(a) Contribution Defined

In a deceptively simple fashion, §170(a) states that an income tax deduction is allowed for charitable contribution, which §170(c) says is a contribution or gift to or for the use of qualified charitable organizations.⁹ Neither the code nor the regulations define the word contribution. The commonly used definition of “contribution” is a voluntary transfer without consideration. In other words, only a gift for which nothing is received in return is fully deductible. The intention to give with no expectation of financial benefit must be present for a donation to occur.¹⁰ In the Supreme Court's words, “the gift must proceed from detached and disinterested generosity.”¹¹ The IRS later said this requirement is too broad and practically impossible, though it can be a reasonable distinction.¹²

When a donor receives services, goods, or other property of value, a rebuttable presumption exists that there is no gift.¹³ Therefore, all the moneys paid for attendance at dinners, balls, theatrical performances, and other fund-raising events are presumed to be payments for value received and not deductible. To overcome the presumption, the donor must prove that the fair market value (FMV) of the benefits, entertainment, or other items furnished is less than the amount paid. Since 1994, charitable organizations have been required to provide valuation information.¹⁴

The requirement that the payment to a charity be disclosed for deductibility caused many charities to reexamine donor-designated payments. Amounts paid directly to an individual are, of course, not deductible. What about amounts paid to support a program conducted by an individual? The Tax Court found that the naming of two missionaries, unrelated to a decedent, as the beneficiaries of a charitable trust did not defeat the charitable nature of the bequest.¹⁵ The judge thought that the church had sufficient control and enforceable rights over the bequest to ensure that the funds would be used for charitable purposes as required by the statute. Following this logic, a donation to a scholarship fund accompanied by a suggestion that tuition be awarded to a specific person could conceivably be deductible, although the IRS may likely disagree.¹⁶

The IRS also says if a person related to the donor is suggested to the recipient organization, specifically in one case a theological seminarian, there is no gift.¹⁷ Such a gift is not made “to” a charity if the charity merely acts as a conduit to a particular person. The test of deductibility is whether the organization has full control of the donated funds and discretion as to their use, so funds will be used for charitable purposes. The parents who directed that their gift be used to pay their son's tuition argued unsuccessfully that although they designated the use of their gift, they had no right to demand such use. Organizations that currently conduct designated gift programs face the problem of whether they sufficiently control the funds to remove any benefit to the donor. Likewise, a church school that allows church members to enroll children for a tuition less than that of nonmembers may need to value the member discount.¹⁸

As another example, a Roman Catholic Church parish combined the sale of cenotaphs and columbaria for interments of deceased parishioners with a fund-raising program. The church sought IRS sanction for treating a portion of the purchase price of the burial spaces as a donation. The parish's solicitation materials specifically requested a donation and disclosed the amount by which the price exceeded the fair market value. The IRS found that the payments represented a combined personal-benefit item and a donation. The IRS also concluded that the sale and maintenance of burial niches was not an unrelated business for the church.¹⁹

Payments made by a §501(c)(3) organization out of detached and disinterested generosity, “rather than to fulfill a moral or legal duty,” are excluded from gross income of the recipient under IRC §102.²⁰ Presumably, payments by other types of tax-exempt organizations could also be characterized as gifts. Similarly, payments made by an employer to an employee in response to needs due to a disaster were found to be nontaxable gifts, not taxable compensation.²¹ Further, relief payments under social welfare programs of governmental units are also not taxable.²²

Disaster relief grants received by a business under a state program to reimburse businesses for losses incurred for damage or destruction of real and personal property on account of a disaster are not excludable from gross income under the general welfare exclusion, as a gift under §102 of the code, but instead as a qualified disaster relief payment under §139 or as a contribution to the capital of a corporation under §118. A taxpayer may elect under §1033 to defer including funds from receipt of the grant to the extent the grant proceeds are used to timely purchase property similar or related in service or use to the destroyed or damaged property.²³

Publication 561, Determining the Value of Donated Property,²⁴ says regarding options, “If you grant an option to a qualified organization to buy real property, you have not made a charitable contribution until the organization exercises the option. The amount of the contribution is the fair market value (FMV) of the property on the date the option is exercised minus the exercise price.” Self-dealing does not occur when an option is given to a private foundation because the transaction is not closed, but could occur when the property transaction closes.

(b) Limitations on Deductions

The allowable tax deduction for a gift to a qualifying charitable organization is limited by several factors:

• Varying percentages of the donor's income (described later).
• Type of property donated.
• Classification of the recipient organization as a public or private charity.
• Character of the property given as a capital versus an ordinary income property.
• Type of transfer—whether the gift is made outright or in trust and whether the donation is of a taxpayer's entire interest or a partial interest.

The following percentage limitations apply:²⁵

• An individual may annually deduct up to 60 percent of his or her adjusted gross income (AGI) for gifts of cash to public charities²⁶ and private operating foundations.²⁷
• Up to 30 percent of an individual's AGI may be offset by donations of long-term capital gain property to public charities and private operating foundations and for gifts of cash to a private foundation.
• Up to 20 percent of an individual's AGI may be offset by donations of cash and readily marketable securities to a private foundation. The deduction for other gifts of appreciated property, such as land or shares of a private company, are limited in their deductibility to the taxpayer's cost basis unless the private foundation (PF) redistributes the property or its equivalent value no later than the 15th day of the third month following the year of gift.²⁸
• Corporate donations are deductible up to 10 percent of the company's pretax income.

