California Bar Recommends Changes Regarding Reporting of Bargain Sales

California Bar Recommends Changes Regarding Reporting of Bargain Sales

News story posted in Compliance on 11 July 2013| comments
audience: National Publication | last updated: 11 July 2013


The Taxation Section of the California Bar Association has issued a paper recommending that (1) Congress amend Section 170 to codify the requirements of reporting bargain sales; (2) that Treasury Regulations section 1.170A-13(f) be amended to explain what kind of documentation can be used collectively to constitute a "contemporaneous written acknowledgment" in bargain sales; and (3) that IRS modify Form 8283.

Full Text:



This proposal was principally prepared by Jordan Lui and Minna Yang, members of the Income and Other Tax Committee of the State Bar of California's Tax Section.1 The authors wish to thank Ciro Immordino and Geoffrey Weg for their valuable insights.2

Contact Persons:

Jordan A. Lui
Minna C. Yang
Wagner Kirkman Blaine Klomparens & Youmans
10640 Mather Blvd., Suite 200
Mather, CA 95655
(916) 920-5286


Internal Revenue Code section 170(f) provides the substantiation requirements to qualify for a charitable contribution deduction. (All "Section" and "Code" references are to the Internal Revenue Code.) Unlike many of the rules found within the Internal Revenue Code, "strict compliance" with provisions of Section 170(f) is required to obtain an allowable tax deduction. Section 170(f) requires that a donor procure from a donee "contemporaneous written acknowledgement" of the gift. A seemingly simple deduction has actually become much more complicated to substantiate, resulting in the disallowance of what would otherwise be a bona fide charitable contribution.

On an increasing basis, charitable contribution deductions are disallowed due to a failure to strictly comply with the procedural requirements of Section 170(f).

In the context of part-sale, part-gifts, also referred to as "bargain sales," the IRS's interpretation of the definition of "goods or services" has resulted in the IRS's proposed disallowance of a gift where the only consideration received by the donor from the donee is cash.

Section 170 requires that a donor file a Form 8283 in the tax year that a charitable contribution is made. Technically, the Form 8283 has the ability to satisfy the requirements of a "contemporaneous written acknowledgment" under Section 170 because the information that is reported on such form is the same information required under Section 170(f). However, it is unclear whether a separate acknowledgment is required in addition to the Form 8283, or whether the form in and of itself is sufficient to satisfy both requirements.

The IRS's denial of charitable contributions has implications to donors that have been and will continue to be extremely detrimental and widespread, especially to donors who have made significant contributions to charity through bargain sales with the expectation of charitable contribution deductions. The effects of denying charitablecontributions are costly to the IRS, donors and donees.

In the area of bargain sales, most donors have in fact correctly reported the transaction under Section 170. However, there is a disconnect in reporting bargain sales and the IRS's interpretation of the requirements under the Internal Revenue Code. Bargain sales often involve the donation of real estate to governmental subdivisions, including federally supported programs. As such, it is important for both donors and donees to understand what is required to substantiate a bona fide charitable transfer for tax purposes.

Accordingly, this paper recommends the following:

1. That Congress amend Section 170 to codify the requirements of reporting bargain sales.

2. That Treasury Regulations section 1.170A-13(f) be amended to explain what kind of documentation can be used collectively to constitute a "contemporaneous written acknowledgment" in bargain sales.

3. That the IRS modify the Form 8283 to comply with the "contemporaneous written acknowledgement" requirement of Section 170(f) for gifts in excess of $250.



A. The Revenue Act of 1917

In 1917, Congress enacted the first legislation allowing deduction of charitable contributions by individuals for federal income tax purposes. The Revenue Act of 1917, section 1201(2), amended the Revenue Act of 1916 to permit individual taxpayers to deduct up to 15% of their taxable net income for gifts to certain charitable organizations. Since that first legislation, Congress has continued to encourage charitable giving by providing for income tax deductions for charitable contributions. Internal Revenue Code4 section 170 is the current provision setting forth the requirements that must be satisfied for a donor's charitable contribution to be deductible. Section 170(f) specifically addresses the substantiation requirements under Section 170.

B. Internal Revenue Code section 170, Currently

For federal income tax purposes, a donor who itemizes his or her deductions is allowed a deduction from their adjusted gross income for charitable contributions if the requirements of Section 170 and certain other Code sections are satisfied.

