what's known as a "donor-advised fund." (Network for Good's 2007 tax return tells us that over $54 million of their roughly $58 million in revenue in 2007 consisted of contributions to donor-advised funds.)  A donor-advised fund is an account that is owned by a tax-exempt organization (in particular, the sort of tax-exempt organization where, if you contribute to it, your contributions are deductible), if the donor, or someone designated by the donor, is allowed to advise where the funds will be distributed or invested.

Network for Good's tax-exempt purpose is supporting other tax-exempt organizations (or, as they put it on their 2007 tax return, to "increase charitable giving...and decrease the cost of fundraising for nonprofits").  Although this might not seem like the usual definition of a charity, the IRS has ruled that this is in fact a good tax-exempt purpose.  Donations to Network for Good are in general deductible, and Network for Good can own and administer donor-advised funds.

Making a donation to a donor-advised fund is tax deductible, and "buying" a Good Card is really just making a donation to a donor-advised fund controlled by Network for Good. So "buying" a Good Card is tax deductible. The person who uses the gift card is simply advising the fund--that is, directing Network for Good to which public charity the funds in the donor-advised fund are to be transferred.  That is not, obviously, deductible.  

(If the Good Card is not "redeemed" within a certain time period--usually six months--the funds go into Network for Good's general account, where they are used for Network for Good's general charitable purpose of assisting other charities.  This doesn't affect their tax treatment, because donations to Network for Good are in general deductible, and the rules for donor-advised funds are actually stricter, not more permissive, than the rules governing donations to charities in general.)

That's my take on it--any thoughts or amendments from other tax or non-tax folks?

(H/T: Paul Caron.)