No percentage limitation applies for gift and estate tax charitable deduction purposes.²⁹

Special 30 Percent Limit. A special 30 percent limit applies for gifts of capital gain property to 60-percent-limit organizations. However, this limit does not apply when the donation FMV is the amount that would have been long-term capital gain if the property had been sold. In this case, only the 60 percent limit applies.

A 30 Percent Limit for Gifts to Other Organizations. A 30 percent limit applies to the following gifts:

• Gifts to all qualified organizations other than 60-percent-limit organizations. This includes gifts to veterans' organizations, fraternal societies, nonprofit cemeteries, and certain private nonoperating foundations.

If these gifts are of capital gain property, they are subject to the 20 percent limit, rather than the 30 percent limit.

Two Separate 30 Percent Limits. The special 30 percent limit for capital gain property is separate from the other 30 percent limit. Therefore, the deduction of a contribution subject to one 30 percent limit does not reduce the amount you can deduct for contributions subject to the other 30 percent limit. However, the total you deduct cannot be more than 60 percent of your adjusted gross income.

Carryover. If the total donations made in any one year exceed the foregoing limits, the excessive amount can be carried over and treated as a donation for up to five subsequent years, again subject each year to the applicable percentage limitations.³⁰

Fair Market Value. The deduction amount for a gift of property other than cash is normally the fair market value of the property. The FMV is the price that the property would sell for in the open market between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.³¹ If the contribution is made in property of a type that the taxpayer sells in the course of his or her business, the FMV of the contributed property is the price that the taxpayer would have received if he or she had sold it in the usual market in which he or she customarily sells, at the time and place of the contribution and, in the case of a contribution of goods in quantity, in the quantity contributed.³²

The usual market place standard means that used clothing must be valued at the price for which it can be sold in a resale shop, considering its age, condition, style, and usefulness. In making and supporting the valuation of donated property, the following factors affect value:³³

• The cost or selling price of the item
• Sales of comparable properties³⁴
• Replacement cost
• Opinions of experts

Property that is sold in an active market for which information is routinely published, like shares of common stock and used automobiles, are relatively easy to value for donation purposes. Closely held company shares, office buildings, fine art, and similar unique properties have no readily established market value. Consequently, in addition to consideration of the foregoing four factors, IRS procedures require that a qualified appraisal be obtained for all donations of property other than money and publicly traded securities where the value of the property is more than $5,000.

A qualified appraisal report:

• Is written and made, signed, and issued in accordance with generally accepted appraisal standards;
• Meets the relevant requirements of the regulations;
• Relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property;
• Does not involve a prohibited appraisal fee; and
• Includes accurate description of property transferred, date of contribution, and terms of agreements involved, if any.

Form 8283 is submitted for a gift of art worth more than $20,000 and other property worth more than $50,000, and must be acknowledged by both the recipient organization and the independent appraiser and attached to the donor's tax return. To provide the IRS with clues about valuations that should be questioned, a charity that sells property reported on Form 8283 within two years of its receipt must itself file Form 8282 to report to the IRS the price at which the property was sold.

Capital Gain Property. The contribution deduction for short-term capital gain property is limited to the taxpayer's cost for the property donated. The rule says that for deduction purposes, the value of the property must be reduced by the amount of gain that would not have been long-term capital gain had the property been sold by the donor.³⁵ Long-term capital gain property must have been held for more than one year.³⁶ Goods normally sold in a business activity, such as inventory, are considered ordinary income property, not capital in nature. Inventory items used solely for the care of the ill, the needy, or infants and scientific property used for research are subject to a partial limitation.³⁷ Nicely enough, the untaxed gain inherent in donated property is not taxed.

A donation of personal services is also limited by this rule. One has no tax basis inherent in one's own time. Theoretically, to claim a deduction for volunteer services rendered, one would first have to report the value of the services as income, to achieve some tax basis. The charitable donation is reported on the individual income tax form as an itemized deduction and is potentially limited in deductibility even if the service provider recognizes income. Therefore, no deductions are available for the value of time contributed to a charitable organization, though unreimbursed expenses paid incident to rendering the services are deductible.³⁸ For Forms 990 purposes, donated services are also not reported, even when they are valued and shown as contributions for financial reporting purposes.

Tangible Personal Property. The deduction for gifts of tangible personal property, such as clothing, art, or other collectibles, may be limited unless the charity keeps and uses the property. This limitation applies when the use by the donee is unrelated to its charitable purposes constituting the basis for its exemption, or, in the case of a governmental unit, its function.³⁹ When applicable, this rule limits the deduction to the donor's tax basis, ordinarily what was originally paid for the property.

The deduction for property donated to charitable auctions and to resale shops is therefore limited to the taxpayer's basis in the property or the value, whichever is lower. The donor is responsible for valuing such property, but the helpful charity assists the donor in valuing such donations for two reasons. The price for which the charity ultimately resells the goods can be treated as determinative of value. Purchasers at charity auctions traditionally pay more than FMV, essentially making a donation to the charity. Providing a list of auction-item values gives the purchaser the documentation necessary to calculate the donation amount.

