Charitable Contributions Receipting Requirements

Substantiating and reporting charitable contributions
Practice Alert
Author: Preston J. Quesenberry, associate with the Washington, DC law firm of Caplin & Drysdale, Chartered.
In 2007, the Treasury Inspector General for Tax Administration released two reports suggesting that hundreds of thousands of taxpayers are incorrectly reporting billions of dollars in deductions for noncash charitable donations. Taxpayers and tax preparers should review the substantiation and reporting requirements for charitable contributions, especially since the Pension Protection Act of 2006 (PPA) recently added even more requirements. Schedule M on the new Form 990, which will allow IRS to identify those charities receiving noncash donations, gives taxpayers and tax preparers added incentive to make sure they get the substantiation and reporting of their charitable deductions right. Unfortunately, these requirements have become unduly complex over the years as both Congress and Treasury have sought to prevent actual and perceived improper deductions. This Practice Alert, which is excerpted from a more extensive article in the March/April 2008 issue of Taxation of Exempts , discusses the requirements for substantiating and reporting charitable contributions.

The dollar thresholds. The discussion below follows the standard practice of organizing the substantiation and reporting requirements by the dollar thresholds at which different rules take effect. Unless otherwise stated, the dollar thresholds represent the amount of the deduction that the donor claims for the charitable contribution, which will not always equal the actual value of the contribution. If, for example, a donor receives goods or services in exchange for the contribution, and is forced to reduce his or her deduction accordingly, the threshold is usually determined by the deduction amount, not the gross value of the contribution. For this purpose, “deduction amount” means the deduction before applying any income limitations under Code Sec. 170(b) (i.e., limitations of charitable deductions to 50%, 30%, or 20% of the donor’s “contribution base,” usually adjusted gross income).

Unless otherwise stated, the substantiation and reporting requirements apply to the contributions of individuals, corporations, and partnerships. They apply to partnerships at the entity level, even though inadequate substantiation can result in the denial of the deduction at the individual partner level.

Requirements applicable to all charitable deductions. To take a charitable deduction for any contributions of cash, checks, or other monetary gifts made after Aug. 17, 2006, Code Sec. 170(f)(17) requires that a donor retain either (1) a bank record or (2) a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. For these purposes, a bank record can include a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount. This provision therefore puts an end to the ability of taxpayers to claim a charitable deduction for undocumented cash contributions, even if each contribution is of a relatively small amount.

Donors making contributions through payroll deductions can satisfy the “written communication” portion of Code Sec. 170(f)(17) with (1) a pay stub, Form W-2, or other document furnished by the employer stating the amount withheld for payment to a charity; and (2) a pledge card or other document prepared by (or at the direction of) the donee organization showing the name of the donee organization. (Notice 2006-110, 2006-51 IRB 1127)

Similarly, donors of noncash property must retain a “receipt” (which can include a letter or other written communication) from the donee. It must show the name of the donee, the date and location of the contribution, and a reasonably detailed description (but not necessarily the value) of the property contributed. ( Reg. § 1.170A-13(b)(1) ) When obtaining a receipt would be “impractical,” however, (e.g., if the donor deposits property at a charity’s unattended drop site), the donor can support a deduction by keeping “reliable written records” that contain the following information:

• The name and address of the donee.
• The date and location of the contribution.
• A reasonably detailed description (but not necessarily the value) of the property contributed.
• The fair market value of the property at the time the contribution was made.
• The method used to determine the fair market value (and, if the valuation was determined by appraisal, a copy of the appraiser’s signed report).
• The terms of any agreement or understanding entered into by the donor relating to the use, sale, or other disposition of the contributed property. (Reg. § 1.170A-13(b)(2)(ii))

Requirements applicable to charitable deductions of $250 or more. The most significant provision that takes effect with gifts of this size is Code Sec. 170(f)(8). It requires donors taking a deduction of $250 or more for any one contribution (either cash or noncash) to obtain a “contemporaneous written acknowledgment” from the donee. This acknowledgment must state (1) the amount of cash and/or provide a description (but not the value) of any noncash property contributed and (2) whether the donee organization provided any goods or services in consideration (in whole or in part) for any cash or other property contributed.

If goods and services were provided as consideration, the acknowledgment also must provide a good faith estimate of the value of such goods or services (or, if such goods or services consisted solely of “intangible religious benefits,” a statement to that effect). (Code Sec. 170(f)(8)(B)) To be “contemporaneous,” a written acknowledgment must be obtained on or before the earlier of (1) the date the donor files the return for the tax year in which he or she makes the contribution or (2) the due date (including extensions) for filing that return. (Code Sec. 170(f)(8)(C))

In determining whether they have crossed the $250 threshold, donors need only look at the amount of a single contribution to a specific donee. Accordingly, separate contributions of less than $250 to the same donee do not require a contemporaneous written acknowledgment, even if they total $250 or more during the same tax year. (Reg. § 1.170A-13(f)(1))

Requirements applicable to noncash charitable deductions of more than $500. Donors of cash of more than $500 face no substantiation and reporting requirements other than those discussed above. Other donors face a more complicated situation. The most notable requirement that takes effect for noncash contributions above the $500 threshold is filing an Form 8283, which any donor, other than certain C corporations, must do when claiming a charitable deduction for a noncash gift of over $500. C corporations, other t
han personal service and closely held corporations, must file Form 8283 only if the amount claimed as a deduction is more than $5,000.

