Taking individual charitable giving to its limit: understanding related rules and court decisions.
Under Internal Revenue Code (IRC) section 170, favorable tax treatment for charitable giving in the United States exists for an individual's contributions to legally designated (qualified) nonprofit organizations; however, meeting all of the requirements for deductible charitable giving can be a daunting task for many taxpayers, especially given the significant changes that have taken effect in recent years and additional modifications under consideration by Congress. Numerous recent court decisions provide evidence for the challenges that financial planners and their clients face (e.g., Rolf v. Comm'r, 109 All IR 2d 2012-828; Henricus C. van der Lee v. Comm'r, T.C. Memo 2011-234).
The discussion below examines the current limitation requirements for deducting charitable gifts made by individual taxpayers. Although many individuals might be concerned about potential increases in their income taxes, they might not be familiar with the most recent charitable giving rules, including substantiation requirements and the potential return of the Pease limitation for 2013. An in-depth understanding of these topics helps financial planners advise clients on how to handle current charitable giving, as well as upcoming changes in 2013.
Furthermore, various issues and rulings from recent court cases and general deduction policies are addressed below, as well as the very stringent documentation changes introduced by the Pension Protection Act of 2006. CPAs who understand these issues can discuss them with individuals contemplating complex charitable donations.
Defining a Charitable Contribution
The term charitable contribution, as defined under WC section 170(c), means a contribution or gift to, or for the use of, the following:
* A state, a possession of the United States, or any related political subdivision of these, or the United States or the District of Columbia (D.C.), but only if made for exclusively public purposes (e.g., a gift to reduce the public debt)
* A corporation, trust, community chest, fund, or foundation that is created or organized in the United States or its possessions, or under the law of the United States, any state, D.C., or U.S. possessions and is organized exclusively for religious, charitable, scientific, literary, or educational purposes; to foster national or international amateur sports competition; for the prevention of cruelty to children or animals (e.g., United Way, American Cancer Society, American Society for the Prevention of Cruelty to Animals, U.S. Olympic teams, and the Salvation Army); as a post or organization of war veterans; or as an auxiliary unit or society of, or trust or foundation for, any such entity, if it is organized within the United States or any of its possessions (e.g., Veterans of Foreign War, United Service Organizations [US0], and Navy League)
* A cemetery company owned and operated exclusively for the benefit of its members, or any corporation chartered solely for burial purposes (with limitations as noted in IRC section 170[c])
* A domestic fraternal society, order, or association operating under the lodge system, but only if the contribution (above and beyond dues) is to be used exclusively for purposes as stated above (e.g., Shriners, Lions Club, Rotary Club).
Limitations to Annual Deductible Giving
If the total charitable giving for a year is 20% or less of an individual's contribution base (defined as adjusted gross income [AGI] computed without regard to any net operating loss carryback to the taxable year), there are no limit considerations. Otherwise, limits of 20%, 30%, or 50% apply, depending upon the type of property donated and the type of organization receiving the gift. Each of these limits is explored below.
50%-limit charities. Taxpayers are allowed to make charitable contributions as long as the total amount of giving does not exceed 50% of a donor's AGI for the taxable year (]RC section 170[b]) for contributions made to the following:
* Churches, conventions, or associations of churches
* Educational organizations with regular faculty and curriculum, which normally have a regularly enrolled body of students in attendance at the location of their educational activities
* Medical organizations whose principal functions are to provide medical-related care, education, or research ORC section 170[b][A][iii] details additional restrictions related to deductible contributions to medical research organizations)
* Entities that organize and operate exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of state and municipal colleges or universities; such entities must normally receive a substantial part of their support from the United States, any state, or a political subdivision thereof, or from direct or indirect contributions from the general public
* The United States, a state, a U.S. possession, or any political subdivision of these--including Indian tribal governments--if the contribution is made for exclusively public purposes
* An organization that normally receives a substantial part of its support from a governmental unit (as listed immediately above) or from direct or indirect contributions from the general public
* A private foundation or organization (defined under IRC section 49420113] and WC section 509[a] or ), including private operation foundations, as well as certain private nonoperating foundations and private foundations that meet specific distribution guidelines.