Pursuant to Section 170(c), such contributions or gifts must be made to a governmental entity or a private charitable entity that is created or organized in the United States. If the contribution or gift is made to a governmental entity, that gift must be used for "exclusively public purposes." (IRC section 170(c)(1).) A contribution or gift made to a private charity must be used exclusively for religious, charitable, scientific, literary, educational, or national or international amateur sports competitions. (IRC section 170(c)(2).)

In order for the donor to qualify for the charitable contribution deduction under Section 170, there are certain substantiation requirements that must be met.

The Internal Revenue Code requires that donor and donee organizations supply certain information to prove a donor's right to deduct charitable contributions. Pursuant to Section 170(f)(8), a contribution of $250 or more is not deductible "unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization."

Treasury Regulations section 1.170A-13(f)(2) indicates that a qualifying acknowledgment must include a letter or other written communication from the donee acknowledging receipt of the contribution, showing the date of the contribution, and containing the required description of the property contributed. The donee's written acknowledgment must include the following items:

1. The amount of any cash that the donor paid and a description (but not necessarily the value) of any other property that the donor gave the donee organization;

2. A statement of whether or not the donee provided any goods or services in consideration, in whole or in part, for any of the cash or other property transferred to the donee organization;

3. A description of any goods or services (other than intangible religious benefits) provided.

An acknowledgment is contemporaneous if it is obtained by the donor by the date the donor files the original return for the year in which the contribution was made or the due date (including extensions) for filing the donor's original return for that year. (Section 170(f)(8)(C).)

C. Cash Gifts

In Gomez v Commissioner, T.C. Summ.Op. 2008-93, 2008 WL 2917654 (U.S. Tax Ct.), the Tax Court sustained the IRS's disallowance of twenty (20) charitable contributions made in the form of separate checks. During 2005, petitioners paid a total of $6,548.27 to the Apostolic Assembly by twenty (20) separate checks, each over $250. Eighteen (18) checks had memo entries that indicated they were for tithes. A letter from the Apostolic Assembly, dated January 22, 2008, indicated that petitioners paid a total of $6,552 as tithes during 2005. The IRS did not question whether petitioners made the payments to the Apostolic Assembly during 2005, or that it was a valid Code section 170(c)(2) exempt organization.

The IRS asserted and the Tax Court agreed that no deduction is allowed pursuant to Section 170(a) for all or part of any contribution of $250 or more unless the donor substantiates the contribution with a contemporaneous written acknowledgment from the donee organization. (Section 170(f)(8)(A) and Treasury Regulations section 1.170A-13(f)(1)). A written acknowledgment is contemporaneous only if it is obtained by the donor on or before the earlier of: (1) the date on which the taxpayer files a return for the tax year in which the contribution is made or (2) the due date (including extensions) for filing such return. Although technically correct under current existing law, the result is harsh for an otherwise deductible charitable gift.

D. Bargain Sales

A bargain sale is the sale of an asset to a qualified donee at less than fair market value. The amount of the donation is calculated by subtracting the amount that the qualified donee pays for the donation from the fair market value of the donated asset.

Many bargain sales involve the sale of land. These transactions occur in the same manner as any other sale of land where there is a purchase and sale agreement, grant deed, closing statement, appraisal and other transfer documents that indicate the price paid by the buyer/donee, the fair market value of the property at the time of the transfer, a description of the property being transferred, and a signature from the donee organization's representative acknowledging that the bargain sale occurred.

In a typical bargain sale transaction, a purchase and sale agreement or similar equivalent transaction document is executed specifying the terms of the sale. Controversy with the IRS has arisen when the only additional consideration from the donee to the donor with respect to the sale portion of the transaction is cash.

E. Cash is Considered a "Good or Service"

Section 170(f)(8) requires that the "contemporaneous written acknowledgment" indicate whether the donee organization provided any "goods or services" in consideration for a charitable donation.

