Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Charitable Contributions through Loan Forgiveness

During a recent Internal Revenue Service examination, the agent questioned the deductibility as a charitable contribution the amount of a loan that the taxpayer forgave to a charitable organization. In fact, the agent indicated that he had discussed the issue with his Manager and that the Manager had indicated that the charitable deduction should be disallowed. Since the amount in dispute was six figures, it was time to educate the IRS.

The facts in the case were as follows:

1. The taxpayer had a timely signed and dated acknowledgement from the charitable organization for all contributions made during the year under examination including the amount of the loan forgiveness.
2. The taxpayer had a properly executed note with the charitable organization. At the time the note was executed, it was not the taxpayer’s intent to forgive the loan.
3. Since the loan was secured with the charitable organization’s real property, taxpayer had properly recorded the note and related security.
4. In the year that the note was forgiven, taxpayer executed a Deed of Trust and Full Reconveyance to the charitable organization.

To convince the IRS that the loan forgiveness was valid, the agent was supplied with two Tax Court decisions, a listing of twelve additional decisions and a Revenue Ruling that validated loan forgiveness as a charitable contribution.

If you have the proper documentation and related support, you may have to educate the taxing authorities to secure a deduction on behalf of the taxpayer.

George Woodard, CPA





  1. Daniel Holladay, CPA says:


    My name is Daniel Holladay and I work mostly with churches and NPOs on tax law matters. I was recently asked about a situation similar to the one you described in your post, but wasn’t really sure the answer. So your explanation was very helpful!

    One question I do still have is, How does the taxpayer report the transaction? Is it considered a non-cash gift? Would an appraisal be needed for form 8283?

    The balance of the loan is $21k. The original loan was properly executed. To my knowledge, there was no intention to forgive the loan when the note was originally signed 3 years ago.

    Thank you!

    Daniel Holladay