Donation to charity in lieu of payment

[bgiez]

I have a client who has been providing personal services (no, not that kind. Get your mind out of the gutter!) for free to friends, some of whom "feel guilty" and want to pay her. She doesn't want to become a business, or have "hobby income" and thought she might suggest these friends make a charitable contribution to a particular educational organization. The client will not receive a benefit from this organization for any contributions that would be made.

So, my question is - If she suggests, but doesn't require, contributions be made to a specific organization, my guess is that would keep her in the clear, but what if she requires that instead of paying her, they make the check out to the organization? It would seem to me that would not generate taxable income to her, either, but I've been wrong before.

[Koss]

Payment

If she provides services, and as a condition of providing those services, requires that the person receiving the services make a payment to a third party, then I think she has effectively received income and then assigned that income to the third party. The fact that the third party is a charitable organization does not change the fact that she received the income.

She may have a charitable contribution. The person who wrote the check certainly can't treat it as a charitable contribution, because they received services in exchange for it. The person providing the services may have a legitimate deduction, but she would still have to report the income. And she may have a really tough time complying with the documentation and recordkeeping requirements for charitable contributions. It would be cleaner for her to accept the check made out to her, and then properly donate the money herself.

But I understand her motivation. Maybe she doesn't itemize, so she would get stuck with the income, and the charitable contribution would have no value. It sux to be her.

My position is based on the doctrine of constructive receipt, and on the principle of substance versus form.

If I fix your car, and tell you that my fee is $100.00, and then ask you to make the check out to my brother, that doesn't allow me to avoid treating the payment as taxable income.

At best, it is a valid and legitimate assignment of income. If I owe my brother money, and it would be difficult for me to cash the check because I don't have a bank account, then I might have a completely legitimate motive for having the check made out to him. But it nevertheless remains taxable income to me, and it is not taxable to my brother.

At worst, it is flat-out tax evasion.

I just don't see how making the payment to a charitable organization would change the dynamics.

BMK

[Burke]

At worst, it is flat-out tax evasion.
BMK

You are absolutely right about this and to boot, it is illegal.

[taxea]

It's called "pay it forward" and she should have no restrictions on how the person goes about it. Her statement to the person should be, "Do something nice for someone in need, or make a donation to a charity, or pay a friend's bill if you need to spend so money.

[bgiez]

Thanks

Koss, Burke & taxea. I'll pass this on to her.