General rules for cash contributions
Cash contributions, regardless of amount, cannot be deducted unless the taxpayer maintains a record of the contribution (Sec. 170(f)(17)). This record can be a bank record or written communication from the donee that shows the name of the donee organization, the date of the contribution, and the amount of the contribution. Final Sec. 170 regulations issued on July 30, 2018, provide that a bank record includes a statement from a financial institution, an electronic fund transfer receipt, a canceled check, a scanned image of both sides of a canceled check obtained from a bank website, or a credit card statement (Regs. Sec. 1.170A-15(b)(2)). Further, the regulations affirm that an email is a sufficient written communication. However, the preamble to the regulations (T.D. 9836) states that blank pledge cards provided by a donee but filled out by the donor are not sufficient substantiation for cash contributions because they do not contain the information required under Sec. 170(f)(17).
Contributions of $250 or more require contemporaneous written acknowledgment from the donee organization. The written acknowledgment must include all of the following:
- The donee organization name;
- The date of receipt;
- The amount of any cash the taxpayer paid;
- A description (but not necessarily the value) of any property other than cash the taxpayer transferred to the donee;
- A statement whether the donee organization provided any goods or services in consideration for the donation;
- A description and good-faith estimate of the value of goods or services (other than intangible religious benefits) that a donee organization provided in return for the contribution; and
- If the donee organization provided any intangible religious benefits, a statement to that effect (Sec. 170(f)(8)(B) and Regs. Sec. 1.170A-13(f)(2)).
The written acknowledgment must be contemporaneous, meaning it must be received on or before the earlier of the date on which the taxpayer files a return for the tax year in which the contribution was made or the due date (including extensions) for the return (Regs. Sec. 1.170A-13(f)(3)).
If the required contemporaneous written acknowledgment from the donee organization is not obtained, the charitable deduction can be entirely disallowed. Consider the Tax Court case of Durden, T.C. Memo. 2012-140. In it, the taxpayers claimed deductions for contributions made by check for more than $250 each. The taxpayer received two acknowledgment letters from the donee organization. The first failed to include a statement regarding whether any goods or services were provided in exchange for the contribution, and the second, revised letter was not contemporaneous.
In denying the deduction, the court emphasized the express terms of the statute, which require an affirmative statement regarding whether goods or services are provided. Absent such a statement, it is impossible to know whether the donee organization provided a benefit and whether the deduction should be reduced accordingly. The court denied the second acknowledgment because it was dated more than a year after the due date of the return.
Taxpayers should review their acknowledgment letters to verify that the "no goods or services were provided" language is present. It is not uncommon to see acknowledgment letters stating that the "donation is deductible to the full extent of the law." This language is insufficient. Generally, charitable organizations are willing to revise letters to include the necessary language. The key is discovering any errors or omissions in the letters early in the tax return preparation process to allow enough time to obtain contemporaneous documentation that complies with all relevant substantiation requirements.
Contributions for which a taxpayer receives a corresponding state or local tax credit or deduction
What happens when a taxpayer makes a contribution and receives or expects to receive a state or local tax (SALT) credit or deduction in return?
In response to the new federal $10,000 SALT deduction limitation under Sec. 164, many states enacted or proposed legislation that allows or would allow a taxpayer to make payments to state or local government-controlled funds in exchange for credits or deductions against the taxpayer's SALT liability. Federal regulations were proposed in response (Prop. Regs. Sec. 1.170A-1(h)(3)) that would generally eliminate the federal deduction for charitable contributions to the extent the taxpayer receives or expects to receive a corresponding SALT credit or a SALT deduction in excess of the amount of the payment. The proposed regulations would apply to charitable contributions made after Aug. 27, 2018.
The preamble to the proposed regulations (REG-112176-18) stressed that they were based on "longstanding principles" of tax law, legislative intent, and public policy considerations and that "appropriate application of the quid pro quo doctrine to substantial state or local tax benefits is consistent with the Code and sound tax administration." For any contribution, the taxpayer must reduce his or her charitable deduction by the benefit received. The proposed regulations clarify that this reduction applies to SALT credits, but they do not limit a SALT deduction unless the deduction exceeds the amount of the taxpayer's payment or the fair market value of the property transferred.
