Temporary and proposed regulations on the substantiation of charitable contributions.

On May 26, 1994, the Internal Revenue Service issued temporary and proposed regulations under section 170(f)(8) of the Internal Revenue Code, relating to the substantiation of charitable contributions of $250 or more. The regulations were printed in the May 27, 1994, issue of the Federal Register (59 Fed. Reg. 27458, 27515) and the July 18, 1994, issue of the Internal Revenue Bulletin (1994-29 I.R.B. 7, 39).

During its separate liaison meetings with each of you last February, Tax Executives Institute raised several issues concerning the Code's new contemporaneous documentation requirements for charitable contributions over $250, including the application of the rules to combined-giving campaigns. The temporary regulations address many of our concerns and resolve the issues concerning combined-giving campaigns in a sensible manner. Although TEI believes the temporary regulations can be finetuned, on the whole we believe that the IRS and Treasury have fashioned a workable solution to what could have become a recordkeeping night-mare for charities, employers that participate in combined-giving campaigns, and the government. We commend you for responding so promptly to taxpayer concerns.

Exception for Corprations

TEI remains concerned, however, that an expansive application of the substantiation requirements in other areas could jeopardize corporate contributions. Section 170(f)(8)'s requirement that donees provide donors with written confirmation of contributions in excess of $250 was enacted as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA). The legislative history of OBRA explains that Congress was concerned with quid pro quo "donations" that, while deducted as charitable contributions, in reality constituted a payment for goods and services. See H.R. Rep. No. 103-213, 103d Cong., 1st Sess. 63-64 (Aug. 4, 1993) (hereinafter referred to as the "Conference Report"). Moreover, although the broad language of the statute sweeps in contributions made by corporations, the substantiation requirement was clearly aimed at individuals.(1)

Large corporations often have extensive charitable-giving programs. Contributions by a company can aggregate millions of dollars a year, spread over scores of locations and thousands of different charities throughout the country. The congressional concern that donors may receive goods or services in return for their "contributions" does not resonate in the corporate setting because the purchase of goods or services by a corporation will generally be deductible under section 162.(2) Therefore, compliance with the new substantiation requirements will impose needless recordkeeping burdens on corporations and may prompt some companies to reduce their level of giving without furthering any legitimate legislative goal.

New section 170(f)(8)(E) of the Code provides broad authority to "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." Thus, Congress has provided the Treasury and IRS with express authority to exempt certain contributions from the new substantiation requirements. TEI believes that contributions by corporations represent an "appropriate case" for exemption from the substantiation requirements.(3) Such an exemption change would not, of course, relieve corporations from their current obligations to substantiate their charitable contributions. See Treas. Reg. [sections] 1.170A-13.

Donations of Inventory Property

Section 170(a) of the Code provides the general rule that taxpayers may deduct contributions to charitable organizations made during the taxable year.(4) Section 170(f)(8)(A) provides that no deduction shall be allowed under subsection (a) for any contribution of $250 or more unless it meets the contemporaneous documentation requirements. TEI is concerned about the application of these new rules--absent an exemption for corporations--to donations of inventory property under section 170(e) of the Code.

Historically, taxpayers were entitled to a deduction under section 170 equal to the fair market value of donated property, including contributions of inventory. As part of the Tax Reform Act of 1969, Congress enacted section 170(e)(1), which limited the deduction for a contribution of inventory property to the taxpayer's basis in the property. This provision was adopted in order to curb perceived abuses. See S. Rep. No. 91-552, 91st Cong., 1st Sess. 80 (1969).

Congress revisited the area in 1976 because the 1969 amendment had the unfortunated and unintended effect of substantially reducing the number of non-cash contributions. The limitation proved especially problematic for charitable organizations providing food, clothing, medical equipment, and supplies to the needy and disaster victims. See S. Rep. No. 94-938 (Part 2), 94th Cong., 2d Sess. 78-79 (1976). See also Staff of the Joint Committee on Internal Revenue Taxation, General Explanation of the Tax Reform Act of 1976, 94th Cong., 2d Sess. 672 (1976). To address this reduced level of contributions, Congress added section 170(e)(3) of the Code, which permits a taxpayer a deduction equal to its basis, plus one-half of the unrealized appreciation (up to a maximum of 200 percent of basis) for contributions made to a public charity or private operating foundation. This enhanced deduction, however, is available only if the donee uses the property in furtherance of its exempt purposes and solely for the care of the ill, the needy, or infants.

Section 170(e) was again modified in 1981 to provide a similar exception for contributions made by manufacturers of scientific equipment or apparatus used for research and experimentation and research training to educational institutions in the United States. (See I.R.C. [sections] 170(e)(4).) Once again, Congress found the restrictions imposed by section 170(e)(1) were effective in curbing abuse with respect to contributions of inventory property, but concluded it was appropriate to encourage specific contributions in certain areas. See S. Rep. No. 97-144, 97th Cong., 1st Sess. 87-89 (1981). See also Staff of Joint Committee on Taxation, General Explanation of the Economic Recovery Act of 1981, 97th Cong., 1st Sess. 138-39 (1981). In 1986, Congress expanded section 170(e)(4) to include contributions to certain scientific research organizations. See H.R. Rep. No. 99-426, 99th Cong., 1st Sess. 185 (1985).

