Wednesday April 1, 2020
Article of the Month
Substantiation Requirements for Charitable Contributions, Part II
The Internal Revenue Service requires donors who claim charitable income tax deductions to substantiate the value of their charitable contributions. Donors may not understand the specific substantiation requirements when making charitable donations. The Service's substantiation rules are strict, and if these rules are not closely followed, a donor may lose his or her entire charitable deduction. Advisors should be prepared to explain these requirements, guide their clients through the process of substantiating charitable gifts and work with charities to meet the Service's requirements.
This article series will explore the substantiation rules for charitable contributions. This series will shed light on the substantiation requirements for specific gift types, including donations of real estate, stock and tangible personal property. Part I of this series reviewed the final regulations regarding substantiation for charitable donations for cash gifts. This second article will examine the basic rules for substantiation for charitable contributions of noncash property. It will review how the requirements vary depending on the value of the charitable contribution and discuss the specific substantiation requirements for noncash charitable gifts. By understanding the substantiation rules under the final regulations, advisors can help ensure that their clients accurately substantiate their charitable donations.
While many donors use cash to make gifts to charity (see Part I for a discussion of cash gift substantiation requirements), the most recent U.S. Census revealed that personal wealth is held, in large part, as noncash assets, such as securities and real estate. Donors who use appreciated noncash assets to make charitable gifts receive a double benefit. They are able to both bypass capital gains tax on the appreciation and receive a charitable income tax deduction. As with cash gifts, the Service requires donors to comply with substantiation requirements when making noncash contributions to charity.
Donors using similar noncash assets to make charitable donations must aggregate the value of these gifts for the purpose of complying with the substantiation requirements. Reg. 1.170A-16(f)(5). The regulations define "similar items of property" as items of the same generic category or type. Reg. 1.170A-13(c)(7)(iii). The regulations provide several category examples, including paintings, jewelry, land, buildings, household appliances and coin collections. Reg. 1.170A-13(c)(7)(iii). If similar items of property are donated in the same taxable year, the donor is required to comply with the appropriate substantiation requirements for the aggregate value of the items.
ExampleNoncash Gifts Under $250
Throughout the course of last year, Simone donated to her favorite local charity, which runs a secondhand thrift store. Simone was in the process of renovating her kitchen and decided to make a few donations early in the year. She donated a toaster, blender, electric kettle and automatic juicer. Her donation was valued at $200.
She later donated a stove, microwave, refrigerator and deep freezer. Her donation of these larger items was valued at $2,750.
At the end of the year, Simone was finally able to renovate her laundry room. She donated a washer, dryer and professional steamer. The donation of her laundry room appliances totaled $1,850.
As a last minute end-of-year gift, Simone decided to donate a vacuum cleaner and an air purifier. These donations were valued at $205.
All of the donated items were in great condition. She hoped that her local charity would be able to sell the items and generate cash to further its mission.
For the year, Simone's donations totaled $5,005. Because all of her donations fell into the generic category of household appliances, they must be aggregated to determine the substantiation requirements for her charitable deduction. She will be required to adhere to the substantiation rules for noncash gifts valued in excess of $5,000.
A donor who makes a noncash asset gift valued at less than $250 must obtain a receipt as substantiation for the charitable gift. The substantiation rules apply to donors who are individual taxpayers, partnerships and certain corporations, such as S corporations, C corporations that are personal service corporations and closely held C corporations. Reg. 1.170A-16(a)(1).
The receipt must contain the name and address of the charitable organization and the date of the contribution. Reg. 1.170A-16(a)(1)(i), (ii). The receipt must provide a sufficiently detailed description of the contributed property so that a person not "generally familiar" with the type of property could ascertain that the property described is the contributed property. Reg. 1.170A-16(a)(1)(iii). If the noncash asset is securities, then the receipt must include the issuer, the type of security and state whether the securities are publicly traded. Reg. 1.170A-16(a)(1)(iv).
In some situations, a donor may not be able to obtain a receipt. The donor may use an unattended drop-off collection bin for charitable donations, which makes obtaining a receipt challenging. The Service permits donors to use a reliable written record in the place of a receipt in some circumstances. Reg. 1.170A-16(a)(2)(i). The inquiry into the reliability of the written record will be based on the facts and circumstances of the case and the proximity in time to the donation. Reg. 1.170A-16(a)(2)(ii).
