Contents

§ 6.8 GIFTS BY LETTERS OF CREDITattempt to make a charitable gift. There was no executed written transfer instrumentand no formal action was taken by the recipient organization to formallytransfer the copyright to itself. A court held that, “[t]herefore, standing alone, ...[the individual’s] physical presentation of the copyright certificate to ... [thecharitable organization], although accomplished with much ceremony, wasinsufficient to transfer a legal interest in the copyright” to the charity; “[t]hisinvalid transfer,” the court continued, “does not begin to qualify as a deductiblecharitable contribution.” 41§ 6.7 GIFTS BY MEANS OF NOTESThe making of a note promising to pay money and/or transfer property to acharitable organization, and delivery of the note to the charity, does not create acharitable contribution deduction. This is because a mere promise to pay doesnot effect transfer of title to the property. 42 Of course, when the money and/orproperty is actually transferred to the charitable donee, in satisfaction of therequirements of the note, an income tax charitable contribution deductionresults. 43 (A promissory note is an item of intangible personal property.)These distinctions are based on the rule that a charitable deduction is availableonly for the year the contribution is actually paid. 44 Delivery of a note is notpayment of the amount it represents. 45A note in these circumstances may bear interest, or purport to bear interest.The tax consequences of payment of the interest depend on the enforceability ofthe note. If the note is enforceable, the payment of interest on the note is notlikely to be deductible as an interest expense; if the note is not enforceable, theadditional amounts paid are not interest for tax purposes, but are deductible ascharitable contributions. 46§ 6.8 GIFTS BY LETTERS OF CREDITA charitable contribution made by means of an irrevocable banker’s letter ofcredit is the basis of a charitable deduction as of the date the letter of credit wasestablished. This is because an irrevocable letter of credit from a bank is theequivalent of money. 47In one instance, an individual established an irrevocable banker’s letter ofcredit in favor of a charitable organization. The letter of credit was for an aggregateamount of $150,000, payable by drafts drawn by the charity. The entire$150,000 was distributed to the charitable organization in four amounts, one in41 Smith v. Commissioner, 42 T.C.M. (CCH) 431, 437-38 (1981).42 Rev. Rul. 78-38, 1978-1 C.B. 67. This rule assumes that the notes represent bona fide debt. E.g., Lippmann v.Commissioner, 52 T.C. 130 (1969).43 Rev. Rul. 68-174, 1968-1 C.B. 81. See also O’Neil v. United States, 82-1 U.S.T.C. 9209 (E.D. Cal. 1982),aff’d without opinion (9th Cir. 1982); Guren v. Commissioner, 66 T.C. 118 (1976); Petty v. Commissioner, 40T.C. 521 (1963).44 See the text accompanying note 1. See also Story III v. Commissioner, 38 T.C. 936 (1962); Andrus v. Burnet,50 F.2d 332 (D.C. Ct. App. 1931).45 See § 4.1(d).46 Rev. Rul. 68-174, 1968-1 C.B. 81.47 Watson v. Commissioner, 69 T.C. 544 (1978), aff’d, 613 F.2d 594 (5th Cir. 1980). 179