Special Private Foundation Limitations. When Congress created private foundations (PFs) in 1969, the rule makers were intent not only upon enhancing regulation of PFs⁴⁰ but also upon discouraging their formation. As mentioned earlier, the percentage-of-income limits are lower for gifts to a PF, and the income tax deduction for certain property donated to a PF is limited to the amount of the donor's tax basis.⁴¹ The limitation is lifted only when the recipient PF gives away either the property donated or other property (usually cash). The re-granted amount must be equal to the fair market value of the property on the day it is donated to the PF.⁴² A private operating foundation that conducts its own active programs is not subject to these restrictive limitations.⁴³

Qualified Appreciated Stock. From 1984 through 1994 and after July 1996 (now permanently extended), Congress lifted the deduction reduction to basis limitation for gifts of certain marketable securities to private foundations. The full fair market value of qualified appreciated stocks is allowable as a deduction. The full fair market value of mutual fund shares of an open-end investment company is deductible upon donation to a private foundation when the shares' value is redeemable on demand at their net asset value. Such shares may qualify as qualified appreciated stock, if they possess the following characteristics:⁴⁴

• Market quotations are readily available on an established securities market on the date of contribution.
• The stock is capital gain property.
• The foundation's sale of the stock cannot be limited by securities laws as to the volume or other insider trading rules.
• The value of the stock contributed, when added to any prior gifts by the donor and his or her family members, cannot exceed 10 percent of the value of the outstanding stock of the corporation.

Cars and Boats. The deduction for a gift of a used automobile, boat, or airplane valued at more than $500 is limited to the actual proceeds of sale by the recipient charity unless the charity retains the item for its use or makes repairs.⁴⁵ The donor acknowledgment must reflect whether the car, boat, or plane was sold or retained and how it is used by the charity and for how long. Unlike most donor receipts, the details must be attached to the donor's income tax return. Form 1099-C, Contributions of Motor Vehicles, Boats, and Airplanes, is filed by charities receiving such donations, and the donee must attach it to his or her tax return to claim the deduction.

Patents and Other Intellectual Property. The year-of-gift deduction for donations of patents, copyrights, and other intellectual property is limited to the lesser of the taxpayer's basis in the property or its fair market value.⁴⁶ To the extent the property produces income in future years, additional gifts may be deemed to occur. Once the donor informs the recipient charity of such a gift, the charity must file Form 8899 by January 31 each year following the gift to report any income it receives on the property.

Foreign Organizations. Only gifts to domestic organizations—those created or organized in the United States—are deductible for U.S. tax purposes.⁴⁷ Because of this limitation and the fact that U.S. tax-exempt organizations are permitted to conduct activities anywhere in the world, domestic Friends Of organizations are created to raise U.S. support for foreign organizations. So long as the U.S. charity has control and discretion over the ultimate spending of the money,⁴⁸ funds raised to conduct foreign activities or for re-granting to a foreign organization⁴⁹ do qualify as charitable contributions. A U.S. charity supporting overseas projects should follow specific standards regarding the activity to ensure that the U.S. supporters receive an income tax deduction. U.S. donors may not qualify for a contribution deduction for income tax purposes if the domestic charity is a mere conduit to receive and transmit funds to a foreign organization. The facts in a private ruling that indicate the U.S. charity is not simply a conduit for the foreign organization can be studied to reinforce the six factors described here to identify absence of conduit characteristics.⁵⁰ This ruling, however, called the foreign organization a “subsidiary,” a term not used in the published rulings cited earlier. Most importantly, the U.S. entity must maintain ultimate control over the funds. It may accept donations from individuals and businesses that suggest their gift be used for specific foreign organizations, but the charity must have discretion to approve the granting of funds under the following six rules:⁵¹

1. The U.S. organization's charter, bylaws, or other governing instruments should not restrict activities to domestic programs; there should be no constraint on support for foreign organizations (and in silence allows it).
2. Solicitation for and acknowledgment of donations from and to U.S. and foreign individuals and businesses should refer to support for the domestic organization's programs.
3. The making of grants to the foreign organization must be within the exclusive power of the domestic organization's board of directors. Such power should be evidenced by overt board approval prior to payment of such grants. Funding might be either authorized as part of the annual budget for such programs or specifically approved at board, executive, or staff meetings.
4. The U.S. charity should also obtain a written grant proposal from the foreign organization(s) that it funds. The proposal should be subject to the same approval systems applied to domestic programs. Authorizing officials should be provided with sufficient detail to allow them to satisfy themselves that the grant serves the domestic charity's purposes. Brochures and other materials describing the domestic organization's programs should contain a description of information to be submitted with grant requests and terms under which grants are awarded.
5. Grant recipients can be required to submit annual reports reflecting how grant funds were expended for the purpose for which they were approved by the board. Reports should contain copies of exhibition catalogs, photographs of installations, and other actual evidence of the program.⁵² For a private foundation, this report may be contractually agreed to ahead of time in the expenditure responsibility agreement.⁵³
6. Grant payment should be accompanied by an award letter reiterating the terms of the agreement and outlining the documentation requirements that grantees must complete. The U.S.-Canadian tax treaty makes special provisions for reciprocal qualification of charitable organizations and permits a U.S. taxpayer to offset donations to Canadian charities against their Canadian income reported for U.S. income tax purposes.⁵⁴

(c) Business “Donations”

