Substantiating Charitable Contributions

Substantiating Charitable Contributions

Article posted in on 13 July 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

With year-end tax and charitable gift planning underway, PGDC guest author Erik Dryburgh reviews the substantiation requirements for income tax charitable contribution deduction purposes.

by Erik Dryburgh

Erik Dryburgh is a partner at Silk, Adler & Colvin in San Francisco, CA. Dryburgh co-authored chapters for Matthew-Bender and Wiley & Sons and is a regular columnist for The Exempt Organizations Tax Review. Dryburgh is a frequent speaker in the charitable giving and estate planning areas, and has recently made presentations at events sponsored by the Northern California Planned Giving Council, Continuing Education of the State Bar of California, and various charity-sponsored events. He earned his JD at the University of California-Berkeley and is a CPA.

What do you have to say to a donor to preserve his/her deduction, and when? The IRS has issued final regulations on substantiation, and the answer is still not entirely clear.

Background

Early cases and rulings form the underpinnings of the regulations, and provide the general concepts that answer the many questions not directly addressed by statute or regulations.

Case Law

Duberstein v. Commissioner, 363 US 278, 1960. Over the course of several years, Mr. Duberstein provided the names of potential customers to Mr. Berman. One day in 1951, Mr. Berman gave Mr. Duberstein a new Cadillac (which he really didn't want as he already had one). Mr. Duberstein treated the car as a gift. The Supreme Court held that the test for determining whether a transfer was a gift was whether the transfer was made out of "detached and disinterested generosity," i.e., a transfer for no consideration and without the expectation of return benefit.

United States v. American Bar Endowment, 477 US 105, 1986. American Bar Endowment (ABE), a tax-exempt entity, provided group insurance to its members for a fee which exceeded the actual cost to ABE. The Supreme Court held a charitable deduction is denied when the contributor expects a substantial benefit in return, but when the benefit is nominal, a deduction is available because the payment has a dual character (part purchase, part gift). A dual character payment is deductible only to the extent the payment exceeds the benefits received, and only if the payor can demonstrate that he/she knowingly and purposefully paid more than the value of the benefit received. As none of the participants in the case could prove that they knew they could have purchased similar insurance for less, no deductions were allowed.

IRS Pronouncements

Revenue Ruling 67-246 sets forth a basic rule: If a transaction involving a payment to a charity is in the form a purchase, the IRS will presume the payment equals the purchase price and no gift is made. It is the taxpayer's burden to prove that he/she paid more than the purchase price with the intent to make a gift. This 1967 ruling sets forth many of the rules that now appear in the Internal Revenue Code, and still has application (e.g., a $50 gift that entitles the donor to a $10 coffee cup). This ruling tells us that charities should value return benefits and inform donors to what extent their contribution is deductible. The ruling also states that in order to deduct the full amount of a quid pro quo gift, the taxpayer must do more than merely not use the benefit; he/she must reject the benefit.

Revenue & Procedure 90-12. Even 23 years after Rev. Rul 67-246, Congress was still concerned that charities were not accurately informing their patrons of the extent to which contributions were deductible. However, the IRS recognized the administrative burden of reporting token return benefits. This ruling established which benefits would be deemed to have insubstantial value:

  • Payment occurs in a fundraising campaign in which the charity informs its donors how much of their payment is deductible; and either:
  • the value of all benefits received is minimal-not more than the lesser of 2% of the payment or $71, or the payment is at least $35.50, and the only benefits are tokens bearing the charity's name or logo and costing $7.10 or less.

The Black Letter Law (And IRS Interpretations)

The "Intent To Make A Contribution" Rule. Regulation Section l.170A-l(h) places a burden of proof on a donor who makes a gift and receives goods or services in return. In order to claim a deduction, the donor must show that his/her contribution exceeded the value of the goods or services received, and also that he/she intended to make the excess payment. Only the excess is deductible. The donor may generally rely on the charity's valuation of the goods or services, unless he/she has reason to know it is unreasonable.

