A young adult I know of claims to have completed the documentation qualifying him as a “508(c)(1)(A) church.” He says that with that status, his parents can now make tax-deductible donations to him through the 508(c)(1)(A) and thereby provide financial support while enjoying tax savings. The parents are concerned that this constitutes tax evasion since the organization is not truly a church or bona fide faith-based organization. The child claims to know of many people engaging in this practice. What do you think?
I think the parents are wise to be worried. Just because a lot of people are engaging in a practice does not make it legal.
As I have said many times, an organization doesn’t get to use section 508(c)(1)(A) to avoid filing an application for recognition of tax exemption unless it first qualifies as a “church” under section 501(c)(3). (See Reader’s Question: “What is the difference between 501(c)(3) and 508(c)(1)(A)?”) If the organization doesn’t qualify as a church under section 501(c)(3) — and you say the parents say it doesn’t — it can’t rely on section 508(c)(1)(A) to avoid an application for exemption. And if it isn’t exempt, the parents can’t take a charitable contribution deduction for gifts to a non-exempt entity.
There are a lot of people out there peddling the idea that 508(c)(1)(A) is a simple pathway to nirvana. Reading some of their websites, it is clear that they don’t understand the basic law. The IRS doesn’t have enough people to police the field as much as they ought to. But if the parents want to be able to sleep well at night, they will listen to their gut and will not play the game.
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I do elder law quite a bit and these facts are screaming red flags that Junior is a grifter.
Anyone who would pitch that to their parents should be treated as radioactive. And parents have any kind of financial estate, they need to get to a good estate planning lawyer who can help them plan for old age without relying on Junior in any way. They can leave their estate to Junior if they want when the second one goes, but until then they need to make good and darn sure that Junior is in no position of trust over their finances.
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