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 ( https://apps.irs.gov/app/eos/ ).

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.

Noncash Charitable Contributions - Not Just An Easy Deduction

(Note:  While the following post is focused on individuals more than charities, charities can learn from the woes of donors and make changes in practices and procedures to assist their donors in claiming noncash charitable contributions.)

We have all done it in the past - gathered up the old clothes and unused household items and delivered them to the charity of our choice.  If we are lucky, the charity's attendant hands us a "receipt" (I use this term loosely) for our donation.  We fill in the receipt as best we can and then add them to our tax information.  At tax time, we take them out and use them to determine our deduction for our noncash contributions (or worse hand them over to our tax preparer uncompleted, believing they have some intrinsic gift to know what was given and how much it was worth.)

Meet Mr. & Mrs. Kunkel (T.C. Memo 2015-71).  The Kunkels followed the above scenario to the amount of more than $37,000 of items donated to various charities.  The IRS audited the Kunkels and found that the substantiation for the noncash donations failed to meet the requirement of Internal Revenue Code Section 170 and disallowed the deductions.  The Kunkels took this position to court in hopes of achieving a more lenient decision from a judge.  The court was just as stringent as the IRS and also disallowed the deductions based on the following:

• The Kunkels did not have any "contemporaneous written acknowledgements" from any of the charities;
• In instances where a charity had picked up the donation from the Kunkels home and left the obligatory "thank you" receipt, the receipt was insufficient to justify a donation since it failed to contain any of the required information;
• The Kunkels did not maintain a written record detailing each item that was donated, how it was acquired and it original price;
• The Kunkels did not maintain any information on how the fair market value of the items was determined; and 
• The Kunkels did not present any credible evidence that the items donated were "in good used condition or better."
  

There are several interesting lessons to be learned from this case:

• The IRS may aggregate all the items donated into categories to determine if the requirement for an appraisal (value at more than $5,000) is met.  For example, out of all the donations, the Kunkels estimated that the clothing given away was valued at $8,000.  This was spread out among various charities, but the IRS aggregated the values and stated that an appraisal was required to claim the donation.  Other groups of items, i.e., household items or toys, were aggregated to determine if the additional substantiation requirements for donations of $500 or more were met.  This level of documentation requires the donor to keep records to describe and list each of the items donated, its original price when it was acquired and what condition it is in in addition to the date donated and the value at the time of donation.
• Receipts, such as door hangers and blank receipts, often used by charities, do not meet the substantiation tests, since they are not donor specific, do not contain a description of the items donated and generally may not even be dated. 
• Failure to claim deductions without the required substantiation may be considered as negligence and subject a donor to a 20% accuracy related penalty in addition to any additional taxes that are due.

Donors who desire a tax deduction for noncash contributions, including clothing and household items, should take great care to have records that contain all the required substantiation for the donation.  Charities, including churches, should become aware of the substantiation requirements, so they can assist donors by issuing receipts including all the required information.

A charities receipt should include:

• The date the donation was received by the charity; 
• The name and address of the donor;
• A complete description of the items donated;
• A general statement as to the condition of the items donated; and 
• The "no goods or services" statement, as generally required for cash contributions. 

In addition to obtaining a qualifying receipt, donors must also be able to:

• Maintain records establishing when or how the donated items were acquired and what the donor's cost basis is in the items;
• Maintain records on how the fair market value of the items were determined by the donor;
• Confirm that a receipt is always obtained and confirm that it is sufficient to meet the "contemporaneous written acknowledgment" when the aggregate of items donated is more than $250;
• Understand when and how the appraisal requirements are applied with donations, either for an individual item or the aggregate of similar items, exceeding $5,000. 

There have been other cases of similar nature decided in the last few years.  The IRS is taking a strong stance on the substantiation of both cash and noncash charitable contributions and the courts are consistently siding with the IRS.  Both donors and charities need to be familiar with all of the requirements for substantiating charitable contributions.  Additional information on substantiation requirements can be found in IRS Publications 526, Charitable Contributions and 561, Determining the Value of Donated Property at www.irs.gov.

  

IRS Backs Off on Proposed Charitable Substantiation Procedures

The IRS continues to struggle with donors substantiating charitable contributions in the midst of advanced computer skills and capabilities or simply failures of donors to know, understand and adhere to the substantiation rules.  Contributions of $250 or more are required to be substantiated with a contemporaneous written acknowledgment that includes:

• The amount of the cash donated or a description of the property donated (no value is required);
• whether the donee provided any goods or services in consideration for the contribution, and if it did, a description and good faith estimate of the value of the goods or services provided; and 
• if the goods or services consisted entirely of religious benefits, a statement to that effect.

Charities have struggled to implement the substantiation rules and include all the pertinent information.  Donors have struggled in understanding what is required substantiation and when they have to have substantiation, i.e., prior to the filing of a timely filed return.  The IRS has struggled with the ability of taxpayers to provide fraudulent receipts due to the wonders of electronic capabilities.  In an effort to provide for an avenue to resolve all of the failures, errors and frustrations, the IRS issued proposed regulations in September 2015 providing for the creation of a new IRS filing.  The filing would allow charities to report donors and related donations to the IRS in a manner similar to the current Form 1098-C used for reporting the donation of transportation equipment.  The filing would require the charity to report the donor's name, address and social security number as well as the amount of the donations.  The proposed filing was strictly optional, not mandatory.

  The IRS requested comments on the proposed regulations and received an overwhelming response.  Despite proposing an optional filing, many charities believed that the regulations were suggesting a mandatory filing requirement with the IRS.  Charities often strive to protect the identities of their donors and were concerned the proposed filing would unnecessarily provide their entire donor list to the IRS.  Additionally, there were concerns that charities choosing to utilize the filing option would not be able to provide adequate security over the social security numbers of the donors giving rise to concerns of potential identity theft.