Treasury Regulations section 1.170A-13(f)(5) states, "[g]oods or services means cash, property, services, benefits and privileges." [ Emphasis added. ] Thus, in the context of a simple bargain sale where cash is the only consideration provided by the donee organization, the requirement to state whether goods or services were provided by the donee organization is satisfied when the amount of cash provided by the donee is reported on a timely filed Form 8283, or in the surrounding transaction documents. However, despite the fact that cash is explicitly listed as "consideration" in the Treasury Regulations, the IRS continues to disallow charitable deductions for failure to state that no consideration in addition to the cash has been indicated in the acknowledgment.

The requirement to indicate whether goods or services were provided in the "contemporaneous written acknowledgment" is an affirmative requirement. Thus, when there are no goods or services provided by the donee organization in exchange for the charitable contribution, the acknowledgment must state so. (See Friedman v. Commissioner, T.C. Memo 2010-45.) However, if a good or service is provided by the donee organization and that good or service is referenced in the documentation surrounding the transaction that makes up the acknowledgment, there is no further requirement to indicate that no other goods or services in addition to the indicated good or service were provided by the donee in exchange for the charitable contribution. Thus, in a simple bargain sale where the documents indicate that cash was contributed by the donee, there is no requirement that the documentation state that no other goods and services were provided in addition to the cash.

Some of the confusion surrounding the inclusion of cash as a "good or service" stems from the fact that in a business context, the phrase "goods or services" is often relevant for determining the application of the Uniform Commercial Code. Section 2-105(1) of the Uniform Commercial Code defines goods as "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid ..." [ Emphasis added ]. Because of this commonly understood definition of "goods and services," it is easy to see why there is confusion as to categorizing cash as a good or service with respect to charitable contributions.

Clarification as to what constitutes "consideration" and the definition of the phrase "goods or services" for purposes of Code section 170 would alleviate much confusion for the IRS, donor and donee.

F. Irby v. Commissioner, 139 T.C. No. 14 (2012)

In a recent case involving a bargain sale of a conservation easement, the Tax Court explicitly pointed out that Treasury Regulations section 1.170A-13(f)(5) includes cash as a "good or service" that satisfies the requirement under Section 170. (Irby v. Commissioner, 139 T.C. No. 14 (2012).) Thus, in the arena of bargain sales, if the written acknowledgment includes the amount of cash paid by the donee, the requirement to specify whether goods or services were provided by the donee has been satisfied.

Irby also provides guidance as to what documentation can satisfy the requirements of a "contemporaneous written acknowledgment" under Section 170(f)(8) with respect to bargain sales. The donor in Irby argued that the totality of the transaction documents relevant to the bargain sale satisfied the requirements of Section 170(f)(8). The Tax Court agreed with the donor, stating that it found no authority to indicate that the contemporaneous written acknowledgment may not be made up of a series of documents. Collectively, the documents provided by the donor constituted a contemporaneous written acknowledgment. The deeds of conservation easement provided precise descriptions of the property being contributed, the option agreement and settlement statements set forth the amount of cash that was paid to the donor in consideration of the donated property, the letters from the donee stated that it was a qualified organization, and the Form 8283 provided that the donors could only deduct part of the value of the easement that was not covered by the bargain sale. Thus, all the requirements had been satisfied.

G. Crimi v. Commissioner, (TC Memo 2013-51)

In the recent Tax Court Memorandum decision involving a part-sale, part-gift, the court further established that when a written acknowledgment includes the amount of cash paid by the donee, no further statement regarding goods and services is required. In Crimi v. Commissioner, TC Memo 2013-51, the court ruled that a contemporaneous written acknowledgment stating the fair market value of the property donated to the donee, the amount of consideration provided by the donee in cash, and the amount of the charitable contribution, satisfied the requirement as to whether goods or services were provided by the donee. The Government argued that the letter in question did not satisfy the requirement because it did not state whether any goods or services were provided. The Tax Court rejected this argument, indicating that the letter effectively stated that the cash consideration the donee provided was the only consideration the donee provided for the contributed property; thus no "superfluous statement" would be required.

H. Form 8283 -- Noncash Charitable Contributions

Proposed Regulations section 1.170A-16(d)(1) states that the Form 8283 must be completed and filed with the donor's return when the deduction is claimed.

The Form 8283, as completed, may qualify as the "contemporaneous written acknowledgment" required under Section 170(f) either in and of itself, or as an addition to the transaction documents, fulfilling a missing requirement. The information required on the Form 8283 is substantially the same as that necessary for the "contemporaneous written acknowledgment".