The regulations provide some guidance as to what a reliable written record should include. The written record must include all of the above information that would be contained in a receipt from a charity. Reg. 1.170A-16(a)(2)(iii)(A). The record must also include the fair market value of the property on the date of the donation and the method used for determining the fair market value. Reg. 1.170A-16(a)(2)(iii)(B), (C). If the donated property was clothing or a household item, as defined in Reg. 1.170A-18(c), the condition of the item must be included. Reg. 1.170A-16(a)(2)(iii)(D).
Noncash Gifts Over $250
For gifts of noncash property valued in excess of $250 but not more than $500, the donor is required to obtain additional substantiation. A contemporaneous written acknowledgement must be obtained from the charity if the donor claims a charitable deduction. Reg. 1.170A-16(b). The document is considered contemporaneous if it is obtained on or before the earlier of: a) the date the donor files the original tax return for the year in which the contribution was made or b) the due date, including any extensions, for filing the original tax return for the year in which the contribution was made. Reg. 1.170A-13(f).
Noncash Gifts Over $500
Donors contributing noncash assets valued at over $500 but not more than $5,000 must obtain the same documentation for gifts valued over $250 (see above) and include additional substantiation. Reg. 1.170A-16(c)(1). Individuals, partnerships, S corporations, personal service C corporations or closely held C corporations must also file Form 8283, Section A to substantiate noncash gifts valued over $500 but not more than $5,000. Reg. 1.170A-16(c)(2).
Form 8283 must be filed with the tax return on which the deduction is claimed. Reg. 1.170A-16(c)(2). The Service provides instructions for Form 8283, available at IRS.gov. The regulations also provide clarification as to what is required to complete the form. Reg. 1.170A-16(c)(3). First, the form must include the donor's name and taxpayer identification number, such as a Social Security Number or employer identification number. Reg. 1.170A-16(c)(3)(i). Second, the form must identify the name and address of the charity. Reg. 1.170A-16(c)(3)(ii). Lastly, the form must include the date the donor made the gift, which, in most cases, would be the date the charity received the property. Reg. 1.170A-16(c)(3)(iii).
Noncash assets come in many varieties. Form 8283, Section A requires a description of the asset, with sufficient detail that a person not generally familiar with the type of property would be able to ascertain that the described property is the contributed property. Reg. 1.170A-16(c)(3)(iv)(A). If the property is real property or tangible personal property, such as household goods, the condition of the property must be described. Reg. 1.170A-16(c)(3)(iv)(B). For securities, the name of the issuer, the type of security and information regarding whether the security is publicly traded must be included on Form 8283.Reg. 1.170A-16(c)(3)(iv)(C).
Regardless of the type of asset, Form 8283 requires the fair market value of the asset on the gift date and a description of the method used to determine the fair market value. Reg. 1.170A-16(c)(3)(iv)(D). The donor must disclose how he or she acquired the asset, whether it was by purchase, inheritance, gift, exchange or some other acquisition method. The donor must also provide an estimated date of acquisition. Reg. 1.170A-16(c)(3)(iv)(E).
An exception for publicly traded securities allows the donor to make a representation that the securities have been held for more than one year. The Service will regard that representation as sufficient for purposes of Form 8283. Reg. 1.170A-16(c)(3)(iv)(E). In the case where the noncash asset was created, produced or manufactured by or for the donor, the approximate date of substantial completion must be included on Form 8283. Reg. 1.170A-16(c)(3)(iv)(E).
Noncash Gifts Over $5,000
For noncash gifts valued over $5,000, donors are required to meet several requirements in addition to the foundational requirements. Donors must fulfill the requirements for noncash gifts valued over $250, which requires the donor to obtain a contemporaneous written acknowledgement that complies with Reg. 1.170A-13(f). Reg. 1.170A-16(d)(1)(i). In addition, a donor must obtain a qualified appraisal prepared by a qualified appraiser. Reg. 1.170A-16(d)(1)(ii). The appraiser qualifications and qualified appraisal requirements will be addressed in an upcoming article.
Publicly traded securities, certain intellectual property, qualified vehicles and certain inventory-type assets are listed in Reg. 1.170A-16(d)(2) as exceptions to the qualified appraisal and Form 8283 requirements. If the asset falls into one of these categories, a qualified appraisal is not required and Form 8283 Section B does not need to be completed. The donor may instead complete Form 8283, Section A to meet the substantiation requirements. Reg. 1.170A-16(d)(2).
A donor will be required to file the form with the return on which the deduction is claimed. For gifts larger than $5,000, Form 8283, Section B must be completed. The completed Section B will include the donor's name and taxpayer identification number, which may be a Social Security Number or employer identification number. Reg. 1.170A-16(d)(3)(i). The charity's name, address, taxpayer identification number, a dated signature and the gift date must be included in Section B. Reg. 1.170A-16(d)(3)(ii).