If gifts to these 50%-limit charities are capital gain properties, however, the contribution limit drops to a special limit of 30%.
30%-limit charities. Most notable in this category are contributions to veterans' organizations, fraternal societies, nonprofit cemeteries, and certain private nonoperating foundations. In general, the 30% limit applies to all gifts made to organizations, other than those made to 50%-limit charities; however, if gifts to organizations in this 30%-limit category are capital gain properties, the limit drops to a special limit of 20%, discussed later. The following is an example of combined 50%-limit and 30%-limit charitable giving:
* Example--Assume that a taxpayer's AGI is $100,000. During the year, he donates $10,000 cash to a 50%-limit charity; he also donates $35,000 to a 30%-limit charity. The $10,000 contribution does not exceed the 50%-limit charity rule; however, the donation to the 30%-limit charity exceeds the deductible annual limit by $5,000 ($35,000 - [$100,000 x 30%[ = $5,000). Thus, the $10,000 gift is fully deductible, but only $30,000 of the $35.000 gift is deductible. Together, $40,000 is deductible as the taxpayer's total giving, which does not exceed 50% of his AGI ($50,000). The excess contribution of $5,000 made to the 30%-limit charity during the year may be carried over to the subsequent tax year.
Special limits of 30% and 20% on capital gain property. A special limit of 30% (of AGI) applies to gifts of capital gain property made to 50%-limit organizations. This limit does not apply if a taxpayer elects to reduce the fair market value (FMV) of the property by the amount that would have been long-term capital gain if the property had been sold. This election is not available to taxpayers making capital gain property gifts to charities listed under the 30%-limit category; instead, a special limit of 20% (of AGI) is applicable against capital gain property contributed to 30%-limit charitable organizations. In addition, the special limit of 30% does not apply to qualified conservation contributions.
The following is an example of the special limit of 30%:
* Example--Assume that a taxpayer's AGI is $80,000. During the year, she donates capital gain property with a fair market value of $10,000 to a local 50%-limit charity. She does not elect to reduce the property's FMV by its appreciation in value. She also gives $5,000 cash to a local 30%-limit organization. Her $10,000 gift of capital gain property is subject to the special limit of 30%; the $5,000 cash contribution is subject to the 30%-limit charity rule. In this case, both gifts are subject to limitations of 30% of her AGI ($24,000) and, therefore, both are fully deductible because they do not exceed the applicable limits. Together they equal or fall below the overall 50% of AGI limitation of $40,000.
Special limit on qualified conservation contributions. The marked increase of contributions of real property over the past few years can possibly trace its launch to the Pension Protection Act of 2006, which defined qualified conservation contributions as gifts of a qualified real property interest to a qualified organization, made exclusively for conservation purposes (IRC section 170[h]). In general, donors must gift their entire interest (other than qualified mineral interest) to an organization that meets the requirements of IRC section 501(c)(3), and the property must be used for conservation and public-benefit purposes, including--but not limited to--outdoor recreation; education; the protection of wildlife, habitat, or historical importance; and scenic enjoyment. This type of contribution (other than those made by certain fanners or ranchers) is limited to 50% of AGI, minus a deduction for all other charitable contributions; if taxpayers have gross income from the trade or business of farming (or ranching) of more than 50% of their gross income, and they donate qualified property used in the production of agriculture or livestock, then the qualified conservation contribution limit on this gift is 100% of AG!.
Contributions with a Potential Benefit
Charity golf tournaments, annual fundraising galas, and donated-item auctions seem to persevere in many communities, despite a slow economy. If an individual pays more than the FMV to a qualified organization for products, privileges, or services, then the taxpayer can consider the excess (amount over FMV) a charitable contribution. Whether the individual uses the item purchased has no effect on the amount that qualifies as a contribution; if the taxpayer returns the item to the qualified organization for resale, the entire amount of the purchase is deductible.
The following are several examples of contributions attributed to FMV and excess FMV:
* Each spring, a charity sponsors a magic show for local children and their families as a fundraising event A taxpayer purchases 20 tickets at their FMV of $5 each, while following the charity's offer to retain 18 of the tickets for their distribution to needy children. The taxpayer can deduct $90 as a charitable contribution. If he receives all 20 of the tickets, regardless of whether they are used for the show, there is no charitable contribution, because the FMV of each ticket is $5.
