Private Donations To Public Entities: Considerations For California Fire Districts

From time to time, members of the community want to contribute personally to the local agencies that serve them.  It comes from a good place!  For example, a member of the public may want to donate a vehicle they are no longer using, or show their appreciation for a public service that saved personal property.  Perhaps a community member wants to donate money for the agency’s use in furthering the services it provides.  Can they do so?  And, if so, can they deduct the donation for personal income tax purposes?  The answers may surprise you!

I. Deductible Donations, When Use is Restricted for Public Benefit

In general, private donations to governmental units, including states and their political subdivisions, are tax-deductible, but only if a donor makes the donation exclusively for public purposes.^[1]   A political subdivision is any division of any State or local government unit that has the right to exercise sovereign powers.  This typically includes the power to tax, the power of eminent domain, and the power to police.^[2]   In 1987, the Internal Revenue Services (IRS) recognized a fire protection district as a “political subdivision” largely because of its power to assess taxes, and because it its Board governance structure.^[3]  While these factors may differ between districts, in many cases, they will demonstrate that the agency is a governmental unit, such that donations directed exclusively for the agency’s public purpose are tax-deductible.  For more certainty, a district can request a “government information letter,” or a private letter ruling from the IRS to demonstrate its ability to accept tax-deductible contributions.

II. Considerations and Limitations on Accepting Private Donations

1. Limitations on Gifts Benefiting Private Individuals
   While the IRS recognizes the deductibility of private donations for public purposes, it prohibits deductions for donations that inure to the benefit of any specific individual.^[4]   Moreover, state law strictly prohibits public employees from receiving additional compensation for performance of their official duty.^[5]  It also prohibits public agency officials from receiving gifts over a certain value for their own personal benefit, or the benefit of any other individual person.^[6]  However, a fire protection district organized under the Fire Protection District Law of 1987, generally may accept any revenue, money, grants, goods, or services from any person “for any lawful purpose of the district.”^[7]
2. Public Perception & Other Restrictions on Private Fundraising Activity
   Despite the ability to accept a donation for a district’s lawful purpose, fire districts and other local agencies may still prefer to direct private fundraising efforts through a public charity recognized as “tax exempt” under Internal Revenue Code section 501(c)(3).  Reasons for doing so warrant careful consideration and discussion with district leadership and counsel.  These reasons include, and are not limited to: recognition by members of the public that donations to 501(c)(3) organizations are tax deductible, professional management of fundraising activities, flexibility to engage in fundraising activities that are not available to public agencies, and public perception.

Unlike certain eligible nonprofit organizations, local agencies cannot engage in raffles or controlled games (e.g. casino nights) to raise private funds, even for public purposes.^[8]  In addition, members of the public may view a public agency’s private fundraising efforts as an improper use of agency staff time, or as the agency “double-dipping” in public resources from constituents who already support the District’s mission through taxation, assessments, and fees.

For these and other reasons, districts should use caution before engaging in private fundraising activities, or accepting donations of money or goods from their constituents.  Some districts may want to obtain 501(c)(3) status, or establish or partner with a nonprofit 501(c)(3) to engage in these activities to benefit the district.  LCW attorneys are experienced in navigating complex donation questions, creating nonprofit corporations, and obtaining tax-exempt status, and can help districts evaluate these issues for their agency.

^[1] 26 U.S.C., § 170, subd. (c)(1); see also IRS information letter, https://www.irs.gov/government-entities/federal-state-local-governments/governmental-information-letter.  The mere fact that a contribution is given to a political subdivision of the State does not in and of itself make the contribution deductible under Section 170. In order for a gift to qualify as a charitable contribution within the meaning of 26 U.S.C. Sec. 170, “the incentive or motive behind the gift must be that of a ‘detached and disinterested generosity’ or that of ‘affection, respect, admiration, charity or like impulses’,” (See Transamerica Corp. v. U.S. (N.D. Cal. 1966) 254 F.Supp. 504, 514, aff’d (9th Cir. 1968) 392 F.2d 522 [citing Commissioner v. Duberstein, (1960) 363 U.S. 278, DeJong v. Commissioner, (1962) 309 F.2d 373].) See also Denver & Rio Grande Western Railroad Co., v. Commissioner (1962) 38 T.C. 557, 584, finding that the donation of a locomotive by the Railroad Company, “in trust” for the use of the City of Gunnison, placed in a City park for public display, was for an exclusively public purpose within the meaning of the law.

^[2] 26 C.F.R. § 1.103-1.

^[3] IRS Private Ruling Letter, PLR 8751010 (1987); CHARITABLE GIVING, ¶ 3.03 Qualified Governmental Entities under IRC § 170(C)(1), 2013 WL 4104641, 2.

^[4] See 26 U.S.C, § 170, subd. (c)(1)-(2)(C); IRS Publication 526 (2022), p. 3.

^[5] Cal. Const. Article XI, section 10(a); 33 Ops.Cal.Atty.Gen. 143 (1959).  Additional compensation means that compensation which is over and above the amount fixed by contract or by law when the employee rendered their services.

^[6] See Gov. Code, § 89503; see also Gov. Code, § 82028, FPPC Factsheet: Limitations and Restrictions on Gifts, Honoraria, Travel and Loans for Local Public Officials (Dec. 2022).

^[7] Health & Safety Code, § 13898.

^[8] Bus. & Prof. Code, s. 19985-19987; Penal Code section 320.5.