New Charitable Contribution Deduction Regulations: The Devil Is in the Details

New Charitable Contribution Deduction Regulations: The Devil Is in the Details

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The IRS published final regulations that are effective July 31, 2018 concerning documentation requirements for charitable contributions. These regulations underscore the rigorous documentation requirements individuals must follow to successfully claim deductions for cash and noncash charitable contributions.

Volunteers sort donations

Since 1993, the law (Section 170(f)(8)) requires that “contemporaneous written acknowledgment” exists for any contribution of $250 or more, which must include:

  1. The amount of cash and a description (but not value) of any property other than cash contributed;
  2. A statement of whether the donee organization provided any goods or services in consideration, in whole or in part, for any such cash or property; and
  3. A description and good faith estimate of the value of any such goods or services or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.

These requirements are not new, but the new regulations emphasize the government’s long-standing form-over-substance stance to substantiate a charitable contribution deduction.

So What’s New?

The new final regulations state that a blank pledge card provided by the donee organization is not adequate substantiation. Specifically, Section 170(f)(17) requires a taxpayer to maintain as a record of a contribution of a cash, check, or other monetary gift either a bank record or a written communication from the donee that shows the name of the donee organization, the date of the contribution, and the amount of the contribution. The proposed and final regulations (Regulation Section 1.170A-15(b)(2)) provide that a bank record includes a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement.

In addition, the final regulations state that a written communication includes an email. However, a blank pledge card provided by a donee organization to a donor does not show the required information, and as such, it is not sufficient substantiation for a cash, check, or other monetary gift. This same principle was clarified in a recent tax court decision involving a donation of noncash property.

Mr. Smith Goes to Tax Court

The portion of the new regulations pertaining to a blank pledge card are illustrated in the recent case of Smith v. Commissioner, TC Memo. 2014-203). Mr. Smith (“Smith”) donated clothing, furniture, and old electronic equipment to a qualified charitable organization, the American Veterans National Service Foundation (AMVETS).

Just like many charities (e.g., the Salvation Army, Purple Heart, etc.), AMVETS provided a mostly blank receipt to Smith. Because the claimed deduction on his 2009 return for those items totaled $27,767, the Tax Court (“Court”) addressed the requirements for:

  • Cash and noncash contributions of $250 or more
  • Noncash contributions exceeding $500
  • Noncash contributions exceeding $5,000

Cash and Noncash Contributions of $250 or More

The required substantiation from the donee must contain a description of any property the taxpayer transferred to the donee, and the substantiation is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of:

  • The date the taxpayer files a return for the year of contribution; or
  • The due date, including extensions, for filing that return.

AMVETS gave otherwise blank, pre-signed receipts to Smith, who later filled them out by inserting supposed donation values. Because the forms were signed before the property was allegedly donated, the Court questioned whether that constituted an acknowledgment that the charity received anything.

Although Smith created a spreadsheet listing the property that he claimed was contributed, the AMVETS tax receipts did not contain a description of any property contributed (because they were blank). That led the Court to question whether the spreadsheet was ever provided or seen by AMVETS.

Noncash Contributions Exceeding $500

Although the value of Smith’s claimed contributions, when aggregated, exceeded this values applicable to this rule, for the sake of completeness, the Court addressed the substantiation requirements of noncash contributions of $500 up to $5,000. Requirements for this tier provides that taxpayers must obtain all of the substantiation specified at the previous tier, and must also maintain reliable written records with respect to each item of donated property (Regulation Sections 1.170A-13(b)(2) and (3); see Gaerttner v. Commissioner, TC Memo. 2012-43). These records must include at a minimum:

  1. The approximate date the property was acquired and the manner of its acquisition;
  2. A description of the property in detail reasonable under the circumstances;
  3. The cost or other basis of the property;
  4. The fair market value of the property at the time it was contributed; and
  5. The method used in determining its fair market value.

The taxpayer must also include “a description of such property and such other information as the Secretary may require” in his tax return.