* A charity holds an annual bake sale and auction as a fundraiser. A taxpayer has the winning bid of $200 on food with an FMV of $15. She intends for the excess of FMV to be a charitable contribution; thus, she may deduct her donation of $185.
* A charity's fundraising week includes a dance, sporting event, and banquet. Tickets for each of the separate events equal $100 per couple. If there is no established charge for the event, a taxpayer can use a reasonable value for the FMV of the event ticket purchased and can consider the excess a contribution. If an FMV value is declared by the charity, then only the excess amount may be a donation, even if the tickets are not used.
Special rides for athletic events and club membership dues or fees. If any part of a payment to or for the benefit of a college or university gives a taxpayer the right to purchase tickets to an athletic event in the athletic stadium of the institution, then only 80% of the payment is deductible as a charitable contribution (e.g., a payment for membership in an athletic scholarship program maintained by a qualified charitable university that provides the benefit of allowing the taxpayer to buy a season ticket to home football games). In this case, the taxpayer may deduct membership dues and fees paid to a qualified organization that exceed the value of any benefits received from the membership.
Certain qualified charity membership benefits are disregarded if received for an annual payment of $75 or less (e.g., free or discounted parking and admission to the organization's facilities or events, excluding athletic events; discounts on the purchase of or preferred access to goods and services). Dues, fees, or assessments paid to nonqualified organizations--such as country clubs--are not deductible.
Volunteering of services and out-of-pocket expenses. The value of one's time or services contributed to a charitable organization is never a deductible contribution; however, most unreimbursed expenses directly connected to the provision of services ( excluding personal, living, or family expenses) may be fully or partially deductible. Typical out-of-pocket expenses are listed in Exhibit 1.
EXHIBIT 1 Deductible (Unreimbursed) Out-of-Pocket Expenses Expenses Limitation Local travel expenses to and Rail and bus fares, actual gas and from a volunteer location or oil costs or 14 cents per mile while providing a volunteer (current rate), plus parking fees service and tolls Travel expenses while away from Duties must be substantial and home overnight in order to genuine throughout a significant perform services for a part of the trip charitable organization (including the costs of out-of-pocket personal car expenses, plus auto, air, rail, bus transportation, and taxi fares from the airport or station to lodging; lodging costs and meals are also included) Covering attendance costs to Provided only to youths selected by athletic events, movies, or a charity whose goal is to reduce dinners for underprivileged juvenile delinquency youths Serving as a chosen Travel and reasonable amounts for representative to attend a meals and lodging convention of a qualified charitable organization Purchasing uniforms not Volunteers are required to wear the suitable for everyday use uniform Serving in a permanent Cost of vestments, books, and diaconate program established transportation required while a by the taxpayer's church deacon candidate or an ordained deacon
Basic rules for noncash contributions. Generally, the FMV at the time of the donation of any noncash contribution sets the amount of the charitable contribution; however, numerous special rules apply when establishing the FMV and documenting the gifting of noncash property. Though these donation types are listed below with reference to related considerations, a further discussion on related issues and potentially required qualified appraisals is beyond the scope of this article. The following are examples of noncash contributions:
* Clothing and household items--must be in good condition or better if used, unless a taxpayer can deduct more than $500 for an item and include a qualified appraisal with the tax return; household items do not include food, paintings, antiques, other art objects, jewelry, gems, or established collections
* Qualified vehicle--an auto or any motor vehicle manufactured mainly for use on public streets, roads, and highways; a boat; or an airplane
* Taxidermy properly--does not include the direct or indirect costs for hunting or killing an animal
* Property subject to debt--FMV must be reduced by related interests
* Partial, fractional, and future interest in tangible personal property--generally not deductible, but limited exceptions exist.
Stringent Documentation Rules
A lack of substantiation instigated full or partial donation disallowances in many unfavorable audit cases. The required records depend upon 1) the amounts of the donations and 2) whether the contributions are cash, noncash, or out-of-pocket expenses. (See IRC section 170[f][A]; Treasury Regulations sections 1.170A-13[a] and 1.170A-13[f] and .)
