Substantiation and disclosure requirements for charitable contributions.
In addition, the RRA generally codified the IRS's position that charities should inform donors of the amount of their contribution that is deductible.(1) For a quid pro quo contribution in excess of $75 (i.e., a payment in excess of $75 that is part gift and part consideration for a benefit furnished to the donor), the deduction is limited to the amount by which the payment exceeds the value of the goods or services furnished by the charity, based on a good faith estimate of the value of the goods or services so provided.
It is impossible to estimate accurately the tax revenue lost from improperly claimed charitable deductions for the purchase of (1) "scrip" (which can be used to purchase groceries from local stores, etc.), (2) items at goods and services auctions, (3) items sold by charitable organizations and (4) group-sponsored travel, lotteries, etc.
The administrative costs of compliance are considerable. For example, United Jewish Appeal Federation of Greater Washington, Inc., which receives contributions in excess of $20 million a year from approximately 22,000 gifts, estimates the cost of complying with the new substantiation and disclosure provisions at about $16,000 a year.
As Congress tightened certain charitable deduction substantiation rules, it also relaxed the alternative minimum tax (AMT) provisions for the charitable contribution of appreciated property. This article will address the effect of these provisions on donors and charitable organizations.
Charitable Contributions Under Pre-RRA Law
Under prior law, an individual taxpayer who itemized deductions had to separately state on Form 1040, Schedule A, the aggregate charitable contributions made by cash or check and the aggregate of donated property other than cash. The taxpayer was not required to provide specific information on the return regarding a claimed charitable contribution made by cash or check, although it was not unusual to attach a list of large contributions.(2)
Taxpayers contributing property other than cash or check had to file Form 8283, Noncash Charitable Contributions, with their returns if the total value of noncash contributions exceeded $500.(3) The donee organization was not required to file any information with the IRS on the receipt of cash contributions, regardless of the amount involved. A payment to a charity in exchange for an economic benefit is not deductible under Sec. 170, except to the extent that the donor can demonstrate that the payment exceeds the fair market value (FMV) of the benefit received.(4)
Pre-RRA, the Code did not require an exempt organization to state explicitly, in its solicitations for support from members or the general public, whether an amount paid to the organization was deductible as a charitable contribution, or whether all or any part of the payment constituted consideration for goods or services (such as a dinner) furnished to the taxpayer. On the other hand, exempt organizations not eligible to receive deductible contributions were required to state explicitly in certain fundraising solicitations that contributions or gifts to the organization were not deductible as charitable contributions.(5)
* Contributions of $250 or more
Under the RRA, no deduction is allowed for any contribution of $250 or more unless the taxpayer has written substantiation from the donee organization of the contribution.(6) After 1993, a canceled check is no longer sufficient proof. The committee reports specified that separate payments will generally be treated as separate contributions and will not be aggregated for the purposes of applying the $250 threshold.(7) For contributions made by withholding from wages, the deduction from each paycheck will be treated as a separate payment.(8) The Treasury has broad authority to provide antiabuse rules to prevent the avoidance of the substantiation provisions by taxpayers writing multiple checks on the same date.(9)
To reduce existing abuses when goods or services are given in exchange for a charitable contribution, the organization is required to include a good faith estimate of the value of any good or service that it provides to the donor in exchange for the gift. If no goods or services are given in exchange for the contribution, the written substantiation is required to include a statement to that effect. There is no official IRS form for this purpose, nor is any specific format required. The substantiation need not contain the taxpayer's social security number or taxpayer identification number.(10)
The Conference Report clarified that when, in consideration for a contribution of $250 or more, a religious organization furnishes to the contributor solely an intangible religious benefit generally not sold in commercial transactions outside the donative context, the written substantiation must contain a statement to the effect that "an intangible religious benefit" was provided, but no value need be placed on that benefit (for example, the "sale" of a church pew or of a synagogue's High Holiday seats).(11) Specifically excluded are tuition for education leading to a recognized degree, travel services and consumer goods. However, de minimis tangible benefits incidental to a religious ceremony (e.g., wine) may generally be disregarded.(12)