The Substantiation Rule. IRC Section 170(f)(8) denies an income tax charitable contribution deduction for a contribution of $250 or more unless the taxpayer obtains a contemporaneous written acknowledgment (meaning received on or before the earlier of the date the taxpayer files his/her tax return for the year, or the due date for the return) from the charity. It is the donor's requirement to obtain the receipt.

The receipt must include:

  • the amount of cash and description (but not value) of any property given;
  • whether the charity provided goods or services in consideration for the gift; and
  • a description and good faith estimate of the value of any goods and services provided (except for intangible religious benefits, which must be noted).

Substantiation by the donor is not required if the charity reports the contribution pursuant to IRS regulations (have not yet been issued).

The Quid Pro Quo Rule. IRC Section 6115 requires a charity which receives a "quid pro quo gift" in excess of $75 to disclose to the donor that his/her contribution is limited to the excess of the amount of money and value of property given over the value of the goods and services provided by the charity, and to provide the donor with a good faith estimate of those goods and services. A quid pro quo gift is a payment made partly as a contribution, and partly as consideration for goods or services provided to the donor by the charity. This obligation is imposed on the charity, and may be satisfied at the time of solicitation or acknowledgment. The disclosure does not need to be individualized, or in the form of a receipt; a statement in an advertisement will suffice.

The Recordkeeping and Appraisal Rules. Regulation Section 1.170A-13 contains a wealth of useful information. First, it addresses the recordkeeping requirements for gifts of cash-these rules apply to all gifts of cash, regardless of whether the substantiation rules of IRC Section 170(f)(8) apply. The donor must maintain a canceled check, receipt, or other "reliable written record" evidencing each contribution.

For gifts of property to which the appraisal rules do not apply, the donor must maintain a receipt from the charity showing the name of the charity, the date and location of the gift, and a description (but not value) of the property. If it is impractical to obtain a receipt, the donor must retain "reliable written records" containing the above information plus information regarding the value of the contribution. If the deduction for a gift of property exceeds $500, the donor must maintain a written record including the above information, plus manner, date of acquisition, and cost basis.

The appraisal rules apply to gifts of property where the deduction claimed exceeds $5,000. No deduction is allowed unless the donor: 1) obtains a qualified appraisal; 2) attaches an appraisal summary to the tax return on which the deduction is first claimed (i.e., Form 8283); and 3) maintains more records. However, only a partial appraisal summary is required for gifts of publicly traded securities and nonpublicly traded stock not exceeding $10,000 in value. The regulations discuss the requirements of a qualified appraisal and appraisal summary, and who constitutes a qualified appraiser.

This regulation also expands upon the receipt rules. It notes separate gifts of under $250 are generally not aggregated for these purposes, and multiple gifts of over $250 may be substantiated via separate receipts or one all-inclusive receipt. It notes that each payroll deduction gift is treated as a separate gift for receipt purposes, and that a paystub or Form W-2, plus a pledge card disclosing that no benefits were provided will suffice as a receipt.

It also notes that certain benefits may be ignored for receipt purposes:

  • Insubstantial benefits as set forth in Rev. Proc. 90-12.
  • Annual membership benefits offered for a membership costing $75 or less that consist of rights that can be exercised frequently (e.g., discounted admission) and admission to events open only to members with a cost of $7.10 or less per person.

The Tattle-Tale Rule. IRC Section 6050L requires a charity which sells, exchanges, or otherwise disposes of "charitable contribution property" within two years of receipt to file a Form 8282, disclosing the disposition and amount received. Charitable contribution property means property for which an income tax deduction was claimed in excess of $5,000 (except publicly traded securities).

Useful Authority

Sec. 170(f)(8) Substantiation Requirement for Certain Contributions

A) General rule. No deduction shall be allowed under subsection (A) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).

B) Content of acknowledgment. An acknowledgment meets the requirements of this subparagraph if it includes the following information:

1) The amount of cash and a description (but not value) of any property other than cash contributed.

2) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (1).

3) A description and good faith estimate of the value of any goods or services referred to in clause (2) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.

For purposes of this subparagraph, the term "intangible religious benefit" means any intangible religious benefit that is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.

C) Contemporaneous. For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of:

1) the date on which the taxpayer files a return for the taxable year in which the contribution was made; or

2) the due date (including extensions) for filing such return.

D) Substantiation not required for contributions reported by the donee organization. Subparagraph (A) shall not apply to a contribution if the donee organization files a return on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B) with respect to the contribution.

E) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases.1

Sec. 6050L. Returns Relating to Certain Dispositions of Donated Property

A) General rule. If the donee of any charitable deduction property sells, exchanges, or otherwise disposes of such property within two years after its receipt, the donee shall make a return (in accordance with forms and regulations prescribed by the Secretary) showing:

1) the name, address, and TIN of the donor;

2) a description of the property;

3) the date of the contribution;

4) the amount received on the disposition; and

5) the date of such disposition.

B) Charitable deduction property. For purposes of this section, the term "charitable deduction property" means any property (other than publicly traded securities) contributed in a contribution for which a deduction was claimed under section 170 if the claimed value of such property (plus the claimed value of all similar items of property donated by the donor to one or more donees) exceeds $5,000.

C) Statement to be furnished to donors. Every person making a return under subsection (A) shall furnish a copy of such return to the donor at such time and in such manner as the Secretary may by regulations prescribe.

D) Definition of publicly traded securities. The term "publicly traded securities" means securities for which (as of the date of the contribution) market quotations are readily available on an established securities market.2

Sec. 6115. Disclosure related to quid pro quo contributions.

A) Disclosure requirement. If an organization described in section 170(c) (other than paragraph [1] thereof) receives a quid pro quo contribution in excess of $75, the organization shall, in connection with the solicitation or receipt of the contribution, provide a written statement that:

1) informs the donor that the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money, and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization; and

2) provides the donor with a good faith estimate of the value of such goods or services.

B) Quid pro quo contribution. For purposes of this section, the term "quid pro quo contribution" means a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization. A quid pro quo contribution does not include any payment made to an organization, organized exclusively for religious purposes, in return for which the taxpayer receives solely an intangible religious benefit that generally is not sold in a commercial transaction outside the donative context.3

Sec. 6714. Failure to Meet Disclosure Requirements Applicable to Quid Pro Quo Contributions

A) Imposition of penalty. If an organization fails to meet the disclosure requirement of section 6115 with respect to a quid pro quo contribution, such organization shall pay a penalty of $10 for each contribution in respect of which the organization fails to make the required disclosure, except that the total penalty imposed by this subsection with respect to a particular fundraising event or mailing shall not exceed $5,000.

B) Reasonable cause exception. No penalty shall be imposed under this section with respect to any failure if it is shown that such failure is due to reasonable cause.4

The 1993 Law

The 1993 Tax Reform Act (1993 Law) established two new substantiation and disclosure rules: One that requires donors who contribute $250 or more to substantiate their contributions, and one that requires charities that provide return benefits to disclose the value of those benefits to donors.

Donor Substantiation. Under Section 170(f)(8), donors who claim a deduction for a charitable contribution of $250 or more are responsible for obtaining from the donee organization, and maintaining in their records, substantiation of that contribution. The document substantiating the contribution must be a contemporaneous written acknowledgment from the charity. A written acknowledgment need not be in any particular form, and it satisfies the requirements as long as it includes the following information:

1) the amount of cash paid and a description (but not necessarily the value) of any property other than cash transferred to the charity;

2) a statement about whether or not the donee organization provided any goods or services in consideration for the cash or property;

3) a description and good faith estimate of the value of any goods or services provided by the donee organization in consideration for the cash or property; and

4) if applicable, a statement indicating that the charity has provided intangible religious benefits.

A written acknowledgment is contemporaneous if it is obtained on or before the earlier of: 1) the date the donor files its original return for the taxable year in which the contribution was made; or 2) the due date (including extensions) for filing the donor's original return for that year.