Cash contributions. Cash contributions may be made in the form of cash, check, electronic funds transfer, debit card, credit card, or payroll deduction. A cash contribution is not deductible unless the taxpayer retains one of the following forms of documentation:
* A bank or credit card company record of the transaction, such as a cancelled check or a statement that shows the name of the organization, date of the contribution, and the amount
* A written communication from the organization showing the same information as above
* A payroll deduction record such as a pay stub or pledge card prepared by the charitable organization.
Typically, an organization must give a taxpayer a written statement if it receives a payment of more than $75 and the payment is partly for a contribution and partly for goods and services (such as for a charity ball ticket). If a single contribution is $250 or more, the taxpayer must have an acknowledgement from the charity that includes specific information required by the WS. If the taxpayer makes more than one contribution of $250 or more to a charity, then the taxpayer must have either a separate acknowledgement for each, or one acknowledgement that lists each contribution and date, as well as the total contributions. (If the contribution date is omitted on the acknowledgement, the taxpayer may use a bank record or receipt to establish the date.) The taxpayer must have the acknowledgement in hand on or before the earlier of--
* the date that the tax return is filed, or
* the due date, including extensions, for filing the tax return.
If a contribution is made by payroll deduction, the deduction from each paycheck is treated as a separate contribution. If a single payroll deduction amount is $250 or more, the taxpayer must keep both the pay stub and the pledge card or other document prepared by or for the charity; this document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. At least one of these documentation forms must show the date of the contribution.
Noncash contributions. If a single contribution (a deduction) to a charity is less than $250, the taxpayer must keep a receipt or some other form of written communication from the charitable organization that shows the name of the charity, the date and location of the contribution, and a reasonably detailed description of the item donated. If it is impractical to obtain a receipt directly from the charity, however, then it is not required (e.g., for donations left at an unattended drop-off location). In addition, the taxpayer must also keep reliable written records for each item donated. This record must include the name and address of the organization; the date and location of the contribution; a detailed description of the property, the FMV of the property at the time of the contribution, and how the FMV was determined; records supporting any required reduction in FMV due to appreciation; and, if applicable, all carryover calculations. If any terms or conditions are attached to the gift, these must also be stated in the taxpayer's records. The following rules apply:
* If a single contribution is at least $250, but not more than $500, a taxpayer must retain an acknowledgement from the organization. If one or more contributions in this value range are given to the same organization, then a separate acknowledgement for each gift or one overall acknowledgement for the total contributions is acceptable. (Detailed acknowledgement information provided from the organization is required, as noted previously.)
* For single contributions that are more than $500 but less than or equal to $5,000, a taxpayer must retain an acknowledgement from the organization, plus a written record of how and when the property was obtained and the basis or adjusted basis of the item.
* A noncash contribution exceeding $5,000 requires the same records as above and, generally, a written appraisal of the donated property from a qualified appraiser. The IRS provides additional details on the reporting of these items in Publication 561, Determining the Value of Donated Property (April 2007).
These recordkeeping rules are very important; if they are not followed, taxpayers can lose their charitable contribution deduction. Advisors and taxpayers should review recent court rulings that involve documentation situations that are potentially common to countless taxpayers who itemize their charitable giving each year. The following three cases are typical of the numerous cases available for public review.
* Henricus C. van der Lee v. Comm 'r. In this case, a married taxpayer provided pro bono consulting services to and served as a board member for several nonprofit organizations. On behalf of these organizations, she maintained a home office and related office expenses, and she traveled extensively to national conferences, quarterly meetings, and countless fundraising events. She did not seek reimbursement for her expenses from the organizations. In addition, the couple donated use of their time-share as an auction item at a fundraising gala. Finally, the taxpayers remodeled their kitchen and donated their used granite countertops, appliances, cabinets, faucets, and similar items to an IRC section 501(c)(3) organization. The court ruled that the first deduction was disallowed: although the spouse's expenditures were directly connected with her charitable services, she failed to satisfy the substantiation requirements. Despite the evidence of credit card statements, there was no trip log, no records to support deductions over $250 (which require extensive recordkeeping per Treasury Regulations section 1.170-A13[a] and [b]), and no written acknowledgement from the nonprofit organization describing her services (as required under 1RC section 170[f][A]). Her second deduction was also disallowed, under IRC section 170(f)(3)(A), because use of the time-share was deemed a gift of a partial interest in property not in a trust (no exceptions qualified in this case); therefore, the donation did not qualify as a charitable contribution. Moreover, the court ruled that a majority of the taxpayers' third deduction was disallowed because the taxpayers did not meet substantiation requirements; the main issue concerned an untimely qualified appraisal and a failure to present written acknowledgements from the charity. (A qualified appraisal must be performed no earlier than 60 days before the date of the contribution and no later than the due date of the return.)