Smith allegedly made noncash contributions to AMVETS of clothing, furniture, and electronic equipment, and for each category of items he claimed a value exceeding $500. But he did not maintain written records establishing when or how these items were acquired, or the cost basis of the items.

Smith also did not maintain written records establishing the items' fair market value at the time they were donated. He testified that he determined these values using a guide from a Salvation Army website, but the values he used were considerably higher than the “high” values the guide displays. He did not maintain photographs or other records to establish the condition of the donated items, and thus did not provide a reason to believe that each donated item should be accorded a “high” rather than a “low” value.

For all of these reasons, the Court said that the substantiation requirements for donations of property valued in excess of $500 were not satisfied.

Noncash Contributions Exceeding $5,000 but Less Than $500,000

For contributions of property (other than publicly traded securities) or similar items of property valued in excess of $5,000 but less than $500,000, the taxpayer must generally satisfy all of the substantiation requirements for property with values in excess of $500,  and in addition:

  1. Obtain a “qualified appraisal” of the items; and
  2. Attach to her/his tax return (and for all carryover years’ returns) a fully completed appraisal
  3. summary.

Under the regulations, “[T]he term qualified appraiser means an individual with verifiable education and experience in valuing the relevant type of property for which the appraisal is performed,” has not been barred from practicing before the IRS, and otherwise meets the requirements of Reg. Section 1.170A-17(b). The education and experience requirement is met if the appraiser successfully completes (with a passing grade, for example) professional or college-level coursework in valuing the relevant type of property, and has two or more years of experience in valuing the relevant type of property; alternatively, the appraiser meets the requirement by earning a recognized appraisal designation for the relevant type of property.

For each qualified appraisal, the qualified appraiser is required by Reg. Section 1.170A-16 to sign under oath a declaration that includes specific language, in order to ensure that he or she understands what his or her appraisal is being used for and that he or she can be subject to penalties separate from the taxpayer.

Although Smith’s spreadsheets show no items with values in excess of $5,000, he failed to aggregate his contributions:

Petitioner contends that he donated property to AMVETS on August 30, 2009, with a claimed value of $27,767. Because the value of the claimed contribution exceeds $500, we must aggregate “similar items of property” to determine what substantiation was required. Petitioner's self-created spreadsheet shows three categories of similar items: clothing with an alleged value of $14,487; household furniture with an alleged value of $11,730; and electronic equipment with an alleged value of $1,550. For all three categories of items, petitioner must meet the substantiation requirements imposed by section 170(f)(8) and (11)(B). For the first two categories of items, petitioner must also meet the stricter substantiation requirements imposed by section 170(f)(11)(C).

Since Smith did not obtain a qualified appraisal for any of the items and did not attach a fully completed appraisal summary to his 2009 tax return, he failed to satisfy the substantiation requirements for his claimed contributions.

For documentation of noncash contributions in excess of $500,000, the entire qualified appraisal must be attached to the return.

Donee Organizations Should Up Their Game

The new regulations should get the attention of donee organizations who have a vested interest in helping donors achieve their income tax deduction goals. The reality is that many of these organizations cannot exist without ongoing donations from the public.

Organizations such as AMVETS are wise to educate donors by providing written guidance and changing their processes to ensure that donor tax deductions will be allowed.

While it is common for an organization to disclaim responsibility for the value of noncash property the donor claims, the new regulations should cause organizations to increase their level of accountability.

For questions regarding you charitable contributions and how to make sure you are using the best substantiation, contact your CBIZ MHM tax professional.

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New Charitable Contribution Deduction Regulations: The Devil Is in the DetailsNew regulations and a recent lawsuit emphasize the government's long-standing form-over-substance stance when it comes to substantiating a charitable contribution deduction....2018-08-07T16:11:03-05:00

New regulations and a recent lawsuit emphasize the government's long-standing form-over-substance stance when it comes to substantiating a charitable contribution deduction.