Substantiation Rules – Non-Cash Contributions
Reasonable Cause Exception
The proposed regulations provided a reasonable cause exception to various non-cash substantiation and reporting rules. The final regulations removed that proposed reg and do not provide a standard for the exception. However, the Preamble indicates that reasonable cause may be determined on a case-by-case basis. Use caution in assuming your client’s reasonable cause will be acceptable.
Deductions of Less Than $250
A taxpayer claiming a non-cash contribution must get and keep a receipt from the charitable organization showing:
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The name of the charitable organization,
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The date and location of the charitable contribution, and
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A reasonably detailed description of the property.
Note
The taxpayer is not required to have a receipt where it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).
Deductions of at Least $250 But Not More Than $500
If a taxpayer claims a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, he or she must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made by more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and include:
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The name of the charitable organization,
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The date and location of the charitable contribution,
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A reasonably detailed description (but not necessarily the value) of any property contributed,
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Whether the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits), and
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If goods and or services were provided to the taxpayer the acknowledgment must include a description and good faith estimate of the value of those goods or services., If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.
The IRS denied a taxpayer a substantial deduction for contributions because the acknowledgment letter from the taxpayer’s church lacked the “no goods or services provided” statement. A second letter that included the required statement was not acceptable because it was not received contemporaneously. The Tax Court agreed with the IRS. This case shows the importance of scrutinizing an acknowledgment letter to be certain all of the required elements are included, and if something is omitted, the taxpayer needs to request a replacement letter before filing their return. (Durden v. Commissioner, Dec. 59,061(M), TC Memo 2012-140)
Doorknob Hangers Insufficient Proof - A married couple’s charitable contribution deductions were denied because they did not provide to the IRS or the Court a “contemporaneous written acknowledgment” from any of four charitable organizations to which they’d donated non-cash items. The Tax Court said, “They produced no acknowledgment of any kind from the Church or Goodwill. And the doorknob hangers left by the truck drivers from Vietnam Veterans and Purple Heart clearly do not satisfy the regulatory requirements. These doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.” The taxpayers had also claimed over $5,000 of clothing donations during the year with no appraisals that were also denied. (Kunkel v. Commissioner T.C. Memo. 2015-71)
Deductions Over $500 But Not Over $5,000
If a taxpayer claims a deduction over $500 but not over $5,000 for a non-cash charitable contribution, they must have the same acknowledgment and written records as for contributions of at least $250 but not more than $500 described above. In addition, the records must also include:
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How the property was obtained. For example, by purchase, gift, bequest, inheritance, or exchange.
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The approximate date the property was obtained or, if created, produced, or manufactured by the taxpayer, the approximate date the property was substantially completed.
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The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. This requirement, however, does not apply to publicly traded securities., If the taxpayer is not able to provide information on either the date the property was obtained or the cost basis of the property and there is reasonable cause for not being able to provide this information, attach a statement of explanation to the return.
Deductions Over $5,000
If the taxpayer claims a deduction of over $5,000 for a charitable contribution of one property item or a group of similar property items, they must obtain acknowledgment from the charitable organization. In determining whether the deduction is over $5,000, combine the deductions for all similar items donated to any charitable organization during the year.
Generally, the taxpayer must also obtain a qualified written appraisal of the donated property from a qualified appraiser. For more details on contributions of $5,000 or more, see IRS Pub 561.
Deduction Over $5,000 for One Item
When the contribution exceeds $5,000 for one item, Section B of Form 8283 must be completed for each item or group of items for which the taxpayer claimed a deduction of over $5,000. Exception: This rule does not apply to publicly traded securities that are reported in Section A of the 8283.
Appraisal Fees
Fees paid to find the fair market value of donated property are not deductible as contributions. They must be claimed as miscellaneous deductions on Schedule A, subject to the 2% of AGI limit. Therefore, for years 2018-2025, because the TCJA of 2017 suspended Tier 2 miscellaneous deductions, the cost of the appraisal is not deductible.
Caution
The Preamble to the final regulations provides that only Section B, part IV of Form 8283, which is completed for property valued at over $5,000, is a donee acknowledgment, and this acknowledgment only contains some of the information required by Code Sec. 170(f)(8)(B). Accordingly, even a fully completed Form 8283 does not satisfy the requirements of Code Sec. 170(f)(8). If a copy of the appraisal must be attached to the tax year of the contribution, then it must also be attached to all carryover years.
Aggregate Contributions Over $5,000
Frequently taxpayers make multiple charitable contributions during the year and if the total of those contributions exceeds $5,000, is a qualified appraisal required?
In determining whether the $5,000 limitation has been exceeded, property and all similar items of property (see below) donated to one or more donees are treated as one property (Code Sec. 170(f)(11)(F)). This rule applies even if the similar items are donated to two or more different charitable donees (Reg § 1.170A-13(c)(1)(i); Reg § 1.170A-16(f)(5)(ii)).
Example: Jay and Emily made three donations of used clothing during the year, $2,500 worth to the Salvation Army, $1,500 worth to the Vietnam Veterans and $2,000 to Goodwill for a total of $6,000. Because the items were all similar in nature (clothing), and because the total exceeded $5,000, Jay and Emily will need to obtain a qualified appraisal.
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Similar Items of Property
Similar items of property means property of the same generic category or type, such as stamp collections (including philatelic supplies and books on stamp collecting), coin collections (including numismatic supplies and books on coin collecting), lithographs, paintings, photographs, books, non-publicly traded stock, non-publicly traded securities other than non-publicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver (Reg § 1.170A-13(c)(7)(iii)).
Exceptions to the $5,000 Limitation
Reduced requirements apply to contributions of non-publicly traded stock for which the claimed deduction is more than $5,000 but not more than $10,000 and additional requirements apply where a deduction of more than $500,000 is claimed. No appraisal is required for contributions of publicly traded securities for which there are readily available market quotations.