Classifying a corporate, or other type of business, payment as a contribution may not necessarily be advantageous. Transfers of property that bear a direct relationship to the transferor's business and are made with a reasonable expectation of a commensurate financial return are business expenses. The corporate contribution deduction is limited to 10 percent of a company's taxable profit for the year (before the deduction).⁵⁵ A contribution disallowed by the percentage limitations of §170 is not otherwise deductible as a business expense.⁵⁶ Correspondingly, no §162 business expense deduction is allowable if any part of a payment qualifies as a charitable gift under §170.⁵⁷

A corporate donation for institutional or goodwill advertising to keep the corporation's name before the public is a business expense.⁵⁸

The tax code says that “a contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for” charitable purposes.⁵⁹ Therefore, a corporate gift to support activities outside the United States is not deductible. This geographic limitation does not restrict the activity of charities formed as corporations. As a practical matter, it is contrary to basic corporate responsibility to private shareholders to make donations without economic motivation. Advertising and promotional expenses have no similar limitation. From a corporation's standpoint, a contribution in many situations is not preferable. A transfer of property to a charitable organization that “bears a direct relationship to the taxpayer's business and is made with a reasonable expectation of financial return commensurate with the amount of transfer” may be deductible as an “ordinary and necessary business expense rather than as a charitable contribution.” The following decisions give a flavor to the issue.

• A corporation agreeing to pay a certain amount to a named charity in return for each unit of a particular product it sold (for which a label was returned) incurred a business expense for its payments to the named charity, in an early cause-related-marketing case.⁶⁰ The business that accepts and pays over donations in a cause-related-marketing circumstance is deemed the donor, not the purchaser of the product from the company that promises to provide a portion of the purchase price. If the taxpayer appears to have established the program with the reasonable belief that it would enhance and increase its business, the payments could be classified as a business expense when the business had a reasonable expectation of commensurate financial return for its donations.
• A sewing machine manufacturer was not allowed to claim charitable deductions for discounts given to school districts. Its expectation that the students using the machines would become future customers indicated an anticipated financial return for the discounts.⁶¹
• Payments made by a newspaper publisher to fund a first-grade reading program in the local school, however, were not a deductible business expense but, instead, a charitable contribution. There was no direct relationship between the program and the publishing business, nor a reasonable expectation of commensurate financial return.⁶²

The IRS also considered corporate matching fund gifts to a political action committee (an IRC §527 nonprofit) to incentivize employees' gifts to the PAC not to be charitable gifts. Additionally, no income tax deduction under IRC §162(e) was available, as the payments were made for support of political campaigns.⁶³

Businesses are encouraged to donate certain types of inventory with an exception to the general rule that, except for capital gain property, the charitable deduction is limited to the taxpayer's basis.⁶⁴ Part of the value of food, clothing, and similar items to be used for the care of the ill, the needy, or infants; computer equipment given to elementary and secondary schools; and scientific property constructed by the business for research are afforded special deductions.⁶⁵ An example of a business donation that yields no charitable deduction is a broadcasting company's contribution of a film library composed of footage documenting local news stories, with zero tax basis.⁶⁶ Similarly, a newspaper was not allowed a deduction for the gift of its clippings library.⁶⁷ In both situations, the library materials were ordinary income property and not capital assets and no special exception applied.

The IRS has announced that “whether or not an activity constitutes advertising or acknowledgment for the recipient charity's purposes does not determine whether a sponsor may deduct its payment under §162 or §170.”⁶⁸ See §21.8(e) for the corollary rules on corporate sponsorships for unrelated business income tax purposes.

(d) Planned Gifts

Planned gifts are those donations intended to occur over time, either with the creation of a trust during one's life or as a bequest effective upon death. A classic planned gift separates the property into its income and principal attributes, in what is referred to as a split-interest trust. Such a gift is a perfect marriage of a donor's desire to support charity, to avoid the income tax, and to keep some of the benefits of retaining future ownership. The underlying property is often a low-yield, significantly appreciated stock.

Charitable Remainder Trust. As its name implies, a charitable remainder trust is created to pay income to the donor or other person(s) for a period of time, after which time the rest or remainder is payable to one or more named charities.⁶⁹ The written agreements creating such trusts must provide for specified income distributions at least annually. Such a trust that distributes a percentage of its assets is referred to as a charitable remainder unitrust (CRUT). A charitable remainder annuity trust (CRAT) instead annually pays out a fixed sum of money. A CRUT or CRAT can last for a term of up to 20 years or for the income beneficiary's life.

The deduction allowed for creation of a qualifying trust is essentially the FMV of the properties placed in trust less a calculated value of the retained income interest. IRS tables calculate the present value of the life interest based on the rate of income to be paid annually and the life expectancy of the person(s) possessing the retained income interest. Both public and private charities can be named as charitable beneficiaries.