Form 8283 requires a description of the donated property, the fair market value of the donated property, the date the donated property was acquired, the donor's basis in the property, and for bargain sales, the amount received by the donor from the donee. The Form 8283 also requires a signature from the donee, acknowledging that it is a qualified organization under Section 170(c) and that it received the property described in the Form 8283.

Because the information reported on the Form 8283 can satisfy the requirement for a "contemporaneous written acknowledgment" under Section 170(f), donors with imperfect acknowledgment letters have argued that their Form 8283 constitutes a "contemporaneous written acknowledgment". (Friedman v. Commissioner, TC Memo 2010-45.) In Friedman, the Tax Court denied the use of the Form 8283 as the donor's contemporaneous written acknowledgment because, despite the fact that the donor had not received anything from the donee in exchange for the donation, the form did not specify that no goods or services had been received. Thus, had the form included this information, it would appear that the Tax Court would have accepted this in satisfaction of the Section 170(f)(8) requirement.

A potential problem with using the Form 8283 for this purpose is that a Form 8283 can be signed after the due date for the donor's return, including extensions, if the return is filed late. The Form 8283, unlike the "contemporaneous written acknowledgment" under Section 170(f), has no requirement that it be signed "contemporaneously," only that it be attached to the return corresponding with the donation year.

In the context of a bargain sale, the amount of cash received from the donee is required information for the Form 8283. As such, if cash is the only consideration paid by the donee, a timely obtained Form 8283 is sufficient to comply with the contemporaneous written acknowledgement requirements. However, it can and will continue to be ambiguous as to whether or not additional goods or services are provided by the donee.


A. Amend Section 170(f)(8)(B)(ii).

Section 170(f)(8)(B)(ii) currently reads as follows: "Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i)."

Pursuant to this proposal, this section would be modified to read:

"Whether the donee organization provided any money, goods or services in consideration, in whole or in part, for any property described in clause (i). [ Emphasis added. ]"
This small amendment would make a large impact on the substantiation of charitable contribution deductions, helping to clarify the reporting requirements in situations where the donee provides only cash in exchange for acharitable donation.

B. Addition to the Statutory Language of Regulations section 1.170A-13(f) -- Recordkeeping and return requirements for charitable contributions.

Regulations section 1.170A-13(f) provides instructions for the written acknowledgment required for charitable contributions under Section 170(f). We propose that a subsection be added to this regulation specifically indicating that certain transfer documents involved in a bargain sale can satisfy the "contemporaneous written acknowledgment" requirement.

Our proposed language would be substantially similar to the decision in Irby v. Commissioner, 139 T.C. No. 14, where the Tax Court found that the transaction documents, taken in their totality, constituted a contemporaneous written acknowledgment.

Our proposed language would provide:

"Transaction Documents" in a bargain sale qualify as a "contemporaneous written acknowledgment" if collectively, they contain all of the requirements listed in Section 170(f) and Regulations 1.170A-13(f). For the purposes of this section, the term "Transaction Documents" includes:

(i) Agreements between the donor and donee regarding the sale of the property;

(ii) Documents recorded by the County pursuant to the sale;

(iii) Closing documents provided by the third-party escrow or title company;

(iv) Appraisal; and

(v) Any other similar documents pertaining to the transaction that may include the required information.

C. Form 8283.

In practice, it is not uncommon for a donor to find that its donee is reluctant to execute a Form 8283. Little can be done to encourage the execution of the document after the gift has been accepted. Some compliant donees interested in encouraging charitable giving have made efforts to research the substantiation requirements for recurring gifts and are ready to provide the necessary writing to its donors. However, governmental agencies and donees of non-recurring gifts are not always as willing.

Providing all the necessary substantiation requirements on one form will educate and inform donees as to what is required of their prospective donors. A single qualifying form also provides donees with a simpler method of compliance where transaction documents are not at the heart of the transfer. For these reasons, we are suggesting the following modifications to the Form 8283:

1. Expand the scope of the Form 8283 to include cash gifts in excess of $250. In the case of donors that find themselves in a situation similar to Irby, instructions in the Form 8283 indicating that donors should obtain a letter containing the same language as in the Form 8283, or an instruction to have the donee complete a section summarizing all gifts in excess of $250.

