You assert that (1) the $25 donation would be tax-deductible and (2) the $28 in gift cards would not be taxable. It's unclear to me whether either of those propositions is accurate.
Regarding the alleged tax-deductibility of the $25 donation, the starting point for the analysis is 26 USC § 170, which authorises a tax deduction for "charitable contributions". A "charitable contribution" is further defined as a "contribution or gift" satisfying a number of conditions. According to the Supreme Court, the legislative history of the statute reveals that Congress only intended "unrequited" gifts to be deductible:
Hernandez v. Commissioner, 490 US 680, 690 (1989). The unrequited nature of the gift is ascertained by looking at the "external features of the transaction in question". The test has been described by the Ninth Circuit as follows in
Graham v. Commissioner, 822 F2d 844 (1987):
| | If a transaction is structured in the form of a quid pro quo, where it is understood that the taxpayer's money will not pass to the charitable organization unless the taxpayer receives a specific benefit in return, and where the taxpayer cannot receive the benefit unless he pays the required price, then the transaction does not qualify for the deduction under section 170. |
This standard was also recently cited and applied by the Tax Court in
Pollard v. Commissioner, TC Memo 2013-38, p 20.
The Treasury regulations contain a similar test at 26 CFR 1.170A-1(h)(1), which states that a payment is not a deductible contribution or gift if made in consideration for a good or service unless the taxpayer "[
i]ntends to make a payment in an amount that exceeds the fair market value of the goods or services"
and actually does so.
The potentially interesting wrinkle in this thread is that the the consideration is paid by a third-party rather than directly by the charity. I am unable to locate any case law directly on point, but I haven't looked very hard. It does seem like the purpose of this limitation would be defeated if a charity could just hire a third party to dispense the benefits. For example, is there a real difference between a charity that provides you a gift in exchange for your donation, compared to a charity that hires a fundraising company to solicit donations and dispense gifts in exchange for same? In that case, the fundraising company is clearly acting as an agent for the charity.
In the case before us, the relationship between Swagbucks and the charity is somewhat unclear. It may be that the charity is paying to be listed on the site, which would be similar to the hypothetical in the preceding paragraph. Or it may be that Swagbucks is advertising for the charity out of the goodness of its heart. It may be some combination of the two (as in, the amount the charity is paying Swagbucks could be nonzero but less than the value of the gift cards).
I won't offer an opinion on how the law actually applies to this situation, other than to say it appears unclear to me. I certainly wouldn't be prepared to breezily assert that this donation is tax-deducible without some citation to case law and/or other legal briefing.
The other part of the equation is whether the $28 gift card is taxable income. According to 26 USC § 102, gross income does not include gifts, but the same case law says that a gift for this purpose does not include a transaction structured in the nature of a
quid pro quo. If the donation to the charity is not deductible, then at least $25 of the gift card would be a purchase (not income), so only the remaining $3 would be potentially taxable income. However, if the donation to the charity
is deductible, then potentially the entire $28 of the gift card would constitute taxable income, unless it can be shown to be a gift.
I don't think we have enough facts from your post to apply the law with any level of certainty.