* Jan E. Van Dusen v. Comm'r (136 TC 515 ). In this case, a taxpayer incurred unreimbursed expenses in connection with animal fostering for a qualified nonprofit organization. The taxpayer provided check copies, bank account statements, and credit card statements for related expenses, but failed to obtain contemporaneous written acknowledgements for donation amounts of $250 or more. The court ruled that a portion of the taxpayer's unreimbursed expenses was disallowed as not being directly connected with and solely attributable to her services of fostering. All remaining related expenses under the $250 limit were allowed because documentation rules were met; however, expenses of or exceeding the $250 limitation were not allowed (under Treasury Regulations section 1.170A-13[f]).
* Ramona L. Mitchell v. Comm'r (138 TC 16 ). In this case, a taxpayer donated conservation easement across seller-financed unimproved land to a qualified charitable organizations, but did not complete the process necessary to legally protect it for exclusive conservation purposes in perpetuity until after the donation took place. The court ruled that although the mortgagee's deed of trust was eventually altered to subordinate to the conservation easement deed, this did not take place until after the time of the donation. Therefore, the court denied charitable contribution deduction for the gift (under IRC section 170[h][A] and Treasury Regulations section 1.170A-14[g]).
Considerations and Concerns
Due to the various substantiation requirements, financial planners should ask clients for all the details of their charitable giving, not just the total dollar amounts. Overall, taxpayers must retain extensive documentation to support all tax-deductible donations. By relaying these rules to clients, CPAs can help protect their charitable deductions under an IRS audit. The final component of concern involves making sure that a taxpayer's gift reaches a qualified charitable organization. "Exempt Organizations Select Check" is an online IRS search tool that has replaced. Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code. As of February 2012, this online data bank--which lists more than 26,000 charitable organizations--will be updated monthly, according to the IRS. As in the former IRS publication, churches, governmental units, and a few other entities are not included in this listing, and taxpayers might need guidance from their financial advisors in order to determine the deductibility of contributions to these groups. Contributions to organizations that are not qualified to receive tax-deductible contributions are numerous; some of these are listed in Exhibit 2.
Examples of Nondeductible Contributions
* Gifts to a specific needy or worthy individual or family
* Part of a contribution from which the taxpayer will receive or expect to receive a benefit
* Adoption fees; appraisal fees; dues to fraternal orders or similar groups; costs to buy raffle, bingo, or lottery tickets; or costs to play bingo or other games of chance
* Contributions to fraternal societies for the purposes of paying medical or burial expenses of deceased members a Payments to the clergy for personal use or expenses
* Expenses paid for another person who provided services to a qualified organization
* Contributions to chambers of commerce, civic leagues, communist organizations, country clubs and other social clubs, business leagues, and certain bar associations
* Amounts given to homeowner's associations, political organizations, political candidates, and labor unions
* Certain contributions to donor advised funds or partial interest in property (see IRS Publication 526, Charitable Contributions, for general details)
Furthermore, unless Congress acts to repeal the controversial Pease limitation, high-income taxpayers face the return of the partial phaseout of many key itemized deductions for 2013. As in tax years prior to 2010, this limited reduction of certain Schedule A items includes charitable contributions. Financial advisors should remain aware of these developments in order to best advise taxpayers.
Linda Campbell, PhD, CPA, is an assistant professor of accounting in the McCoy College of Business Administration, Texas State University, San Marcos, Tex,
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|Title Annotation:||personal financial planning|
|Publication:||The CPA Journal|
|Date:||Sep 1, 2012|
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