No particular form is described for the acknowledgment; it may be a letter, postcard or computergenerated form. The organization may prepare separate acknowledgments for each contribution or give donors periodic or annual acknowledgments with the required information.(13)
There is no due date for the preparation of the acknowledgment. The burden of obtaining the report is on the taxpayer, who is required to have the contemporaneous report in his hands by the earlier of the filing date or the due date (including extensions) of the return for the tax year of the contribution.(14)
* Quid pro quo contributions
A "quid pro quo contribution" is a payment made partly as a contribution and partly in consideration for goods or services provided to the donor.(15) New Sec. 6115(a) provides a disclosure requirement for all quid pro quo contributions exceeding $75. Thus, if a charity receives a $125 contribution for which the donor receives a $40 dinner, the charity must inform the donor in writing that the charitable contribution is only $85.(16) However, the disclosure requirement does not apply if the donor receives only de minimis, token gifts or services (such as those deemed to be of an insubstantial value under Rev. Procs. 90-12(17) and 92-49(18)). The disclosure requirement does not apply to transactions that have no donative intent, such as the sale of goods by a museum gift shop.(19)
For purposes of the $75 threshold, separate payments made at different times of the year for separate fundraising events generally will not be aggregated. However, the Treasury is expected to issue anti-abuse rules to prevent avoidance of the quid pro quo disclosure requirments by writing multiple checks.(20)
The disclosure must be made in a manner reasonably likely to come to the donor's attention, e.g., if the required information is in small print within a larger document, it might not meet the intended requirements.(21) The IRS has been instructed to issue promptly appropriate guidance via notices, instructions and announcements.
* Noncompliance penalities
A penalty of $10 per contribution, capped at $5,000 per fundraising event or mailing, will be imposed on charities that willfully fail to make the required disclosure.(22) The penalty applies if the charity fails to make a disclosure in connection with a quid pro quo contribution or makes incomplete or inaccurate disclosures. For example, the penalty will apply if a charity makes an estimate of the value of goods and services provided to a donor that was not determined in good faith.(23)
The Practical Approach
The RRA requires the donor to obtain a receipt for each separate contribution of $250 or more. If there is nothing received in return for the contribution, the receipt must so state. Once taxpayers learn that they must obtain a receipt for such contributions, charitable organizations will be inundated with requests for receipts and replacement of lost or misplaced receipts as the tax deadline approaches. The law provides that charitable organizations may elect to file a special form with the IRS showing each cash receipt item or provide the donor with an annual statement of donations.(24)
In most cases, the best interest of all parties can be served by the use of an annual statement. The statement should have imprinted on it a disclosure concerning the quid pro quo, if any, and contain a statement to the effect that it meets the new substantiation requirements.
Since many contributors make their gifts at the end of the year, it may be appropriate to include in the statement the first few days of the following year with an appropriate disclosure that the statement cuts off in the new year to reflect payments that may have been made as late as December 31 of the preceding year. This procedure should be attractive to many organizations. Whether the organization undertakes to follow this procedure (or, instead, reports to the IRS), its notices, bulletins and bills should include a notice that a qualifying annual statement will be sent to each donor or to the IRS that complies with the RRA's substantiation requirements.
AMT Treatment of Contributions of Appreciated Property
A taxpayer who itemizes deductions generally can deduct the FMV of property contributed to a charitable organization.(25) However, for charitable contributions of inventory, other ordinary income property, short-term capital gain property, or certain gifts to private foundations, the deduction is limited to the taxpayer's basis in the property.(26) In the case of a charitable contribution of tangible personal property, a taxpayer's deduction is limited to the adjusted basis in such property if its use by the recipient is unrelated to the organization's exempt purpose.(27)
Pre-RRA, for alternative minimum tax (AMT) purposes, the deduction for charitable contributions of capital gain property (real, personal or intangible) was disallowed to the extent that the FMV of the property exceeded its adjusted basis.(28) An exemption from disallowance was temporarily available for contributions of tangible personal property.