Another requirement is to maintain the “reliable written records” discussed above. These donors’ records must also include information regarding (1) how the donor acquired the property (e.g., by purchase, gift, bequest, inheritance, or exchange); (2) the approximate date on which the donor received the property (or substantially completed its production, manufacture, or creation); and (3) the adjusted basis of the contributed property (with the exception of publicly traded securities) immediately before the contribution. (Reg. § 1.170A-13(b)(3))

Additional requirements apply to gifts of particular kinds of noncash contributions in excess of $500—specifically, (1) qualified vehicles, (2) qualified conservation contributions under Code Sec. 170(h) , and (3) clothing and household items.

Requirements applicable to noncash charitable deductions of $5,000 or more. Crossing the $5,000 threshold triggers the most onerous substantiation rule for donors of noncash property: the requirement to obtain a “qualified appraisal” of the contributed property. (Code Sec. 170(f)(11)(C))

Qualified appraisal. All donors claiming a charitable deduction of more than $5,000 for an item (or similar items) of noncash property (other than publicly traded securities and certain other excepted items) must obtain a qualified appraisal and keep it in their records “for as long as it may be relevant in the administration of the internal revenue laws.” (Reg. § 1.170A-13(c)(3)(iv)(C)) They also must complete the appraisal summary on section B of Form 8283, which must be signed and dated by both the qualified appraiser and the donee. (Reg. § 1.170A-13(c)(4)(i)(B), (C))

As defined in the Code and regs, a qualified appraisal is a written appraisal document that:

• Is made not earlier than 60 days before the property is contributed.
• Is received by the donor before the due date (including extensions) of the return on which the deduction is claimed.
• Includes certain specified information.
• Does not involve an appraisal fee based on a percentage of the appraised value of the property (with one narrow exception for certain fees to nonprofit appraiser associations) or the value of the property allowed as a charitable deduction under Code Sec. 170.
• Is conducted in accordance with “generally accepted appraisal standards” (e.g., the Uniform Standards of Professional Appraisal Practice), as well as any applicable regs or other guidance provided by Treasury.
• Is conducted, prepared, signed, and dated by a “qualified appraiser.” (Code Sec. 170(f)(11)(E) ; Reg. § 1.170A-13(c)(3))

A key component of a “qualified appraisal,” then, is that it be conducted by a “qualified appraiser.” Under new provisions in the PPA, a qualified appraiser is an individual who:

• Has an appraisal designation from a recognized professional appraiser organization or has met minimum education and experience requirements to be set by regulation.
• Is regularly paid to perform appraisals.
• Can demonstrate verifiable education and experience valuing the type of property appraised.
• Has not been barred from practice before IRS during the three years preceding the date of the appraisal.
• Meets any additional requirements prescribed by the Treasury in regs or other guidance. (Code Sec. 170(f)(11)(E))

Requirements applicable to deductions of $20,000 or more for contributions of art. Donors who take a total deduction of $20,000 or more for contributions of works of art must attach a complete copy of their signed appraisal to the return on which they claim the deduction. For individual objects valued at $20,000 or more, a photograph of “sufficient qualify and size” must be provided to IRS upon request. (Ann. 90-25, 1990-8 IRB 25; Instructions to Form 8283)

Rev Proc 96-15, 1996-1 CB 627, contains a procedure open to those who contribute works of art valued at $50,000 or more. Such donors may, before filing the return claiming the charitable deduction, request a Statement of Value from the IRS to substantiate the value of the gift for income tax purposes. This does not save the donor the trouble of getting an appraisal, as the donor has to submit a completed appraisal to IRS to get the Statement of Value.

Requesting a Statement also presents a potential downside risk. If the donor does not withdraw the request before receiving an answer and obtains a Statement of Value that is lower than his or her appraisal, the donor nevertheless must attach the Statement to his or her income tax return reporting the charitable deduction (though the donor can also enclose additional information supporting his or her appraised value). On the other hand, if the Statement accords with the donor’s own appraisal, he or she is entitled to rely on it, assuming the Statement was based on “accurate statements of the material facts.”

Requirements applicable to deductions of more than $500,000. Donors claiming a deduction of more than $500,000 for an item (or group of similar items) donated to one or more donees must attach their qualified appraisal to their returns. (Code Sec. 170(f)(11)(D))

Source: Federal Taxes Weekly Alert (preview) 10/30/2008, Volume 54, No. 44