Charitable Lead Trust. A charitable lead trust reverses the pattern of a remainder trust by first paying a defined percentage of principal to charity(ies). At the end of the trust's life, or lead period, the property is returned to the donor or other designated beneficiary. The lead trust must also be either a qualifying annuity or a unitrust. The advantage of this type of planned gift is an immediate tax deduction for the donor equal to the present value of the charity income stream. Unlike the remainder trust, however, the donor is treated as a grantor of the trust and must annually report the trust income.⁷⁰

Pooled Income Fund or Charitable Annuity. Two other forms of planned gifts popular with public charities encompass a gift of property directly to the charity rather than a separate trust. As does a CRUT or CRAT, the charity promises to pay income to the donor for some period of time. Essentially, such trusts have the same elements as a charitable remainder trust, but are established and managed by the public charity itself.⁷¹

(a) History of Disclosure Rules

In the late 1980s, the House Budget Committee decided that “charities fail to make sufficient disclosures in soliciting gifts to allow donors to calculate the nondeductible portion of donations.” Legislation was passed that made it mandatory for non-§501(c)(3) organizations to prominently print on all fund-raising materials that payments were not deductible.⁷³ The IRS was directed to measure tax revenues lost due to overstated donations to §501(c)(3) organizations and to investigate any abuses found. In response, the IRS initiated a special emphasis program entitled “Exempt Organization Charitable Solicitations Compliance Improvement Study.” It mailed Publication 1381 to the more than 500,000 tax-exempt organizations eligible to receive deductible contributions, sent IRS representatives around the country to give public education talks on the subject, and examined major charities to test compliance.

Based on the relatively poor results of the study, Congress ended the deductibility dilemma in 1993 by adding §§170(f)(8) and 6115 to the income tax code to require that charities provide information to donors illustrated below revealing the value of benefits provided. The Senate said, “Taxpayers may not simply rely on a canceled check as substantiation.” The Revenue Reconciliation Bill of 1993, passed by Congress as part of the Omnibus Budget Reconciliation Bill, imposed a substantiation rule on persons claiming charitable donations and disclosure rules on the charities themselves, effective for gifts after 1993, as follows:

• A written receipt from the donee organization is required for taxpayers claiming a charitable gift of $250 or more. Congress said this burden is on the giver, but it also falls on the organization that must produce the receipt. See Exhibit 24.1.

   

  Failure to disclose the value of benefits provided is subject to a $10 penalty for each donor for each event. The language can vary, but three very specific items of information must be provided to satisfy the IRS:

  1. Donor name with amount and date of cash paid

  2. Description of other property donated (without a valuation)

  3. Statement of whether or not benefits were provided, and if so, a good-faith estimate of the value

  NO BENEFITS PROVIDED—CHARITABLE GIFT OF $250 OR MORE

  Donor Name

  Thank you for your contribution of _________ in cash and property _________ (description) on _________ (date). Your gift will be devoted to our organizational charitable objectives and we will provide no benefits or services required to be valued in consideration for this gift.

  Organization Name

  BENEFITS PROVIDED—PAYMENT OF $75.01 OR MORE

  Donor Name

  Thank you for your contribution of _________ in cash and property _________ (description) on _________ (date). We estimate the fair market value of the benefits we provided to you in consideration for this gift was $_________ per person. We are a §501(c)(3) organization and you may be entitled to claim a donation deduction for the difference between the cash and property donated and the value of the benefits you received.

  Organization Name

  INTANGIBLE RELIGIOUS BENEFITS—GIFT OF $250+

  Donor Name

  Thank you for your contribution of $_________ in cash and _________ (description of property donated) on _________ (date). The church furnishes intangible religious benefits that need not be valued for tax purposes. You may be entitled to claim the full value of your gift as a donation.

  Name of Religious Organization

  CHARITABLE BENEFITS—TICKET PRICE $75.01 OR MORE

  Donor Name

  Thank you for your purchase of benefit tickets for $_________ in cash on _________ (date). We estimate the fair market value of the meal and entertainment furnished in connection with the event was $_________ per person (ticket). We are a §501(c)(3) organization and therefore you may be entitled to claim a donation deduction for the difference between the cash you paid and the value of the benefits, or _________.

  Organization Name

  AUCTION PURCHASE RECEIPT

  Purchaser's Name

  Thank you for your purchase of auction item #_________ (description) for $_________ in cash on _________ (date). We estimate the fair market value of this item is $_________. We are a §501(c)(3) organization and therefore you may be entitled to claim a donation deduction for the difference between the cash you paid less the value of the item, or $_________.

  Organization Name

   

• A donee organization furnishing economic benefit in the form of goods or services in return for donations more than of $75 must provide a written statement revealing the deductible portion of donor payments. See Exhibit 24.1.

(b) Substantiation Rules

No charitable deduction is allowed for a gift of $250 or more unless the taxpayer obtains a contemporaneous written acknowledgment from the donee organization with sufficient information to evidence the amount of the deductible contribution.⁷⁴ Separate payments are not aggregated; only a single payment of $250 or more requires substantiation. This flawed rule means that a monthly contribution of $200 resulting in a total of $2,400 for the year is not subject to receipting.⁷⁵ The acknowledgment must be written and contain the information reflected in Exhibit 24.1. A simple thank-you letter was not adequate for a taxpayer who attached the appraisal to Form 8283 to claim a deduction for the value of a façade easement.

On July 30, 2018, the IRS withdrew regulations issued in 2015 to implement a form (Form 1099 type) to provide the donation acknowledgment for gifts of $250 or more directly to the IRS, rather than the donor.⁷⁶

Timing. A “contemporaneous acknowledgment” is one obtained on or before the earlier of (1) the actual filing date of the taxpayer's original return for the year in which the contribution was made, or (2) the due date (including extensions) for filing the taxpayer's original return for that year. In other words, a donor may not file a return claiming a contribution deduction for a charitable payment of $250 or more without a proper receipt in hand.