Under Sec. 56(g)(1), for tax years beginning after 1989, corporate alternative minimum taxable income (AMTI) is increased by 75% of the amount by which adjusted current earnings (ACE) exceeds AMTI (calculated before the adjustment). ACE generally is computed under the earnings and profits (E&P) rules.
To provide an additional incentive for individual and corporate taxpayers to make charitable contributions of appreciated property, the RRA eliminated the treatment of contributions of appreciated property as a tax preference for AMT purposes, and provided that no adjustments related to the E&P effects of any charitable contribution need be made in computing ACE for AMT. Thus, the disallowance rule was repealed for contributions of tangible personal property made after June 30, 1992, and for contributions of intangibles and real property after 1992.(29) This opens up the possibility for refund claims in those cases in which AMT was paid.
The advantage to making charitable contributions of appreciated property at FMV is obvious: the donor can claim a deduction on the appreciated value of the gift without ever having been taxed on the appreciation. For instance, a high-income taxpayer who makes a charitable contribution of securities that were purchased for $2,000, and are now worth $12,000, completely escapes the $3,960 Federal tax on the unrealized appreciation had the donor sold the securities. This opens the door for numerous tax-advantaged contribution opportunities that not only help taxpayers, but also benefit charities by making contributions less expensive.
These new provisions are obviously a step backward in the march towards tax simplification. Just how much additional burden must charitable organizations bear in the drive for 100% "Voluntary" compliance?
Many questions remain unanswered. For instance, what happens when an individual is invited to a charitable event at which a $50 dinner is provided, with the expectation that his charitable contribution will be forthcoming? If the contribution is made in connection with the dinner, the quid pro quo rules require the donor to reduce his charitable contribution by the FMV of the dinner. On the other hand, suppose the donor does not respond to the charitable request at the time of the dinner, but six months later, sends the charity a check for $500. Is the deduction then reduced by the value of the dinner, even though the donor attended the event but did not make a contribution at that time?
What are the requirements for a charitable organization that sends out unsolicited tickets to a show, or similar items that are not used by the recipient, who nevertheless makes a charitable contribution in response? Must the donor return the tickets, and if not, must the charity subtract the value of the tickets from the donation receipt?
Until the Treasury is able to issue guidance, practitioners will have to rely on common sense and professional judgment in exercising a good faith attempt to comply with the new law.
The chart on page 640 shows interim guidelines for charities and donors of charitable contributions.(30) It has proven to be a useful tool pending the release of regulations.
Interim Guidelines for Charitable Contributions(*) Substantiation,(a) Rep
orting and Deductibility (as of Jan. 1, 1994)
Contribution description Charity Donor $75 or less, No particular form of Deduction limited to with quid receipt required, but amount of contribu- pro quo charity should provide tion in excess of FMV donor with the value of benefit received; of benefits received, in canceled check or solicitation materi- other receipt sufficient als or on a receipt (Rev. substantiation for Rul. 67-246(b)). amount donated. It is unclear how donor is to estimate FMV of benefit received if not provided by charity. Less than No receipt required, but Canceled check or $250, no nevertheless other receipt is suffi- quid pro quo should be provided. cient substantiation. Over $75 and Inform donor in writing, Canceled check or less than in connection other receipt sufficient $250, with with solicitation or substantiation for quid pro receipt: amount contributed. quo a. that the charitable Deduction limited to deduction is limited amount of contribu- to the amount of the tion in excess of FMV contribution in excess of benefit received of FMV of benefits based on good faith received; estimate, which must b. of benefits that were be provided by provided and their charity. value, based on a good faith estimate.