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Reese Henry & Company, Inc.
Phone 970.925 3771
Fax 970.925.3979

Aspen Office
400 East Main Street
Aspen, CO 81611

Carbondale Office
0326 Hwy 133, Suite 200
Carbondale, CO 81623

To Pledge or To Promise - That is the Question

Our Valley is filled with wonderful charities that perform vital services for the communities in which we live. Those organizations often ask for binding commitments from donors so that they can plan for such major undertakings as the expansion of the organization's facilities or the acquisition of new equipment with which to conduct programming. Often, the words "promise" and "pledge" are used interchangeably. The critical question is whether or not a binding, enforceable commitment has been made by the donor. Care must be taken in how donors enter into such agreements else there may be penalties in the form of excise taxes imposed by the Internal Revenue Service.

Many commitments that are made to charitable organizations by donors take the form of a binding pledge to give a specified amount over a designated period of time. In accounting literature, these binding commitments are often referred to as "unconditional promises to give". These are in essence contracts between the donor and the charitable organization. On the other hand, many donations take the form of a non-binding promise to give. State statutes govern whether the commitment constitutes a binding pledge (a contract or an "unconditional promise to give") or a non-binding promise to give.

The IRS gets involved in these issues principally in two ways. First, if a donor is unable or unwilling to fulfill a binding pledge to the organization, the IRS will seek to determine if that person has, in essence, received an "excess benefit" as a result. If it is determined that the donor or any other individual receives an "excess benefit" from an organization then the IRS might impose an excise tax.

A second way that the IRS gets involved is where an individual donor makes a binding pledge to an organization and then uses funds from other sources to fulfill the pledge - sources such as the donor's private foundation, donor advised funds held by another charitable organization, or funds from a related business entity. Again, this situation might result in excise taxes being imposed.

If you plan to make a pledge or a promise to give to a charitable organization, there are many options as to the best way to accomplish this. Please call our offices to find out what methods might serve your needs best.

If you are a charitable organization that asks donors and prospective donors to enter into binding pledge agreements, let us know. We can help guide you through the maze of rules to find the best solution to protect your interests and prevent penalties or excise taxes.

As always, please contact us with any questions!

Reese Henry & Company, Inc.
400 East Main Street Aspen, CO 81611
970.925 3771

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