What happens if taxpayers made a contribution in exchange for a SALT credit and the acknowledgment letter from the charitable organization fails to disclose a benefit conferred upon the taxpayer? Consider the case of Addis,374 F.3d 881 (9th Cir. 2004), aff'g 118 T.C. 528 (2002). In Addis,the taxpayers received an acknowledgment letter that erroneously stated that the taxpayers were given no goods or services in return for contributions. In denying the charitable deduction, the Ninth Circuit quoted Regs. Sec. 1.170A-1(h)(4) in stating that "a taxpayer may rely on . . . a contemporaneous written acknowledgment provided under section 170(f)(8) . . . for the fair market value of any goods or services," unless "the taxpayer knows, or has reason to know, that such treatment is unreasonable." The IRS noted in the preamble to the proposed regulations that SALT credits are "not generally provided by the donee entity," but that there might be "situations in which the entity would be providing the credit and would need to include it" in the acknowledgment provided to the donor. The IRS invited comments on the issue.
Taxpayers should consider whether they engaged in charitable transactions resulting in a SALT credit. Careful review of the acknowledgment letter related to such a charitable donation is also warranted. If the acknowledgment letter indicates that no goods or services were provided in exchange for the donation and yet the taxpayer is aware that a SALT credit was (or is expected to be) received, that statement cannot be relied upon, and the taxpayer's contribution should be reduced.
General noncash substantiation requirements
For noncash contributions of more than $500 but not more than $5,000, the donor must obtain a contemporaneous written acknowledgment and must also file a completed Form 8283, Noncash Charitable Contributions, with the return on which the deduction is claimed. Subject to certain exceptions, the taxpayer must also obtain a qualified appraisal for contributions valued in excess of $5,000 prior to filing the return on which the deduction is first claimed (Regs. Sec. 1.170A-13(c)(3)(iv)(B)). This appraisal must be attached to the tax return if the contribution is more than $500,000 (Sec. 170(f)(11)(D)). Importantly, the final regulations affirm that required substantiation must also be submitted with the tax returns of carryover years in which the deduction is taken (Regs. Sec. 1.170A-16(f)(3)).
Failure to properly complete all required fields on Form 8283, including the donor's cost or other basis, could jeopardize the entire deduction for the donated property. In RERI Holdings I, LLC, 149 T.C. 1 (2017), the Tax Court denied a $33 million charitable deduction because the partnership failed to comply with Regs. Sec. 1.170A-13 by omitting the cost basis of the contributed property from Form 8283.
More expansive substantiation issues arose in Ohde, T.C. Memo. 2017-137. In Ohde, the Tax Court ruled against a married couple, finding that they were not entitled to claim a noncash charitable deduction of $145,250 for donating over 20,000 items to Goodwill Industries. The taxpayers' receipts from Goodwill did not list the quantity of the items or describe them. The taxpayers provided a (noncontemporaneously prepared) spreadsheet showing a total dollar value for items contributed, but they provided no credible evidence to establish the cost basis or fair market value of any of the 20,000 individual items. The court also disallowed contributions exceeding $5,000 for which the taxpayers did not obtain an appraisal. While they attached to their return several Forms 8283, the forms were not executed by the donee organization or an appraiser, as is required for contributions in excess of $5,000.
In Estate of Evenchik,T.C. Memo. 2013-34, the taxpayers obtained appraisals and still were denied a deduction. The taxpayers made a charitable donation of a corporation, the sole assets of which were two apartment buildings. However, the appraisals valued the apartment buildings rather than the corporation itself. The Tax Court said that "not appraising what was actually donated is a big problem, but not the only one." It noted that the appraisals fell "woefully short" of meeting the requirements for a qualified appraisal under Regs. Sec. 1.170A-13(c)(3), including failing to state the date or expected date of the contribution and failing to provide a statement that the appraisal was for income tax purposes.
Several lessons can be learned from these cases. The most basic is that taxpayers should carefully review Form 8283 to ensure that all required fields are completed and necessary signatures obtained. Taxpayers should also be mindful that even if the donation is only clothing and household items, the rules must be followed. When making noncash contributions, the taxpayer may consider taking photos of the donated property to document the number and type of items and their condition and then attaching a list of the items and the value of each item to the back of the Goodwill receipt for tax records. Making the extra effort to comply with the requirements upfront might save a deduction from being denied.
Planning prior to charitable donations is crucial, particularly when appraisals will be required. Appraisals take time, and they must be obtained prior to claiming the deduction. If taxpayers wait until April (or October, for an extended return) to discover that they failed to obtain a necessary appraisal, the only recourse is to file a return without a deduction and amend the return to claim the deduction once the appraisal is completed. In any case, when an appraisal is required, taxpayers should consult with their tax adviser to review the appraisal to confirm it is a qualified appraisal and is for the asset actually donated. Finally, taxpayers should be diligent to attach appraisals to the return when required.
Charitable deductions are a matter of legislative grace. The cases discussed above show that the IRS can deny that grace when substantiation rules are not properly followed.
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Jacob Puhl, J.D., LL.M., is a former manager at Deloitte Tax LLP in Washington.
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All contributors are members of or associated with Deloitte Tax LLP.