Substantiating Charitable Contributions

Overview

While IRS audit activity data shows that less than one percent of returns were audited in fiscal year 2015, there are some areas that receive more attention than others.  One of the areas of “low-hanging” fruit for IRS examining agents involves charitable contribution deductions.  Numerous cases illustrate that properly substantiating contributions is critical, and that many taxpayers aren’t following the rules.   In one recent case, the taxpayer was denied a $33 million charitable deduction because the taxpayer failed to properly substantiate the deduction.  RERI Holdings I, LLC v. Comr., 149 T.C. No. 1 (2017).   How does that happen when so much value is at stake?

So, what documentation is required to properly substantiate charitable contributions?  It depends on the type of the contribution and the amount that is given.  Substantiation rules for charitable contributions – that’s the topic of today’s post:

Cash Gifts

Charitable donations with cash have the most simplistic substantiation rules.   For a single donation that is less than $250, a bank record or written receipt from the charity showing the charity’s name, amount and the date of the donation is sufficient.  For single cash gifts of $250 and greater, the taxpayer must have an acknowledgement from the charity.  That acknowledgement must include the amount of cash and a description of any other property that the taxpayer gave to the charity.  It also must indicate whether the charity provided any goods or services in return for the donation.  If non-cash goods or services were provided along with the cash gift, the acknowledgement must provide a description of them and a good faith estimate of their value.  In addition, a statement must be included that only the contribution in excess of that estimated value is deductible.  This also applies if the donor receives something (other than merely de minimis items) in return for a donation exceeding $75.  However, if only intangible religious benefits were the only thing that the charity provided, a statement to that effect can be made instead of valuing the benefits.

There is an important point concerning the charity’s acknowledgement.  The taxpayer must receive it by the earlier of the date the donor’s return for the year of the donation is filed, or the extended due date of that return.  There has been recent litigation on this point, and the outcome hasn’t been taxpayer-favorable.  So, it’s critical that charities get the acknowledgements out shortly after the yearend.

The $250 threshold is applied to each contribution separately.  Treas. Reg. §1.170A-13(f)(1).  Thus, for donors that make multiple cash gifts to the same charitable organization (such as a church, for example) that total $250 or more in a single year, where each gift is less than $250, written acknowledgement is not required unless the smaller gifts are parts of a series of related contributions made to avoid the substantiation requirements

A good approach for charities to take, particularly churches, is to track all donations on a weekly basis by each donor.  That information can be easily laid out in a spreadsheet, with a listing of the various funds (e.g., benevolence, building, etc.) being donated to.  That information can then be transferred to the acknowledgement form for each donor that contains the required language and the appropriate signature of the person on behalf of the charity.  This can all be taken care of shortly after yearend and provided to the donor well before the donor’s return is filed.

Payroll Deduction

For charitable donations of less than $250 that are made via a payroll deduction, a paystub, Form W-2, or other employer statement showing the amount withheld, plus an acknowledgment from the charity is sufficient documentation to support the deduction.  For payroll deduction gifts of $250 or more, the acknowledgement from the charity must contain the necessary details that the charity did not provide goods or services in return for the donation.  Again, the $250 threshold is applied by treating each payroll deduction as a separate contribution.  Treas. Reg. §1.170A-13(f)(11).

Volunteers

For taxpayers that provide volunteer services to qualified charities and incur out-of-pocket expenses, canceled checks, receipts or some other record that shows the date the expense was incurred and the amount along with a description and the reason for incurring the expense is sufficient.  If the amount of expense incurred reaches the $250 level, the taxpayer should still keep sufficient records, but the charity will also need to provide a proper acknowledgement.

Non-Cash Contributions

Publicly traded stock.  For small non-cash contributions (less than $250 in value), substantiation is sufficient if the taxpayer has a receipt with the charity’s name on it along with the date of the gift, the location and a description of the donation.  In lieu of a receipt, the taxpayer should maintain sufficient records that contain the same information.  A key point is to clearly show how the value of the property was determined, including a copy of an appraisal if one was obtained.  If the gift involved a partial interest in property, additional information will be necessary.

For non-cash contributions of publicly traded stock that are between $250 and $500, the taxpayer will need a written acknowledgement from the charity along with maintaining written records.  While IRS Publication 526 says that written records are to be maintained in all cases, the governing regulation says that written records are only required if the charity doesn’t provide a receipt.  Treas. Reg. §1.170A-13(b)(1).

If the contribution is valued in excess of $500 but not over $5,000, an acknowledgement from the charity and written records are required, and Form 8283, Section A must be completed and filed with the IRS.  That’s the same result for higher-valued gifts.  For gifts of securities that are worth over $500, additional rules must be complied with.

Non-publicly traded stock.  The rules for the donation of non-publicly traded stock are the same as for gifts of publicly traded stock, except that Form 8283, Section A must be completed and filed with the IRS.  If the gift exceeds $10,000 in value, the donor must obtain a qualified appraisal before the due date of the return.  If the value of the gift exceeds $500,000, the written qualified appraisal must be attached to the return.

Artwork

Several prominent cases in recent years have involved the donation of valuable artwork.  Again, the substantiation rules are tied to the value of the donated artwork.  For gifts under $500, the substantiation rules basically require the maintenance of written records and an acknowledgement from the charity.  Once that level is exceeded, Form 8283 must be completed and filed with the return.  Once the $5,000 level is reached, Section B of Form 8283 must be completed and a qualified appraisal must be obtained before the due date of the return.   For donated artwork valued at $20,000 or more the appraisal must be attached to the return and the taxpayer must keep a clear photo of the artwork.

Vehicles, Boats and Airplanes

Again, special rules apply to vehicles, boats and airplanes that are donated to charity.  The maintenance of good records is again essential.  In addition, Form 1098-C must be completed and an acknowledgement must be obtained from the charity.  For gifts of such property, up to $5,000 in value, Form 8283, Section A must be completed.  For higher-valued donations, Section B of Form 8283 must be completed.  If the charity either gives the donated property to a “needy individual” or sells it to such a person at a significantly discounted price, a qualified appraisal must be obtained.  Other rules must be complied with if the charity uses the donated property or makes a material improvement to it.

Other Non-Cash Donations

Other property, such as patents and intellectual property can also be donated to charity.  If that happens additional special substantiation rules apply.  The rules are particularly technical.

The RERI Holdings I, LLC Case

So, what went wrong in RERI Holdings I, LLC?  A partnership paid just shy of $3 million in 2002 to acquire a remainder interest in particular property.  The acquisition came along with certain covenants that were designed to maintain the property’s value.  In addition, if the covenants were breached the remainder interest holder would get immediate possession of the property without any damages being paid by the holder of the term interest.  About 18 months later, the partnership assigned the remainder interest to a University and claimed a deduction of over $33 million.  The partnership completed and filed Form 8283 with its return, but it left blank the space on the Form where it was to provide its cost or adjusted basis in the property – the partnership either simply forgot or didn’t want to alert the IRS that it had likely overvalued the amount of the donation.  But, that was a fatal mistake. The omission of that basis information violated Treas. Reg. §1.170A-13(c)(4)(ii)(E).  No deduction was allowed.

Conclusion

Substantiating charitable contributions properly is essential.  It is one area that the IRS audits more closely than other areas.  Because the deduction can be particularly valuable, the substantiation rules must be carefully complied with.