Internal Revenue Service
Revenue Ruling
Rev. Rul. 78-38
1978-1 C.B. 67
Sec. 170
Sec. 7805
IRS Headnote
Credit card; charitable contributions. A contribution made to a qualified
charity by a charge to a bank credit card is deductible as a charitable
contribution under section 170(a) of the Code in the year the charge is
made regardless of when the bank is repaid; Rev. Rul. 68-174 distinguished
and Rev. Rul. 71-216 revoked.
Full Text
Rev. Rul. 78-38
The Internal Revenue Service has given further consideration to Rev. Rul.
71-216, 1971-1 C.B. 96, which holds that a taxpayer who used a bank credit
card to contribute to a qualified charity may not deduct any part of the
contribution under section 170(a)(1) of the Internal Revenue Code of 1954
until the year the cardholder makes payment of the amount of the
contribution to the bank.
Rev. Rul. 71-216 cites section 1.170-2(a)(1) of the Income Tax Regulations
(predecessor to current section 1.170A-1(a)(1) of the regulations) which
provides that a deduction is only allowable to an individual under section
170 of the Code for charitable contributions "actually paid" during the
taxable year, regardless of when pledged and regardless of the method of
accounting employed by the taxpayer in keeping books and records.
In Rev. Rul. 71-216 the assumption was made that a charitable contribution
made by a taxpayer by use of a credit card was tantamount to a charitable
contribution made by the issuance and delivery of a debenture bond or a
promissory note by the obligor to a charitable organization, as discussed
in Rev. Rul. 68-174, 1968-1 C.B. 81, which holds that, under the facts
presented, the issuance of a debenture bond or a promissory note represents
a mere promise to pay at some future date, and delivery of the bond or note
to a charitable organization is not "payment" under section 170 of the
Code.
Upon further study, it has been concluded that there are major distinctions
between contributions made by the use of credit cards and contributions
made by debenture bonds and promissory notes. In Rev. Rul. 68-174, the
charitable organization that received the debenture bond or promissory note
from the obligor received no more than a mere promise to pay. Conversely,
the credit card holder in Rev. Rul. 71-216, by using the credit card to
make the contribution, became immediately indebted to a third party (the
bank) in such a way that the cardholder could not thereafter prevent the
charitable organization from receiving payment. The credit card draft
received by the charitable organization from the credit card holder in
Rev. Rul. 71-216 was immediately creditable by the bank to the
organization's account as if it were a check.
Since the cardholder's use of the credit card creates the cardholder's own
debt to a third party, the use of a bank credit card to make a charitable
contribution is equivalent to the use of borrowed funds to make a
contribution.
The general rule is that when a deductible payment is made with borrowed
money, the deduction is not postponed until the year in which the borrowed
money is repaid. Such expenses must be deducted in the year they are paid
and not when the loans are repaid. Granan v. Commissioner, 55 T.C. 753
(1971).
Accordingly, the taxpayer discussed in Rev. Rul. 71-216, who made a
contribution to a qualified charity by a charge to the taxpayer's bank
credit card, is entitled to a charitable contribution deduction under
section 170(a) of the Code in the year the charge was made and the
deduction may not be postponed until the taxpayer pays the indebtedness
resulting from such charge.
Pursuant to the authority contained in section 7805(b) of the Code,
contributions made by credit card use before January 1, 1978, may be
deducted either in the year in which the contribution is charged or in
accordance with Rev. Rul. 71-216.
Rev. Rul. 68-174 is distinguished; Rev. Rul. 71-216 is revoked.