Charity Disclosure. Section 6115 requires each charity that receives a "quid pro quo contribution" in excess of $75 to provide a written disclosure statement to the donor. A quid pro quo contribution is one in which the charity provides the donor with goods or services in return for his or her contribution. The written disclosure statement must contain the following information:

1) a statement that the deductibility of the donor's contribution is limited to the excess of the amount of any money or the value of any property contributed by the donor over the value of the goods or services provided to the donor by the charity; and

2) a good faith estimate of the value of the goods or services provided by the charity. This disclosure must be made in connection with the solicitation of funds or the receipt of funds. A charity may fulfill its obligation under Section 6115, therefore, by printing the required disclosure on its solicitation materials.

The New Regulations

Since the 1993 Law was enacted, charities and their advisors began to identify issues that were not clearly addressed in the 1993 Law. In 1994, in response to these concerns, the IRS issued a set of proposed regulations. These regulations provided some guidance on three issues, including the application of the rules to employee contributions from payroll withholding.5

The following is a summary of some of the key rules set forth in the regulations.

Deductibility of a Contribution-Donor Intent. The New Regulations (regulations) first remind us that a charitable contribution is only deductible to the extent that it exceeds the fair market value of any goods or services that the charity provides to the donor. In addition, the donor must intend to make a charitable contribution. For example, the regulations provide that if a donor attends a charity auction and makes a winning bid of $500 for a vase with a value of $100, the donor may only deduct the difference of $400 if the donor can show that he/she intended to make a charitable contribution of $400 by making a bid in excess of the fair market value of the item. If the donor can demonstrate that he/she had received an auction catalogue that listed the fair market value at $100, he/she would be able to prove that he/she overbid knowingly, intending to make a charitable contribution. Without an auction catalogue, the regulations imply it would be very difficult for the donor to prove that he/she had the intent to make a charitable contribution. The donor may have thought that the vase was worth $500 when he/she offered his/her bid. As in tax matters generally, the burden is on the taxpayer-the donor-to prove intent.

Certain Goods or Services Disregarded. The regulations define "goods or services" as "cash, property, services, benefits, and privileges." The regulations identify certain goods and services that may be disregarded in determining the amount of the charitable contribution deduction.

Insubstantial Goods and Services. Certain goods are too minimal or token-too insubstantial-to be treated as quid pro quo items that reduce the value of the charitable contribution. Benefits are too minimal to reduce the charitable contribution if they have a fair market value of: 1) less than 2% of the amount of the contribution; and 2) less than $71 in 1998 (adjusted each year for inflation). Goods are too token to be considered if the cost of the item is $7.10 in 1998 or less (adjusted each year for inflation).

Certain Membership Benefits are Too Difficult to Value. The regulations provide that certain membership benefits are just too difficult to value and, therefore, may be disregarded for purposes of calculating the charitable contribution deduction and for purposes of the charity's obligation to disclose return benefits. There is no definition of "member," however, as is the case in other sections of the Internal Revenue Code, such as those dealing with lobbying, a member does not have to be a voting member under state law. A member is generally a person or entity that is entitled to certain rights and privileges, such as the right to receive a newsletter or attend special events in return for an annual contribution.

The regulations state that member benefits may be disregarded, for purposes of donor substantiation and for charity reporting, only if: 1) they are given as part of an annual membership; 2) offered in return for a payment of $75 or less (even if the donor decides to contribute more); and 3) and fall into one of the two categories described below. The first category is admission to events that are open only to members and for which the donee organization reasonably projects that the cost per person (excluding allocable overhead) for each event will be less than or equal to $7.10 (adjusted for inflation each year). The preamble to the regulations gives an example of a modest reception where light refreshments are served to members of a donee organization before an event. This rule is not very helpful because this type of minimal benefit is probably already excluded as an insubstantial benefit.

