Q&A #2 – Can donors use the charitable deduction for pre-paid fees for events that have been cancelled if the donor lets the organization keep the fees in lieu of a refund?

Question: My 501(c)(3) organization receives pre-paid fees from donors to attend our monthly events, which we have had to cancel because of COVID-19. We would like to give these donors a choice to receive a partial refund of the fees, or (preferably) treat the unused portion of the fees as a "donation" to help us keep operating. If our donors choose to donate the fees, can we tell them that they can use the charitable deduction for this amount?

Answer: The IRS has never, to my knowledge, issued guidance on this particular question. But applying fundamental principles of the charitable deduction rules, people who affirmatively decline to receive a refund for cancelled events, and instead let the organization keep the remaining fees, should be able to deduct this portion as a “donation.”

When a donor receives goods or services in exchange for a contribution, the donor can only deduct the excess of the amount contributed over the fair market value of what the donor receives in return. See Treas. Reg. § 1.170A-1(h). The IRS calls this a “quid pro quo” contribution, as described in IRS Pub. 1771 (a very helpful and informative resource on this topic). In fact, if the goods or services are made available to the donor, this treatment applies even if the donor declines to receive the goods or services. See Rev. Rul. 67-246.

Prior to the cancellations, your donors could only have used the charitable deduction to the extent that the fees exceeded the fair market value of the events (if at all). Now that the events have been cancelled, your donors are no longer receiving goods or services – they are making a choice between receiving a refund and letting the organization keep the fees. Thus, you (and your donors) would have a strong argument that the choice to forego the refund has the key factor of “donative intent.”

Your case is different than the facts addressed in Rev. Rul. 67-246 because your donors are not simply declining to attend the events. The events are no longer happening at all, so the donors don’t have a choice to receive the “services.” Their only choice is to get a refund or support the organization by declining the refund. This is an important distinction.

You will need to take steps the clearly document this choice. Keep a copy of the letter you send to donors explaining that the events have been cancelled and that they have the option of receiving a refund or letting the organization keep the fees as a way of supporting the organization during a difficult time. Ask the donors to send an email or, if possible, sign a document stating that they are choosing to forego the refund.

As for timing, the “donations” should be considered made on the date that the donors choose to decline the refund. This will need to be reflected in the acknowledgment letter that you send to the donors, in accordance with IRS Pub. 1771.

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