In Consideration Of. Benefits are treated as being “in consideration of” the donation where there is a connection between the transactions. The charity is deemed to have provided goods and services in consideration of a donation if at the time the taxpayer makes the payment, he or she expects to receive the benefits in exchange for the payment. It is a matter of the donor's intention. To receive a full deduction for support of a solicitation in which a benefit is offered, a donor can refuse the benefits and indicate the rejection in writing. Goods received in a year other than the year of payment are included if the donor had an expectation of their receipt. An unannounced or irregularly scheduled recognition dinner held to honor supporters would not be a quid pro quo benefit, but a routine and anticipated dinner could be connected to annual giving. The de minimis amount used to identify donor benefits of insubstantial value in 2011 was $9.70.⁷⁷

Good-Faith Estimate. The donor is entitled to rely upon the charity's estimation of the value of benefits provided unless he or she has some reason to know the value is incorrect.⁷⁸

Disregarded Benefits. Due to the difficulty of valuing certain donor privileges, in August 1995 the IRS significantly eased the disclosure requirements by extending the token item rules to apply to certain benefits. Although this refinement can be helpful, readers should carefully study the regulations, because the dollar amounts are adjusted annually for inflation and description of member privileges are listed extensively in this regulation. Benefits can be disregarded if they fall into one of two categories:⁷⁹

1. Goods and services that have insubstantial value, referred to as the token items, can be disregarded.
2. Annual membership rights and privileges offered to members in exchange for a payment of $75 (original number) or less per year.

Payroll Deductions. Contributions paid through a payroll withholding system need not be acknowledged by the donee organization directly to the donor,⁸⁰ except for donations of $250 or more withheld from an individual paycheck. For example, taxpayers can substantiate a $2,501 payroll deduction with a combination of pay stubs, pledge cards, or other document prepared by the donee organization.

Volunteer out-of-pocket expenses are also subject to contemporaneous written receipt rules. Volunteers must themselves keep adequate substantiation (meaning airline tickets, meal chits, and other §274 expense-account-type receipts), plus obtain a disclosure statement containing the following:

• Description of services provided by the taxpayer.
• Statement that benefits were or were not received.
• Quid pro quo benefit description plus valuation, if applicable.

Gifts to charitable remainder and lead trusts, but not pooled income fund gifts, are exempted from the $250+ substantiation requirement. The IRS reasoned that the donee of such transfers is often unknown and subject to change. Partnerships and S corporations need not obtain separate substantiation receipts for each partner reporting a contribution deduction passed through to them. The partnership or S corporation is considered as the donor required to obtain a $250+ receipt.⁸¹

Rights to Buy College Athletic Tickets. When an amount paid to an institution of higher education entitles the donor to purchase tickets for seating at an athletic event in an athletic stadium of the college or university, 20 percent of the amount paid is considered as the value of the right to buy tickets.⁸²

Tax-Exempt Grantors. A tax-exempt organization wishing to claim a contribution deduction for unrelated business income tax purposes must obtain the disclosure receipts described earlier in this section for any grants it wishes to claim as a charitable gift for that purpose.⁸³

Donation Collection Agents. When one entity, for-profit or not-for-profit, collects funds on behalf of a charitable organization, it is important to verify whether the fund-raising entity is serving as agent for the charity. The question is whether the funds are to or for the use of⁸⁴ the charity. The payment is deductible only if it is paid to the agent subject to the ultimate discretion and control of the recipient charity. An agency relationship exists when the charity enters into a fiduciary agreement with the fundraiser to act on its behalf, subject to the charity's control and consent.⁸⁵ Luckily, the accounting profession has issued FASB No. 136 as guidance to aid in identifying whose income is whose.⁸⁶

Identifying the ultimate donee is important for several reasons. The donor needs to receive adequate disclosure information to document his or her payment to a qualifying entity for donation deduction purposes. The second question is whose revenue it is for purposes of calculating the public support ratio.⁸⁷ When the agent is itself a charitable fund solicitation organization, such as a United Way campaign, that allows its donors to unequivocally designate a gift to a particular charity, the gift is not treated as revenue to the united campaign. Instead, the gift is treated as being made to the ultimate charity designated by the donor.

When the solicitor is a commercial business, additional questions arise. Does the arrangement result in private inurement to the agent? When the solicitation program involves personal property, such as used cars, boats, or clothing, are the donated items properly valued? If the solicitation agent sells the property, does the charity get a fair share of the proceeds of the sale?

The IRS revised Publication 1771 in June 2010⁸⁸ to expand the media allowed for donor acknowledgments. The publication admits there are no prescribed IRS forms for §170(f)(8) purposes (the $250-or-more receipt) and quid pro quo disclosures of benefits provided to donors.⁸⁹ The publication provides for use of electronic media as follows:

Letters, postcards, or computer-generated forms with the above information are acceptable. An organization can provide either a paper copy of the acknowledgment to the donor, or an organization can provide the acknowledgment electronically, such as via an e-mail addressed to the donor.

(c) Quid Pro Quo Disclosure Rules

When an organization described in §170(c), other than paragraph (1), receives a quid pro quo contribution in excess of $75, the organization shall, in connection with the solicitation or receipt of the contribution, provide a written statement that:⁹⁰

• Informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of goods or services furnished in return, and
• Provides a good-faith estimate of the value of such goods or services.