The second category is rights or privileges that members can exercise frequently during the membership period. Examples include free admission to a museum, free parking during performances, gift shop discounts, and the right to purchase tickets a week before they go on sale to the public. These types of rights have been very difficult for charities to value since the 1993 Law took effect. The regulations also indicate, through example, that any of these rights that are available to donors of $75 or less may still be disregarded even if the donor happens to give more than $75, but rights and privileges that are only available to donors of more than $75 may not be disregarded.

For example, assume that every donor to museum X who gives $50 receives free admission to the museum all year and a 10% discount in the gift shop. A donor who contributes $100 also receives a free print by an artist displayed in the museum, in addition to the package available to $50 donors. The regulations tell us that the $100 donor must reduce his contribution deduction by the value of the print, but not by the value of the package otherwise available to the $50 donors. This rule provides valuable guidance for charities to consider in structuring their return benefits packages.

Under this second category, however, the benefit must be capable of being exercised frequently. If a theater company produces four plays a year, each of which runs for two nights, the regulations indicate that the right to reduced admission is not covered by the regulations because the plays are not frequent. Presumably IRS private letter rulings and technical advice will help draw the line between frequent and infrequent activity.

Goods or Services Provided to Donor's Employees. The regulations also offer guidance to charities that provide goods or services to the employees of their corporate donors. The same membership rules that benefit individual donors, described above, also apply to company contributions where the goods or services are provided to company employees. This means, for example, that if a charity has a policy of providing free museum admission to any individual donor who contributes $75 (or some lesser amount), and a company contributes $50,000 and receives the right to have all of its employees attend the museum, the benefit to the company is disregarded for purposes of the substantiation rules. If a museum or similar entity is interested in providing discounts to company employees, therefore, in return for large grants, it must make sure that these same benefits are available to all donors in return for a dollar contribution at some level equal to or less than $75.

The regulations also provide that for any other benefits provided to employees of company donors, the charity is not required to value the goods or services provided, but merely to include a written description of the goods and services provided. In this way charities are relieved completely of the burden of valuing benefits provided to the employees of corporate donors.

Good Faith Estimate. The regulations reiterate law and standing IRS policy that the charity must make a good faith estimate of the value of goods or services provided. The fair market value of goods or services to the donor may, and usually does, differ from the charity's cost in obtaining the goods or services. Sometimes items with substantial fair market value are donated to the charity. The charity may use any reasonable method in making a good faith estimate of the value of goods and services. Moreover, the regulations make it clear that in most cases, the donor is not required to determine how the charity arrived at its estimate. But a donor may not treat an estimate as the fair market value of the goods or services if the donor knows, or has reason to know, that such treatment is unreasonable. For example, if the donor is a dealer in the type of goods or services it receives, it is unreasonable for the donor to accept an estimate that he or she knows is inaccurate.

The regulations provide that an estimate of the value of goods or services in a contemporaneous written acknowledgment or written disclosure statement is not in error if the estimate is within the typical range of retail prices for the goods or services. For example, if an organization provides a book in exchange for a $100 payment, and the book is sold at retail prices ranging from $18 to $25, the taxpayer may rely on any estimate of the organization that is within the $18 to $25 range.

The regulations further provide that a charity may make a good faith estimate of the value of goods or services that are not available in a commercial transaction by reference to the fair market value of similar or comparable goods or services. The regulations provide an example of a donor that, in return for its gift, has the right to hold an event in a museum without paying rent. The donor can look to the cost of renting comparable space in a local hotel for the value of the rental, even though the museum offers the unique ability to appreciate fine art while attending the event. In other words, the distinctive aspects of the museum are not taken into account in estimating the value of the right to use those facilities.

The regulations confirm that certain unique opportunities, such as the right to have dinner with a celebrity, have no actual dollar value for purposes of the substantiation rules and do not require valuation. Substantiation of Contributions to a Split-Interest Trust. Since the 1993 Law, we have wondered whether these substantiation rules applied to contributions to split-interest trusts. The regulations tell us that these substantiation rules do not apply to contributions to charitable remainder trusts or charitable lead trusts, but they do apply to contributions to pooled income funds.

