Deadline for contribution substantiation approaches.

Beginning with 1994 returns, taxpayers claiming charitable deductions for cash and noncash contributions of $250 or more are required to obtain adequate written substantiation from the donee organization or charity. Reliance solely on canceled checks for substantiation of the claimed deduction is no longer an option. Initially under these new rules, taxpayers filing 1994 tax returns were required to secure such substantiation by the original or extended due date or, if earlier, the actual filing date of their 1994 returns. Many taxpayers experienced difficulty in obtaining written acknowledgments from the donee organizations or charities. Therefore, in March 1995, the IRS issued Notice 95-15, which provides taxpayers with limited relief; taxpayers were given until Oct. 16, 1995 to obtain written acknowledgments from donee organizations or charities for charitable contributions of $250 or more.

Background

Stricter substantiation requirements for taxpayers claiming a deduction for charitable contributions of $250 or more, made on or after Jan. 1, 1994, have been in effect since the enactment of Sec. 170(f)(8). Generally, taxpayers must obtain a "contemporaneous written acknowledgment" from the donee organization or charity to support the contribution, unless the donee organization files a return reporting information sufficient to substantiate the contribution. Most charitable organizations have no obligation to report such information. Therefore, the responsibility to secure substantiation rests solely with the taxpayer.

This written acknowledgment need not meet any prescribed form; it may consist of a letter, postcard or computer-generated form. The charitable organization may either prepare a separate acknowledgment for each contribution of $250 or more, or provide an annual report with the required information for contributions of $250 or more. The acknowledgment must also include the amount of the cash contribution or a description of noncash property contributed and the extent to which any goods or services were provided in return by the donee organization or charity, as well as a description and good-faith estimate of the value of the goods or services provided.

Taxpayers must obtain an acknowledgment for any single charitable contribution of cash or property that amounts to $250 or more. Therefore, a series of smaller contributions to the same charity that equals or exceeds $250 on a combined basis during the same year would not be subject to these rules. However, if several checks are written on the same date or a large quantity of payments are used to avoid the $250 threshold amount, the IRS would likely aggregate the checks or payments and apply the substantiation requirements.

Similar substantiation rules apply to contributions made through payroll deductions. Each payroll deduction is treated as a separate contribution for purposes of the $250 threshold. Since employees typically do not receive a receipt from their employers for contributions made through payroll deductions, the regulations provide that the new substantiation requirements may be satisfied with both of the following documents: (1) a pay stub, Form W-2 or other employer statement specifically indicating the amount withheld for the purpose of making a contribution to the donee organization or charity, and (2) a pledge card or other document from the donee organization or charity indicating that no goods or services were provided in return for the contribution.

Relief provision

The new substantiation rules for charitable contributions require that written acknowledgment for a contribution must be contemporaneous. This contemporaneous written acknowledgment must be obtained on or before the actual due date for filing the return (including any extensions) or, if earlier, the filing date of the return for the year of the contribution.

For taxpayers filing 1994 returns, the Service extended the deadline for obtaining a written acknowledgment from a donee organization or charity. Notice 95-15 provides that taxpayers will satisfy the contemporaneous requirement for substantiation if they obtain a written acknowledgment by Oct. 16, 1995, or put forth a good-faith effort to obtain an acknowledgment by that date. For example, a letter sent to the donee organization on or before Oct. 16, 1995, requesting a written acknowledgment of the contribution, will constitute a good-faith effort sufficient to meet the substantiation requirements of Sec. 170(f)(8).

Proposed regulations

The IRS proposed regulations on Aug. 3, 1995 which, in part, provide guidance on the new substantiation requirements. for charitable contributions of $250 or more. Under Sec. 170(f)(8), if goods or services are provided by a donee organization or charity at the time the charitable contribution is made, a taxpayer must obtain a good-faith estimate of the value of the goods or services provided. Under the proposed regulations, a "good-faith estimate" is defined as an estimate of the fair market value (FMV) of the goods and services provided. Donee organizations or charities may employ any methodology they choose to determine the FMV of the goods or services, if the method is applied in good faith. Generally, if the estimate is contained in a contemporaneous written acknowledgment or written disclosure, taxpayers may treat the estimate as the FMV for the purpose of satisfying the new substantiation requirements. A taxpayer has no responsibility to ascertain the method used or question the value determined, unless, based on the taxpayer's knowledge of or experience in the business of providing the goods or services in question, the value is clearly unreasonable.

Additionally, under the proposed regulations, partnerships and S corporations are required to meet the new requirements at the entity level; partners and S shareholders are not required to secure a written acknowledgment before claiming a deduction for their allocable shares of charitable contributions made by the partnership or S corporation. Taxpayers may rely on the proposed regulations for purposes of filing their 1994 income tax returns.

Impact on other rules

Notice 95-15 does not affect any of the other existing reporting requirements for charitable contributions, including the reporting requirements for noncash contributions claimed in excess of $500. Taxpayers are still required to report noncash contributions on Form 8283, Noncash Charitable Contributions, and to provide information regarding the manner and date of acquisition, the cost or other basis of the contribution, and the method used to determine the value of the contribution. Additionally, a qualified appraisal is still required on any noncash contributions (other than publicly traded securities) in excess of $5,000.

Summary

The IRS has provided taxpayers filing 1994 returns with limited relief from compliance with the new substantiation requirements for contributions of $250 or more. However, the Oct. 16, 1995 deadline for obtaining adequate written substantiation is fast approaching. Taxpayers filing 1994 tax returns on or before the final Oct. 16, 1995 extended due date should review the substantiation rules to determine if they have obtained adequate written substantiation for charitable contributions of $250 or more or have put forth a good-faith effort to obtain the proper substantiation.

From Thomas M. Kosinski, CPA, MST, Ostrow Reisin Berk & Abrams, Ltd., Chicago, Ill.