A quid pro quo contribution is defined by §6115(b) as “a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization.” The fact that the goods or services were donated to the organization at no cost does not make a quid pro quo payment fully deductible. Neither does the fact that the money will be used exclusively for the organization's exempt purposes.⁹¹ A pure exchange transaction, such as a museum gift shop or church bookstore purchase, has no donative element, so no disclosures are required.

Intangible Religious Benefits. Payments to religious organizations in return for “intangible religious benefit that generally is not sold in a commercial transaction outside the donative context” are not required to be valued. The regulations provide no guidance on the definition of intangible religious benefit. U.S. tax policy does not define religion, to foster the separation of church and state.⁹² The results are not necessarily logical or fair. Fees paid for the many weddings and funerals performed in or outside churches are not deductible.

Voluntary Disclosures. The value of all benefits provided in connection with an ostensibly charitable payment must be subtracted from the amount paid to the charity, regardless of whether the charity is required to disclose such amount to the donor. Although the charitable disclosure rule requires that the value of goods and services be provided where the solicitation is for a gift of more than $75, the helpful charity might choose to value all benefits not excluded by the de minimis rules.⁹³ The following illustrates the fact that the $50 contributor also needs to receive valuation information to correctly claim the charitable deduction portion of his or her gift.

Timing. The disclosure is to be made in “connection with the solicitation or receipt of the donation.” The disclosure should be made in a manner reasonably likely to come to the attention of the donor. For example, a disclosure in small print set forth within a larger document might not meet the requirement. Timing of the disclosure can be troublesome. Many charities choose to disclose an estimated value on the invitation printed well in advance of the actual event with values sometimes over-or-under stated. Author is told most donors do not choose not to attend an event due to the non-deductible portion. Thus leaving the valuation disclosure for the donation receipt may be preferred. What should a prudent organization do if they find the valuation was mistaken? Do they send a follow-up receipt once the more accurate valuation is available? If possible, at least the required follow-up $250+ plus substantiation acknowledgments would reflect the subsequently corrected value, though this practice could bring questions from attendees.

Note that the code to gives a choice: Information can be furnished at the time the gift is requested or when payment is received. As a practical matter, the charity may not be able to assign an accurate valuation for an event when invitations are mailed. The de minimis rules do require a statement on the solicitation, and it is unfortunate that Congress provided a choice.⁹⁴ The $250+ gift acknowledgment clearly will be provided after the gift is received, perhaps only once a year, listing all gifts by a particular giver.

Donative Intent. The connection between a benefit conferred by a charity and the actual donation is sometimes vague. What if one purchases tickets but does not use them? How does a charity determine when a payment is made in “consideration for” a benefit that was not necessarily expected or bargained for? What if the charity invites potential donors to be guests at a dinner reception worth $50 a person? If no consideration is paid specifically for the dinner, the question is whether the value of the “free” dinner reduces an attendee's subsequent payment. Does the result change if the charity regularly holds such dinners? Does it matter whether a donation is made at the dinner or within a short time after the dinner?

Auctions. Purchases in a charity auction are not quid pro quo transactions, but the purchase may involve a partial donation. A bidder who pays more than the FMV for an item for sale in a charitable auction is entitled to treat the excess amount paid as a charitable gift. A catalog, label, or other evidence of the value of the items should be available, and the helpful charity will also print the estimated value on the purchase receipt. Though the charity is not technically required to place a value on the donated items in acknowledging the gift to auction donors, it must do so if it wishes to provide documentation for the purchasers. When the donation portion exceeds $250, an acknowledgment should be provided, as discussed previously.

Raffles. A purchase of a raffle ticket is without donative intention; consequently, the price paid is not deductible as a charitable gift. The prize value is reportable as taxable income by the winner, and the charity sponsoring the raffle has reporting and tax withholding requirements as outlined in Exhibit 24.2.

A donor that desires a full deduction for support of a charitable raffle must refuse to participate in the raffle by returning the ticket or otherwise not accepting it. The purchase of a raffle ticket is treated as an exchange transaction in which no gift occurs. What if, instead, a prospective donor's name is entered into a sweepstakes without regard to whether an actual donation is made? Tickets for entry were mailed by a university free of charge to prospective donors with a letter inviting entry into the contest, complete with a description of prizes to be awarded and suggested donation levels. Respondents were asked to return a preaddressed envelope to enter the contest and enclose any contribution they wished to make voluntarily. Neither the envelope nor the entry form indicated whether a donation was enclosed. Because there was no obligation to pay to enter the sweepstakes, payments voluntarily sent were fully deductible.⁹⁵ No quid pro quo occurred.⁹⁶

§6714(a) Imposition of Penalty. If an organization fails to meet the disclosure requirements or provides incomplete or inaccurate information with respect to a quid pro quo contribution, a $10 penalty for each contribution, in respect of which the organization fails to make the required disclosure, is due. Form 990 asks, “Did the organization comply with the disclosure requirements relating to quid pro quo contributions?” When the answer to this question is No, the total penalty with respect to a fund-raising event or mailing can be up to $5,000.

