Monday, October 30, 2017

Charitable Contributions - A Primer in Preparation for Year End

Often when I present tax updates to nonprofit organizations and churches, a section on charitable contributions is included.  These sections discuss unfortunate taxpayers who lost their way in accomplishing a successful tax deduction for their charitable contributions.    These cases illustrate the importance for the recipient of charitable contributions to be knowledgeable in the contribution receipting rules.  Many disallowed contributions result from a donor's failure to obtain the proper "contemporaneous written acknowledgement", better known as the contribution receipt, from the charity.  

There are only two months left in 2017 and the end of the year is a time of increased giving.  Since churches and other charities desire happy donors, it is a fitting time to review the basics of contribution receipting rules to prepare for the increased giving and issuing of annual donation receipts at the end of the year. 

Virtually every core contribution rule can be reviewed through a review of Embroidery Express, LLC v. Commissioner, TC Memo 2016-136.  The taxpayers were audited for 2004, 2005, 2006 and 2007 and ran afoul of the receipting rules in every way possible.  The following is a discussion of the lessons learned from Embroidery Express and owners, Mr. & Mrs. Brent McMinn.

Lesson 1:  To be tax deductible, the donation must involve a valid exempt organization. 

The McMinns demonstrate this lesson in two separate scenarios.

  • Foreign Organizations - In 2004, the McMinns donated $2,600 to Kayit's Children's Home.  The Home is based in Mexico and is not organized as a charity in the United States.  Donations to foreign organizations are not deductible by U.S. taxpayers (certain exceptions exist for Canadian charities). This rule may also apply when donations made to U.S. charities are  specifically earmarked for a foreign organization.  The contribution may not be deductible unless the U.S. charity takes and maintains control over the funds.  
  • Unregistered U.S. Charities - Throughout the audit years, the McMinns donated more than $11,000 to R.L. Montgomery Ministries.  While Montgomery Ministries is based in the United States, it never registered as a tax-exempt entity or received recognition as a 501(c)(3) organization by IRS.  Churches do not have to have status as 501(c)(3) organizations confirmed by the IRS, but all other charities, with gross receipts or more than $5,000, must receive IRS recognition.  Donors may look for confirmation of an organization's status online through the IRS Select Check program ( ).

Lesson 2:  No contemporaneous written acknowledgement - no deduction for donations of $250 or more.

For all donations of $250 or more, the law requires the contribution to be substantiated with a contemporaneous written acknowledgement, otherwise referred to a qualifying donation receipt.  The receipt must include a) the amount of cash and a description (but not value) of any property other than cash contributed; b) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in the receipt and c) a description and good faith estimate of the value of any goods or services provided in exchange for the donation.  A receipt is "contemporaneous" if obtained by the earlier of the final due date of the taxpayer's return or the date the taxpayer's return is filed.

The McMinns failed to obtain contemporaneous written acknowledgments for various cash donations and the court disallowed each contribution of $250.

Lesson 3: Noncash donations need a qualifying receipt adequately describing the donated property to be deductible.

The McMinns encountered a road block encountered by many donors.  The McMinns contributed office furniture and equipment to their church and claimed a donation for $6,950.  They obtained contemporaneous written acknowledgment from the church with a generic description of the property on the receipt.  Treasury Reg. 1.170A-13(b)(1)(iii) states that the receipt must contain a "description of the property in detail reasonably sufficient under the circumstances."  Without adequate description, it is not possible to determine if the value attributable to the item by the taxpayers is reasonable.  The McMinns lost the contribution deduction due to the vague description of the property in an otherwise qualifying receipt.  

The McMinns are not alone in this trap.  Over the past few years, the courts have consistently held the receipt must contain an adequate description of the property given to secure the tax deduction.  In Ohde v. Commissioner, T.C. Memo 2017-137, the taxpayers lost contributions of $145,250 to Goodwill for similar reasons.  The Ohde's maintained an extensive list of donated items, but the court was not persuaded, since there was no evidence Goodwill had ever seen the listing.  In Thad D. Smith v. Commissioner, T.C. Memo 2014-203, the taxpayer lost more than $27,000 in contributions because the receipts issued by AMVETS were pre-signed and contained no descriptions of the donated items.  

