Charitable Donations: The Role of 'Cash Back Rewards'
Bird, Bruce M., Hopper, Michael, Segal, Mark A., Bible, Lynn, The CPA Journal
The past several decades have witnessed a significant increase in the popularity of affinity credit cards. Most affinity credit cards are issued to cardholders through an arrangement with a credit card company or bank. Cardholder purchases during the year result in charity receiving payments from the credit card company or bank. A charity participating in an affinity card program also often receives cash payments based upon new customer sign-up fees or annual customer renewal fees.
Many colleges and alumni associations have benefited financially by participating in affinity card and similar programs (Jay MacDonald, 'Once Secret Credit CardCollege Marketing Deals to Be Revealed," Des Moines Register, February 17, 2010). For example, in 2003, the University of Michigan signed an agreement to receive $25.5 million over 11 years from its credit card marketing arrangements (Ben Protess and Jeannette Neumann, "Banks Paying Colleges for Students Who Rack Up Credit Card Debt," Huffington Post, June 8, 2010, www.huffingtonpost.com/ 2010/06/08/banks-paying-collegesfor_n_604109.html). With careful planning, a charity can structure its affinity card (or other sponsorship) payments as royalties not subject to taxation as unrelated business income (see Sierra Club Inc. v. Comn'r, 86 F.3d 1526, 1996).
For many cardholders, however, affinity credit cards pose a number of drawbacks. Many of these cards feature high interest rates and typically do not offer a "cash back rewards" feature. The average payment to charity is often a surprisingly small percentage of a cardholder's purchases (often less than one-half of 1%). In addition, an affinity cardholder cannot claim a charitable contribution deduction for payments made by a credit card company (or bank) to the charity itself.
In recent years, affinity cards have also received a fair amount of negative publicity. In a series of articles, the Huffington Post criticized colleges and universities for their affinity credit card arrangements with credit card companies or banks. Typically, the college or university receives funds by issuing cards that carry the school's moniker, while its student cardholders build up significant debt without knowing the specific terms of the arrangement between the institution and credit card company or bank. Protess and Neumann list the following college or university actions as examples of the type that have come under criticism:
* Selling students' personal information: Many [universities] are contractually obligated to share students' names, phone numbers, and addresses with banks.
* Earning royalties: Banks typically pay schools Sl for each student who keeps a credit card open for 90 days. When students carry a balance, some schools can collect up to S3 more per card.
* Cashing in each time a student uses plastic: Many schools are entitled to receive 0.4% of all retail purchases made with student cards.
* Benefiting from marketing incentives: When a university or alumni association agrees to market cards to students itself, the payoff is greater - sometimes up to $60 for each card opened through a school's own marketing.
* Offering special perks: Banks sometimes gain special access to athletic events.
Under the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, banks are restricted from using certain aggressive marketing practices on students. Banks are also prohibited from providing credit cards to persons under the age of 21 (unless the person has a cosigner who is over age 21). Section 304 of the act requires the public disclosure of contracts or other agreements between credit card issuers and institutions of higher education. The Huffingîon Post has encouraged its readers to act as "citizen journalists" to help it obtain and analyze credit card agreements at the largest schools in the country (Ben Protess, "Details of Deals Between Banks and Colleges Spur Reaction," Huffingîon Post, July 15, 2010, www. …