(c) Cash of $250 Technically, there is no Must receive and or more, obligation for charity maintain written sub- with no quid to give a receipt, but stantiation from pro quo since taxpayer will need charity prior to filing and noncash receipt, charity should return. Canceled of provide written sub- checks are not sufficient. $250-$350, stantiation that states with no what was contributed quid pro quo and that no benefits were provided. Cash of $250 Inform donor in writing, Must receive and or more, in connection maintain written sub- with quid with solicitation or stantiation from pro quo receipt: charity prior to filing a. that the charitable return. Canceled deduction is limited checks are not sufficient. to the amount of the Deduction limited to contribution in excess amount of contribu- of FMV of benefits tion in excess of FMV received; of benefit received b. of benefits that were based on good faith provided and their estimate provided by value, based on a good charity in the faith estimate. receipt. Because taxpayers are required to receive receipts, charities should provide receipts and alert donors to the quid pro quo impli- cations of the gift during the solicitation process. Noncash of Substantiation In addition to the over $500, requirements for noncash substantiation require- with or gifts (Forms 8283 and ments for noncash without quid 8282(d)) have remained gifts (Form 8283) (which pro quo the same. However, because have not changed), donors must donor must receive and have a written receipt, maintain written charity should pro- receipt from charity prior vide receipt that: to filing return. Canceled checks are not a. describes the property sufficient. Deduction received (no new limited to the FMV of obligation to estimate the property property value); contributed, as determined b. states that the according to the charitable deduction is valuation rules (which limited to the value of have not changed), in the property con- excess of FMV of ben- tributed in excess of the efit received based on FMV of the bene- good faith estimate fits received; and provided by charity in the receipt. c. states if benefits were provided and their value, based on a good faith estimate. Charities should also alert donors to the quid pro quo implications of the gift, if any, during the solicitation process.
(*)Prepared by the Council of Jewish Federations.
(a)In some cases, a receipt is not required to claim the charitable deduction. If the return is audited, however, the donor may be required to furnish "proof" of the gift. In all cases in which substantiation is required, the donor must have the receipt in his possession before filing the return. All receipts obtained should state the date of the contribution.
(b)Rev. Rul. 67-246, 1967-2 CB 104.
(c)But see Rev. Procs. 90-12, 1990-1 CB 471, and 92-49, 1992-1 CB 987, for de minimis rules.
(d)Donee Information Return.
(1)Sec. 170(f)(8), added by RRA Section 13172(a). See S. 1134, 103d Cong., 1st Sess. 42(1993).
(2)See H. Rep. No. 103-213, 103d Cong., 1st Sess. 63 (1993) (hereinafter, the "Conference Report").
(5)Id., at 64.
(7)Conference Report, note 2, at 67, n. 9 and accompanying text.
(8)Temp. Regs. Sec. 1.170A-13T(b)(2), as amended by TD 8544 (5/26/94).
(9)Conference Report, note 2, at 67, n. 9 and accompanying text.
(10)Id., at 67, n. 10 and accompanying text.
(11)Id., at 67, n. 11 and accompanying text.
(12)Id., at 68, n. 14 and accompanying text.
(13)Id., at 67, n. 12 and accompanying text.
(14)Id., at 67.
(15)Sec. 6115(b), added by RRA Section 13173(a).
(16)Conference Report, note 2, at 66.
(17)Rev. Proc. 90-12, 1990-1 CB 471.
(18)Rev. Proc. 92-49, 1992-1 CB 987.
(19)Conference Report, n. 2, at 66.
(20)Id., at 69, n. 16 and accompanying text.
(21)Id., at 69, n. 15 and accompanying text.
(22)Sec. 6714, added by RRA Section 13173(b).
(23)Conference Report, note 2, at 66 and 69.
(24)Id., at 68, n. 12 and accompanying text.
(28)Sec. 57(a)(6), repealed by RRA Section 13171(a).
(29)Id. See H. Rep. WMCP:103-11, 103d Cong., 1st Sess. 192 (1993). A similar rule applies to publicly held securities given to private foundations; the appreciation in value is not an AMT item. See Sec. 170(e)(5). This provision's sunset date is Dec. 31, 1994, and there is no indication yet if it will be extended.
(30)Prepared by the Planned Giving and Foundation Relations Department of the Council of Jewish Federations. It may be reproduced with attribution and without their permission.
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|Author:||Kamerow, Martin L.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 1994|
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