2. Include a section to allow the donor to indicate if it has received money, goods or services. This would alleviate confusion in determining what level of specificity is required in the transfer documents with respect to the receipt of money, goods or services by the donee rather than the donor.

Because a correctly completed Form 8283 contains all the elements to satisfy the requirements of a "contemporaneous written acknowledgment" under Section 170(f), it would be helpful to streamline the form to ensure that both the donor and the IRS recognize this as a substitute for an additional letter from the donee.

In the case of a bargain sale where the donee organization provides cash in exchange for the contributed asset, Form 8283 already includes a portion where the amount paid by the donee is specified. However, there is still some confusion on the part of the IRS as to whether cash is a "good or service" under Section 170(f), as well as whether any additional "goods or services" were provided by the donee.


The ambiguities contained in Section 170(f) relating to the substantiation required to support a charitable contribution deduction have made a seemingly simple task of reporting a charitable contribution much more complicated. As a result, the economic consequences of a charitable transfer by a donor are often substantially greater than anticipated. Further, the process of determining compliance with the substantiation requirements becomes overly burdensome and costly for both the IRS and the donor. The risk and cost associated then negatively affect the donor/donee relationship, thereby diminishing the desire of would be donees to participate in programs often much needed by our society.

Simple clarification in Code section 170(f) and additions to Treasury Regulations section 1.170A-13(f) would increase the understanding of donors and donees, thereby facilitating greater compliance with the intentions of Code section 170(f). With respect to the need to identify "goods and services" received by the donor, the goal is clearly to ensure that the amount of the tax deduction is not overstated. However, the ambiguity in the language often results in a complete disallowance of a deduction in circumstances where the donee receives no actual goods or services.

In light of the fact that many of the bargain sale transactions involve government entities that are attempting to further government purposes, which often includes redeveloping and revitalizing blighted areas, or organizing developments for low income housing, there is a substantial public purpose in encouraging these types of gifts with full compliance. Without the deduction incentive to contribute the real estate involved in many of the bargain sales, donors will have less motivation to make charitable contributions to further such governmental projects.

This proposal encourages simple methods of educating the public as to the substantiation requirements and removing current ambiguities in those requirements. The costs associated with the proposal are nominal in comparison to the benefits of encouraging full compliance with Section 170(f) in a manner that does not diminish a donor's willingness to make charitable gifts.

Codifying the findings under Irby and Crimi and clarifying the Regulations under Section 170 will allow donors involved in such transactions to recognize the necessary documentation that they must compile and organize for reporting purposes. It will also expressly inform the IRS that the "contemporaneous written acknowledgment" may be satisfied by a series of documents and need not be wholly contained in one acknowledgment letter.

Utilizing the Form 8283 to substantiate gifts in excess of $250 will further educate donees and meet the requirements placed upon donor for substantial and continued gifting. Adding a section to the Form 8283 to indicate whether or not money, goods or services were transferred to donee will help both donors and the IRS resolve disputes over whether that requirement under Section 170(f) has been satisfied. Thus, there will be fewer charitablecontribution deductions denied based upon a technicality.

Charitable contributions are important to both donors and the Government. Based on small changes to the Code and to the IRS Form 8283, a significant impact will result that makes charitable contributions more user-friendly and encourages cooperation between the donors and the Government to pursue a common cause.


1 The comments contained in this paper are the individual views of the author(s) who prepared them, and do not represent the position of the State Bar of California or of the Los Angeles County Bar Association.

2 Although the authors and/or presenters of this paper might have clients affected by the rules applicable to the subject matter of this paper and have advised such clients on applicable law, no such participant has been specifically engaged by a client to participate on this paper.

3 Jordan Lui is an associate with Wagner Kirkman Blaine Klomparens and Youmans LLP ("WKBK&Y"). Minna C. Yang is a Partner at Wagner Kirkman Blaine Klomparens and Youmans LLP. The views expressed herein are those of the author and do not necessarily reflect the views of WKBK&Y. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or an opinion provided by WKBK&Y to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other factors if any action is to be contemplated. The reader should contact his or her tax advisor prior to taking any action based upon this information. WKBK&Y assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

4 All "Section" and "Code" references in this paper are to the Internal Revenue Code.


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