Lesson 4:  Noncash contributions of $5,000 or more of a single item or similar items require an appraisal issued by a qualified appraiser and an acknowledgement by the charity.

The McMinns entered into a bargain sale of a 2002 Chevy Suburban to their church and claimed a contribution of more than $15,000 for the donation portion of the transaction.  Noncash donations of $5,000 or more require an appraisal to support the value of the donation and the McMinns failed to obtain the appraisal.  Information from Kelly Blue Book was deemed insufficient to meet the appraisal qualification.  

The appraisal requirement is applicable when one or more items, similar in nature, are donated for a total value of more than $5,000.  For example, a collection of books valued at $10,000 requires an appraisal even if each book donated is valued at less than $5,000.  The qualifications for the appraiser and the appraisal are stringent.  

Special Note:  The McMinns case predates Form 1098-C requirements.  Today, the recipient organization must issue Form 1098-C to the donor besides other potential documentation requirements.  The donor is must attach the Form 1098-C to his tax return to claim the donation.  A lesson learned by Mr. Izen, Jr., when his contribution of an airplane, valued at $338,000, to a museum was disallowed.  The recipient organization failed to issue Form 1098-C and the related documents did not contain sufficient information to meet all the requirements of a contemporaneous written acknowledgment.  [Izen, R. v. Commissioner, 148 T.C. No 5 (2017].  (It also should be noted that the recipient organization can be assessed a penalty for failing to issue Form 1098-C.)

Lesson 5:  Out of pocket volunteer expenses may require a contemporaneous written acknowledgment that describes the volunteer services provided by the donor. 

During 2006, the McMinns traveled to Jamaica as a part of their church's mission trip spending $3,013 for unreimbursed travel expenses.  Out of pocket volunteer expenses incurred on behalf of a charity may be deductible contributions. [Treas.Reg. Sec. 1.170A-1(g)] However, as with other contributions, where the expenses exceed $250, a contemporaneous written acknowledgement is required.  The acknowledgment need not include the actual amount of the unreimbursed volunteer expenses, but it should describe the volunteer services provided to the charity.  The McMinns did not receive the required acknowledgment from their church, so the deduction was disallowed. 

Take Aways from the McMinns

Only in certain instances must churches and other charities issue a contribution receipt or face a penalty.  These instances include complying with Form 1098-C requirements and for contributions of more than $75 where goods or services are provided in exchange for the contribution.  

Generally, it is the donor's responsibility to obtain contemporaneous written acknowledgements sufficient to support contribution deductions.  However, donors rely on recipient organizations to be knowledgeable of the rules and assist them in obtaining sufficient documentation for contribution deductions.  Churches and other charities should:
  • be aware of and understand the rules applicable to donors;
  • review receipting practices and determine if they include the following:
    • receipts containing name, address and details of donations are issued for both cash and noncash donations of $250 or more;
    • receipts contain either a description of the goods or services provided in exchange for a donation or the statement "there were no goods or services provided in exchange for the donations" (religious organizations should include "other than intangible religious benefits" with this statement.);
    • receipts for volunteer services, especially those including travel, are issued to participants detailing the services provided to the organization; 
    • donations of any mode of transportation; i.e., auto, plane, boat, motorcycle, etc. are reported on Form 1098-C; and 
    • receipts for noncash contributions contain an adequate description of the property donated including the condition of the property (value of property not required or suggested.)
Due to the strict nature of the timing for "contemporaneous" receipts, a donor may not be provided a new receipt or a corrected receipt in the event of an IRS exam.  If a donor doesn't have required substantiation at the time the tax return is filed, there is no provision for correction in the future.  Time taken now to review organizational receipting practices may be the difference between a donor's success or failure in claiming a tax deduction for charitable contributions.