The penalty imposed on a church that failed to disclose “disguised tuition payments” was not limited to $5,000 when the payments were not made in response to a discrete fund-raising event or mailing.⁹⁷ The church accepted “donations” from “member-families” in amounts equal to or exceeding the annual tuition at the private school unrelated to the church. The school billed the church for tuition. The church expects an amount at least equal to the tuition plus the member-family's regular contribution to the church's general fund. At the end of the year, the church provides donation receipts that do not reflect a valuation for any benefits received, but only for intangible religious benefits received. In reviewing this practice, the IRS asked four questions:

1. In a disguised tuition payment program, at what point does the quid pro quo penalty arise?
2. Do deficiency procedures apply to the quid pro quo penalty?
3. Does the quid pro quo penalty limitation of $5,000 per fund-raising event or mailing apply to disguised tuition payment programs, and if so, how?
4. What “reasonable cause” would except a church from the quid pro quo penalty ($10 for each contribution) with respect to the disguised tuition payment programs?

The answers were:

1. The penalty arises when a church is required to make a disclosure to a contributor regarding the value of the benefit received for the contribution.
2. The quid pro quo penalty is an assessable penalty; deficiency procedures that would involve objecting to the penalty in the Tax Court do not apply.
3. The cap ($5,000) on this penalty applies where there is evidence of a fund-raising event or mailing.
4. The disguised tuition program so plainly violates the rule that the reasonable cause is unlikely to be established. Proof depends on the facts and circumstances.⁹⁸ If facts beyond their control resulted in their failure to comply or ordinary care and business prudence were exercised, reasonable cause might be established. The church would have to show it made reasonable efforts to comply with the law.⁹⁹

Finally, the ruling noted that the penalty for aiding and abetting an understatement of tax under §6701 to the tune of $1,000 for each person “appears to apply” to the church.

§6714(b) Reasonable Cause Exception. No penalty shall be imposed under this section with respect to any failure if it is shown that such failure is due to reasonable cause. Although an organization relied on compliance information furnished as industry standard by a national organization, it could not escape the penalty. Neither would the IRS relent because the solicitations were made by volunteers.¹⁰⁰

(a) The de Minimis Rule

Premiums or benefits of insubstantial value given in connection with a qualified fund-raising campaign are de minimis and can be ignored.¹⁰⁶ In response to charities' complaints that the valuation process was too difficult and subjective, benefits can be disregarded and do not reduce the donation in the following circumstances:

• The fair market value of all benefits received for the payment is not more than 2 percent of the payment, or $99, whichever is less (e.g., a benefit worth up to $99 can be given to a $4,950 contributor).
• The donation is $49.50¹⁰⁷ or more (during 2011 and adjusted annually) and the benefits received are token items (bookmarks, calendars, key chains, mugs, posters, T-shirts, etc.) bearing the organization's name or logo, with a cost (as opposed to FMV) of no more than $9.90 (during 2011 and adjusted annually). All benefits received during a year are aggregated to calculate the total amount furnished. For example, the combined cost of a $5.80 mug and a $4.20 T-shirt exceeds the de minimis amount, and thus reduces the donation by the entire $10.00.

Organizations following this procedure are instructed to include this statement in their fund-raising literature:

Under IRS guidelines, the estimated value of [benefits received] is not substantial; therefore the full amount of your payment is a deductible contribution.

De minimis benefits provided to the employees of a donor or to partners of a partnership may be disregarded.

Qualified Campaign. A qualified fund-raising campaign has three elements:

1. It is designed to raise tax-deductible donations.
2. The charity uses reasonable methods to value benefits offered in return for donations.
3. Solicitations state how much of the donation is deductible and how much is not. (This statement may be written on tickets or receipts, broadcast, telephoned, or made in person.)

Commercial-Quality Publications. Publications such as newsletters or program guides are assigned value that reduces the contribution if they are commercial-quality publications (CQPs). Such a publication (1) is one the primary purpose of which is not to inform members about the organization's activities, (2) is available to the general public, (3) contains paid advertising, and (4) contains articles written for compensation.

(b) Benefits that Need Not Be Valued

It is sometimes difficult to tell whether a donor is receiving something of value treated as a quid pro quo, or whether the charity is simply fulfilling its exempt functions by furnishing services. Furnishing educational benefits to donors in the form of newsletters, lectures, or training is normally considered an exempt function. Civil Air Patrol squadron dues entitling members to be trained for rescue missions and to purchase items at a military exchange were deemed to be deductible, because the specific benefits were merely incidental to the charitable purposes of the patrol and to the public services rendered by the members.¹⁰⁸ The rights to attend an annual meeting, vote for officers, attend semiannual social functions, and conduct an annual rummage sale did not make a convalescent home member's dues nondeductible.¹⁰⁹

Intangible Religious Benefits. Goods and services that consist solely of intangible religious benefits are not valued and do not reduce one's donation to a religious organization. Such benefits are those provided by an exclusively religious organization for religious purposes and generally not sold in a commercial transaction outside the donative context.¹¹⁰ Pew rents, building fund assessments, and periodic dues are methods of making contributions to a church.¹¹¹ The Supreme Court, in 1989, found “auditing fees” of the Church of Scientology to be valuable personal services in upholding IRS disallowance of their deduction as charitable donations.¹¹² Later the IRS reversed its position, issued a favorable determination letter for the church, and deemed such payments deductible effective January 1, 1993.

Member Privileges. Until 1995, member dues were deemed to represent a pure charitable donation only if members are given no commensurate rights and privileges other than the personal satisfaction of being of service to others and furthering the charitable cause in which the members share a common interest.¹¹³ Due to the difficulty of valuing such privileges, the substantiation rules allow certain member privileges to be disregarded under specific conditions.¹¹⁴