Amidst the hue and outcry against the proposed regulations, the IRS attempted to placate the charity world by emphasizing the "optional" in the new regulations in a rare email communication issued early in December 20125.  However, concern over the proposed filing continued and in an action published January 8, 2016, the IRS has withdrawn the proposed regulations that would institute the new filing mechanism.

In the midst of all the discussion created by the IRS proposal, it is a great time to review the substantiation requirements and double check contribution receipts before they are issued this month.  Charities continue to struggle with the substantiation requirements resulting in donors forfeiting the right to deduct charitable contributions.  While the real burden to obtain adequate substantiation for one's charitable contributions lies with the donors, donors rely on charities to issue receipts that comply with the rules.

To assist donors, in the event of an IRS examination, contribution receipts reporting donations of $250 or more should include the following:

• The name and address of the charity (including a logo or other unique identifier is not required but beneficial);
• The date the receipt is issued (this is not required but is a prudent practice to assist donors in proving the receipt was timely provided to them);
• The name and address of the donor;
• A listing of the dates and the donation amounts (receipts for noncash donations would only list the date and a description of the item(s) donated);
• In the event the donor is provided a product or service in exchange for the donation, the value of the product or service should be indicated; and 
• Statement that there were no goods or service given in exchange for the contributions other than intangible religious benefits (if the charity is a religious organization).  (If goods or services have been given in exchange, this statement may be modified to indicate that the value has already been noted in the receipt.)

Donors should also be aware there is no mandatory deadline for when a charity has to issue contribution receipts.  Many charities and donors mistakenly believe contribution receipts have to be issued by January 31st each year.  While this may be a prudent business practice, it is not a legal requirement.  The donor is legally required to have the receipt in his/her possession either by April 15th or, if later, the filing date of his/her timely filed tax return.  

In summary, charities do not have to worry about a new filing requirement with the IRS, but they do have to worry about keeping their donors happy.  Reviewing contribution receipts for the above factors will make sure charities assists their donors in meeting all of their legal requirements in claiming charitable contributions. 

Lack of Required Statement Kills Charitable Contribution

Friedman, TC Memo 2010-45
In a recent Tax Court decision, a taxpayer forfeited his charitable contribution for several reasons but one of the reasons was due to an insufficient charitable contribution receipt. The receipt issued to the taxpayer failed to contain the statement that there were no goods or services provided to the donor in exchange for the contribution.

Background
In 1995 Congress enacted IRC Section 170(f)(8)requiring a donor to obtain a qualifying charitable contribution receipt to claim a deduction for a contribution of $250 or more. A qualifying receipt must meet the following criteria:

1. The receipt must contain the amount of cash or a description of the property contributed.
2. The receipt must state whether or not the donee organization provided any goods or services in consideration, in whole or in part, for the contribution.
3. The receipt must contain a description and a good faith estimate of the value of any goods or services referred to in (2) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
4. The receipt must be addressed to the donor and obtained by the donor by the earlier of the date the donor files his tax return or the due date of the return (including extensions).

Additionally, legislation in 2006 added to the above requirements the need for the receipt to reflect the dates of the donations as well as the individual amounts of the donations.

Implementation
Despite the fact that these changes in the law originated in 1995, an amazing number of charitable organizations still do not issue receipts with the wording required to make the receipt a qualifying receipt. Granted the law is not on the organization, but rather it is on the donor to have a qualifying receipt in order to claim a donation. However, donors believe that the receipts received from charitable and religious organizations will be qualifying receipts. Many discover in the course of an IRS exam that the receipt received from an organization is not qualifying and lose the corresponding deduction. There is nothing at this point that can be done for a donor. The donation is lost and the receipt cannot be corrected. At this point, an organization may lose a valuable relationship.

Despite being the law for 15 years, many organizations, including many religious organizations, are issuing receipts to their donors that are insufficient to claim a donation. Each year as my firm prepares tax returns for individuals, we see receipts that are insufficient to claim a donation and must be reissued prior to the completion of the return. Additionally, I have received calls from distraught church finance and business administrators wanting to know how to provide assistance to the member who has lost the deduction due to an insufficient receipt.

In order to make sure that an organization is not the one in the hot seat dealing with a distraught and angry donor, it should review all the contribution receipts for your organization and make sure the following wording appears on the receipt.

There were no goods or services given in exchange for the above contributions other than intangible religious benefits.

In the event the receipt does include the fair market value of the goods or services received, the the organization may include this statement:

There were no goods or services given in exchange for the above contributions other than intangible religious benefits and those goods or services so indicated on this receipt.

Haiti Earthquake Relief Contributions Deductible in 2009

On January 22nd, President Obama signed into law H.R. 4462, which allows taxpayers to claim a charitable contribution on their 2009 tax return for cash contributions given through March 1, 2010, dedicated to Haiti earthquake relief. The law does not extend to the donation of noncash items dedicated to relief efforts. The contributions may be deductible either on the 2009 tax return or on the taxpayer's 2010 tax return.

This new law will require charitable organizations to clearly indicate on donor receipts the contributions received for Haiti relief efforts. Additionally, the contributions for Haiti relief efforts will need to be separately stated on any cumulative or year end receipts issued at the close of 2010.

As a reminder, all contributions of $250 or more are required to be documented with a qualifying receipt including the following:

• the date the receipt is issued
• the name and address of the donor
• a listing of the charitable contributions
• a statement indicating that no goods or services were given in exchange for the contribuitons