Charitable contribution substantiation requirements for estates and complex trusts.

Estates and complex trusts are allowed an unlimited income tax charitable contribution deduction for amounts that, pursuant to the terms of the will or the instrument creating the trust, are paid out of gross income during the tax year for a purpose specified in Sec. 170(c). This unlimited charitable income tax deduction for estates and complex trusts is authorized by Sec. 642 (c) and is in lieu of the limited charitable contribution deduction authorized by Sec. 170(a) for individuals.

As originally drafted, Regs. Sec. 1.642(c)-1 (addressing the unlimited deduction for amounts paid for charitable purposes by estates and trusts) did not impose the substantiation requirements on estates and trusts that are applicable to individuals who claim income tax charitable contribution deductions. However, in 1988 the IRS issued proposed amendments that would change the first sentence of Regs. Sec. 1.642(c)-1 to read, in part, as follows:

Any part of the gross income of an estate or trust which. . .is paid. . .during the taxable year for a purpose specified in section 170(c) shall be allowed as a deduction to such estate or trust...(provided that the recordkeeping and return requirements for charitable contribution deductions contained in [Sections] 1.170A-13 resatisfied). (emphasis added.)

Observation: The proposed amendments would also impose the recordkeeping and return requirements contained in Regs. Sec. 1.170A-13 on the unlimited deduction allowed to estates (and certain trusts created on or before Oct. 9, 1969) for amounts permanently set aside for charitable purposes.

Because estates and trusts are only allowed an income tax charitable contribution deduction for amounts of gross income paid (and, for estates and certain trusts, permanently set aside) for charitable purposes, distributions from estates and complex trusts to charitable organizations are typically made in cash. Consequently, assuming the proposed amendments to Regs. Sec. 1.642(c)-1 are followed, estates and complex trusts distributing amounts of gross income to charitable organizations generally will only need to comply with the substantiation requirements under Regs. Sec. 1.170A-13 that deal with cash contributions.

Contributions of money are required to be substantiated by a canceled check or a receipt from the donee showing the donee's name, the date of the contribution and the amount of the contribution (Regs. Sec. 1.170A-13(a) (1) ). A receipt may consist of a letter or other communication from the donee charitable organization that acknowledges receipt of a contribution and indicates the date and amount of the contribution.

If a taxpayer does not have a canceled check or receipt from the donee, the gift may be substantiated by other reliable written records showing the name of the donee, the date of the contribution and the amount of the contribution. However, the burden of proof is on the taxpayer to establish the reliability of the written records (Regs. Sec. 1.170A-13(a)(2)). Although the reliability of the records is a factual determination made on the basis of all relevant facts and circumstances, the following factors indicate that written records are reliable:

The contemporaneous nature of the writing.

The regularity in the taxpayer's recordkeeping procedures.

For small contributions, the existence of any written or other evidence received by the taxpayer from the donee, such as an emblem, button or other token.

Further, all contributions of $250 or more, whether in cash or property, made on or after Jan. 1, 1994, are subject to an additional requirement that the donor receive from the donee a "contemporaneous written acknowledgment" of the donation (Prop. Regs. Sec. 1.170A-13 (f) (1)). The acknowledgment must provide information sufficient to substantiate the amount of the contribution. According to Prop. Regs. Sec. 1.1 70A-13(f) (2), an acknowledgment will be sufficient to substantiate the amount of the contribution if it contains the following information:

The amount of cash paid and a description (but not necessarily the value) of any property other than cash transferred to the charitable organization.

Whether or not the charitable organization provided any goods or services in consideration for the cash or property contribution.

A description and good faith estimate of the value of any goods or services provided by the charitable organization in consideration for the cash or property contribution.

The acknowledgment need not be in any particular form, but may be made by letter, postcard or computer-generated form. The donee may provide an acknowledgment for each contribution of $250 or more, or may provide a periodic statement of contributions. The acknowledgment will be considered contemporaneous with the gift if the donor receives the acknowledgment on or before the earlier of the date on which the donor files its return, or the due date of the return (including extensions) (Prop. I Regs. Sec. 1.170A-13(f) (3)).

Observation: The proposed regulations exempt transfers to charitable lead trusts and charitable remainder trusts from these "contemporaneous written acknowledgment" substantiation rules. This exception reflects the fact that charitable lead trusts and charitable remainder trusts are not required to identify the charitable beneficiary at the time the trust is funded, and thus, there may be no donee organization to provide the acknowledgment. However, since the charitable beneficiary of a pooled income fund is determined at the time the contribution is made to the fund, the proposed regulations do not exempt transfers to pooled income funds from the contemporaneous written acknowledgment substantiation rules (Prop. Regs. Sec. 1.170A-13(f) (13)).

Although proposed regulations do not have the effect of law, they are often finalized without change. Thus, the safe course of action is to ensure that the substantiation requirements are being satisfied for all estates and complex trusts that claim a charitable contribution deduction for amounts of gross income paid to charitable organizations.

FROM MARK T. WATSON, CPA, MS, WASHINGTON, D.C.