Information regarding the qualified appraiser is required to be completed on Form 8283, Section B. The name, address and taxpayer identification number must be disclosed. The appraiser must make a declaration on the form and sign and date the form. Reg. 1.170A-16(d)(3)(iii).
The form must include information regarding the noncash asset donated to charity. The fair market value of the noncash asset should be disclosed. Reg. 1.170A-16(d)(3)(iv)(A). There must be a statement with a sufficiently detailed description identifying the property so that a person not generally familiar with the property would understand that the described property is the contributed property. Reg. 1.170A-16(d)(3)(iv)(B). If the property is real property or tangible personal property, a description of the condition of the property is required. Reg. 1.170A-16(d)(3)(iv)(C).
The donor must disclose how he or she acquired the property (e.g., inheritance, gift, bequest or exchange) and the approximate date he or she obtained the property. If the property was created, produced or manufactured by or for the donor, the donor should disclose the date the asset was substantially completed as the date of acquisition. Reg. 1.170A-16(d)(3)(v).
The donor must include the cost basis of the property. Reg. 1.170A-16(d)(3)(vi). If the gift was made through a bargain sale, the donor must disclose this information and the amount received in the transaction. Reg. 1.170A-16(d)(3)(vii). If Form 8283, Section B or the instructions to Form 8283 require any information not listed in the regulation, then the donor must also provide the required information. Reg. 1.170A-16(d)(3)(viii).
Noncash Gifts Over $500,000
If a donor makes a charitable contribution valued at over $500,000, he or she will be required to attach additional substantiation to claim a charitable deduction. The donor must obtain a contemporaneous written acknowledgement and a qualified appraisal prepared by a qualified appraiser. Reg. 1.170A-16(e)(1). A completed Form 8283 must be filed with the return on which the deduction is claimed. In addition, the donor must attach the qualified appraisal to the tax return on which the deduction is claimed. Reg. 1.170A-16(e)(1)(iv).
The same exceptions for noncash gifts valued over $5,000 apply to noncash gifts over $500,000. A qualified appraisal is not required for gifts of publicly traded securities, certain intellectual property, qualified vehicles and certain inventory-type assets. Reg. 1.170A-16(e)(2). Form 8283, Section B does not need to be completed for this type of property gift. The donor will, however, be required to complete Form 8283, Section A. Reg. 1.170A-16(e)(2).
Special Rules for Noncash Asset Gifts
Form 8283 Additional Requirements
Each contributed noncash asset will require a separate Form 8283 from the donor. Reg. 1.170A-16(f)(2)(i). The forms must be attached to the tax return on which the deduction is claimed. Donors contributing similar items may attach one Form 8283 for the similar items if contributed to the same charity during the same taxable year. Reg. 1.170A-16(f)(2)(ii).
In some instances, a donor may be unable to claim the full charitable deduction in one year. For most noncash appreciated assets, the donor's charitable income tax deduction is limited to 30% of the donor's adjusted gross income in the year of the gift. In many cases, the charitable deduction will exceed that deduction limit. If the donor is unable to claim the full deduction in the year of the gift, the Service allows the donor to carry forward the charitable deduction for up to five additional years. Reg. 1.170A-10.
If the original charitable gift exceeded $500 in value, the donor must include the same substantiation documentation as required for the original charitable deduction with any tax returns claiming a carryforward deduction. Reg. 1.170A-16(f)(3). If a donor fails to include this substantiation, the Service may disallow the deduction entirely.
Reasonable Cause Exception
In the 2008 proposed regulations, the Service included a reasonable cause exception. In 2013, the Tax Court decided Crimi v. Commissioner, T.C. Memo. 2013-51. In Crimi, the Court decided that reasonable cause is "inherently a fact-intensive one, and facts and circumstances must be judged on a case-by-case basis." The final regulations were published excluding a codified reasonable cause exception.
Advisors and charities may be called upon to participate in the completion of Form 8283. Professional advisors and charities should understand the requirements of Form 8283 under the final regulations so that the form is completed accurately and timely, allowing donors to claim charitable deductions in the appropriate year.
Because donors' charitable income tax deductions are at stake, it is crucial for advisors to understand the final regulation requirements for substantiation and assist their clients in obtaining correct receipts. Charities must understand their obligations to provide correct receipts for charitable gifts and work with professional advisors to ensure that donors are given the correct substantiation documentation in a timely manner.