Substantiation of Out-of-Pocket Expenses. Sometimes an individual will donate time to a charity and also incur out-of-pocket expenses, such as travel expenses. The regulations recognize that a charity typically has no knowledge of the amount of out-of-pocket costs incurred by a donor on behalf of the charity and, therefore, would have difficulty providing donors with substantiation of these unreimbursed costs. The regulations provide that where a taxpayer makes non-reimbursed expenditures incident to the rendering of services, and these expenses are large enough to require substantiation, the expenditures may be substantiated by the donor's normal records and an abbreviated written acknowledgment provided by the charity. This written acknowledgment from the charity must contain a description of the services provided by the donor, the date the services were provided, whether or not the charity provided any goods or services in return, and if the charity provided any goods or services, a description and good faith estimate of their fair market value.

Contributions Made by a Partnership or an S Corporation. The regulations provide that if a partnership or an S Corporation makes a charitable contribution of $250 or more, the organization-rather than the partners or shareholders-will be treated as the taxpayer for purposes of the substantiation and disclosure rules. The partnership or S Corporation must obtain the receipt for contributions of $250 or more, and the charity need only disclose quid pro quo benefits to the partnership or S Corporation, rather than to individual partners or shareholders.

Conclusions

The regulations do provide some needed guidance on some of the outstanding issues created by the 1993 Law. As is often the case, however, the regulations do not address all of the questions that those of us working in the field might be concerned about, and the regulations will no doubt cause charities and their advisors to think of additional scenarios that were not used as examples in the regulations. The regulations also raise the interesting question of whether, or to what extent, the guidelines set forth here may apply to the private foundation self-dealing rules under Section 4941.

The substantiation rules are detailed and complex. They can also have the effect of requiring the charity to reach conclusions on issues-such as when a gift is complete, whether a return benefit was provided, or whether a gift was made at all-that are more properly the donor's issues.

Exhibit A: All-Purpose Receipt

This letter is to gratefully acknowledge, for your tax records, our receipt of your generous gift of $______ [cash in the amount of $______ ] [describe property donated in reasonable detail]. We received your gift on [date] at [location].

  • No goods or services were provided to you in exchange for this gift. Therefore, the full amount of your contribution is deductible.


  • We provided you with [describe property], which we estimate has a value of $______ in return for your gift. The amount of your contribution that is deductible is limited to the excess of your contribution over the value of the goods and services we provided to you. Again, we thank you for your support.


Exhibit B: Pooled Income Fund Receipt

This letter is to gratefully acknowledge, for your tax records, your generous gift of [amount of cash or describe property donated in reasonable detail] to [name of the pooled income fund]. We received your gift on [date].

No goods or services were provided to you in exchange for this gift. However, you have retained an income interest in the fund. The amount of your contribution, which is deductible, is limited to the excess of your contribution over the value of the income interest. Attached is a calculation of the projected income tax deduction generated by this gift. Please understand that this calculation is an estimate only, and you should consult with your tax advisor.

Again, we thank you for your support.

Exhibit C: Charitable Gift Annuity Receipt

This letter is to gratefully acknowledge, for your tax records, your generous gift of [amount of cash or describe property donated in reasonable detail] in exchange for a charitable gift annuity. We received your gift on [date].

No goods or services were provided to you in exchange for this gift. However, you have received an annuity. The amount of your contribution that is deductible is limited to the excess of your contribution over the value of the annuity. Attached is a calculation of the projected income tax deduction generated by this gift. Please understand that this calculation is an estimate only, and you should consult with your tax advisor.

Again, we thank you for your support.


Footnotes


  1. Tax Analysts, March 1997.back

  2. Id.back

  3. Id.back

  4. Id.back

  5. "IRS Proposed Regulations Clarify Substantiation and Disclosure for charities," Wexler, Robert A., Silk, Adler & Colvin, 1995.back

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