The history of section 170(e) demonstrates not only Congress's willingness to make legislative changes in the charitable contribution provisions where necessary, but also its commitment to crafting a delicate balance with respect to non-cash contributions and encouraging taxpayers to donate property for charitable purposes. That balance is now at risk.

TEI submits that the congressional purpose in fostering such contributions will be undermined by subjecting corporations to the additional substantiation requirements of section 170(f)(8). The experience of charitable organizations between 1969 and 1976 suggests that the imposition of further limitations on gifts of inventory will discourage C corporations from contributing property to charitable organizations. Moreover, such contributions are already subject to the substantial substantiation requirements of Treas. Reg. [sections] 1.170A-13. If corporations are not exempted from the reach of the section 170(f)(8) rules, at a minimum, all corporate contributions of inventory property under section 170(e) should be removed from the reach of the provision.(5)

Payroll Deductions

a. Substantiation Requirements. Temp. Reg. [sections] 1.170A-13T(b) provides that a contribution made by means of withholding from a taxpayer's wages may be substantiated by (i) a pay stub, Form W-2, or other document furnished by the employer showing the amount withheld; and (ii) a pledge card or other document prepared by the donee organization that includes a statement that the organization does not provide goods or services in whole or partial consideration for any contributions made to the organization by payroll deduction. The preamble essentially provides a transition rule: If the donee organization includes the statement contemplated by the rules on a pledge card prepared to solicit contributions in 1995, a donor who receives the card before timely filing the donor's 1994 tax return may use that card to substantiate contributions made in 1994. 1994-29 I.R.B. at 8.

TEI commends the IRS for taking such a rational approach to meeting the substantiation requirements for contributions made by payroll deductions. In addition, the transition rule concerning the "contemporaneousness" of the documentation required for 1994 is at once pragmatic and reasonable. We suggest, however, that the transition rule be included in the regulations and the regulations be clarified to state that the pledge card (in respect of all periods) need not be prepared by the donee organization. Such a change would obviate the need for costly, but essentially unnecessary, changes to the conduct of combined-giving campaigns. As part of their combined-giving campaigns, many corporations--and not the charities--prepare the pledge cards that are distributed to employees. If these cards contain the required statement that the donee organizations participating in the campaigns do not provide goods or services as whole or partial consideration for any contributions made by payroll deduction, the cards should be recognized as meeting the second part of the substantiation test. (The corporation could substantiate that no quid pro quo goods or services were offered by keeping a letter to that effect from the donee organization in its file.)

b. Aggregation Rules. Temp. Reg. [sections] 1.170A-13T(b)(2) provides that for purposes of applying the $250 threshold to contributions made by payroll deduction, the amount with-held from each payment of wages to a taxpayer is treated as a separate contribution. The preamble amplifies this requirement by stating that the substantiation requirement will not apply to contributions made by payroll deduction unless the employer deducts $250 or more from a single paycheck "to a donee organization." 1994-29 I.R.B. at 8.

Donors who make contributions through combined-giving programs may have amounts deducted from their paychecks in excess of $250 per pay period; donors may also make lump sum payments in excess of that amount. These amounts may then be divided among several different charities. For example, an employee may authorize a deduction of $500 per pay period, payable equally to four different charities. It is unclear under the temporary regulations whether the $250 threshold requirement is to be applied on an aggregate or separate basis.

TEI urges the Treasury and IRS to clarify that where the aggregate amount of the payroll deduction or lump sum payment exceeds the $250 threshold, but all of the payments to individual charities are below that amount, the new substantiation rules will not apply.

TEI is pleased to have this opportunity to comment on the new substantiation rules for charitable contributions. If you have any questions, please feel free to contact Michael A. DeLuca, chair of TEI's Federal Tax Committee, at [phone] or Mary L. Fahey of the Institute's professional staff at [phone].

(1)See, e.g., Conference Report at 63, which refers to "[a]n individual taxpayer who itemizes deductions" and notes that a taxpayer is not required to provide specific information "on his or her return" regarding a claimed charitable contribution made by cash or check.

(2)Moreover, corporations making such large contributions will invariably have adequate accounting systems and internal controls; their accounts will most likely be audited by certified public accountants. These factors should ensure that only qualified charitable contribution deductions will be claimed.

(3)There is some precedent for exempting C corporations from the charitable substantiation requirements. Under Treas. Reg. [sections] 1.170A-13(c)(2), C corporations (other than closely held or personal service corporations) are not required to attach written appraisals of donations. See also Section B, Part I, 3 to the Instructions to Form 8283 (Noncash Charitable Contributions).

(4)To be allowable under section 170(a), the contribution must be "verified under regulations prescribed by the Secretary."

(5)Private charitable foundations are also subject to strict documentation requirements for contributions to other section 501(c)(3) organizations. We suggest that this area would also be appropriate for an exemption from the new rules.