Our tax laws allow a deduction for contributions and gifts made to charities. The idea is that the charity is relieving the government of some service or function that the government would have to otherwise have provided.
The amount of the charitable contribution deduction can be significant. This benefit has been part of tax planning and strategies. This includes the contribution of buildings and houses that would have otherwise been demolished to fire departments who later burn the structures down in training exercises, conservation easements and facade easements where a real estate owner contributes land to a nature preserve or historical society so that the property will not be developed, and charitable remainder trusts that accept and sell appreciated property in exchange for a return of investment made back to the donor in series of payments over time.
The charitable deduction is often disputed by the IRS even absent this type of tax planning. Most of these more routine disputes involve questions about whether the taxpayer substantiated their charitable deductions (others involve foot faults in reporting charitable donations). The recent Harrison v. Commissioner, T.C. Summary Opinion 2022-6, case provides an example and an opportunity to consider the substantiation rules.
Facts & Procedural History
The facts in this case are unremarkable. They have been repeated in similar cases time and time again. Here is the abbreviated version.
The taxpayer’s return was pulled for audit by the IRS. The IRS inquired about the taxpayer’s Schedule C business and proposed adjustments to the business expenses. In addition, the IRS disallowed the taxpayer’s Schedule A charitable deductions. The combination of a Schedule C business loss and Schedule A charitable deductions was likely why the IRS pulled her tax return for audit in the first place.
As for the charitable contributions, they consisted of donations made in cash and donations of property. The property consisted of donations of clothing, shoes, and jewelry to organizations such as Goodwill and Dress for Success. The taxpayer reported $7,500 on her tax return for these amounts.
Since the IRS allowed none of these amounts, the taxpayer filed a petition with the U.S. Tax Court to dispute the IRS’s proposed changes.
Charitable Contributions, Generally
Section 170 provides a tax deduction for certain charitable contributions and gifts. The charity then takes the property and can dispose of it or use it tax free–as that is the nature of charitable organizations (see exception for gifts that are actually income to the charity). These are the general rules. There are nuances.
The nuances start with the type of organization that receives the contribution or gift. It has to be a qualified organization. There are limitations based on the type of organization. There are also limits that apply depending on whether you contribute cash (or equivalent) or property or costs in providing services. There are also limits that apply depending on the tax status of the party making the contribution, i.e., an individual, trust, partnership, or corporation.
We won’t go into the nuances of these limitations in this post. We just note that gifts of cash, property, and costs in providing services have different substantiation requirements. These requirements are based on the value of the contribution. Cash (or equivalent) is easy to value. Property and costs in providing services are not.
The term “fair market value” is defined as “the price at which the property would change hands 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. This value is determined as of the time of the contribution.
Substantiation for Cash Contributions
You generally do not need a receipt for contributions of cash or money that are less than $250. You apply the $250 to each contribution even if you made numerous contributions to the same charity during the year. IRS Publication 526 provides this example:
In figuring whether your contribution is $250 or more, don’t combine separate contributions. For example, if you gave your church $25 each week, your weekly payments don’t have to be combined. Each payment is a separate contribution.
Contributions of cash in excess of $249 to charity has to be substantiated by either:
- a canceled check,
- a receipt from the donee charitable organization showing the name of the donee, the date of the contribution, and the amount of the contribution, or
- other reliable written records showing the name of the donee, the date of the contribution, and the amount of the contribution.
These rules are set out in Treas. Reg. § 1.170A-13(a)(1). With respect to item # 3, the regulation goes on to set out factors that establish that records are “reliable”:
- The contemporaneous nature of the writing evidencing the contribution.
- The regularity of the taxpayer’s recordkeeping procedures. For example, a contemporaneous diary entry stating the amount and date of the donation and the name of the donee charitable organization made by a taxpayer who regularly makes such diary entries would generally be considered reliable.
- In the case of a contribution of a small amount, the existence of any written or other evidence from the donee charitable organization evidencing receipt of a donation that would not otherwise constitute a receipt (including an emblem, button, or other token traditionally associated with a charitable organization and regularly given by the organization to persons making cash donations).
The rules are similar but different for non-cash contributions.
Substantiation for Property
The substantiation rules are different for contributions of property. Taxpayers generally have to have a receipt for non-cash contributions.
Not any receipt is good enough. The receipt has to show the following information:
- The name of the donee,
- The date and location of the contribution, and
- A description of the property in detail reasonably sufficient under the circumstances.
With respect to the last item, the rules say that “Although the fair market value of the property is one of the circumstances to be taken into account in determining the amount of detail to be included on the receipt, such value need not be stated on the receipt.”
The rules also say that a letter that contains the above information is acceptable.
Last, the rules say that a receipt is not always needed if it is impractical to obtain one. It gives the example of depositing property at a charity’s unattended drop site. The taxpayer is expected to maintain some other written record in these situations.
If the contribution is over $500, taxpayers also have to fill out and include a Form 8283 with their tax return. If the contribution is over $5,000, the taxpayer has to provide the Form 8283 and have an appraisal by a qualified appraiser completed and include a copy with their tax return.
There are rules for what counts as a qualified appraisal. IRS Publication 526 says that it is one that:
- Is made, signed, and dated by a qualified appraiser (defined later) in accordance with generally accepted appraisal standards;
- Meets the relevant requirements of Regulations section 1.170A-17(a);
- Has a valuation effective date no earlier than 60 days before the date of the contribution and no later than the date of the contribution. For an appraisal report dated on or after the date of the contribution, the valuation effective date must be the date of the contribution; and
- Does not involve a prohibited appraisal fee (such as a contingent fee).
There are a few exceptions to having the qualified appraisal, such as donating a used vehicle to charity or publicly traded securities. Note: the charity will file a Form 1098-C with the IRS if the vehicle is valued over $500. You may want to obtain a copy of this record to provide to the IRS if audited.
Substantiation for Costs Incurred in Providing Services
While not considered in this particular court case, costs incurred in providing services can also qualify for a charitable deduction. In addition to the receipt for the items purchased or incurred in providing the services, taxpayers generally have to have an acknowledgment from the charity that contains:
- A description of the services provided,
- A statement of whether or not the organization provided any goods or services to reimburse the taxpayer for the expenses incurred,
- A description and a good faith estimate of the value of any goods or services (other than intangible religious benefits) provided to reimburse the taxpayer, and
- A statement that the only benefit you received was an intangible religious benefit, if that was the case.
Car expenses can qualify. Taxpayers just need the typical records for car and truck expenses, such as a mileage log. The taxpayer can then choose between the standard mileage rate (which is lower for charitable deductions) and the actual costs incurred.
Example of How the Court Applies the Rules
This case provides an example of how the court applies these rules. The taxpayer had reported a $7,500 charitable contribution deduction. The deduction was for contributions of cash and property.
For the cash contributions, the court described the cash contributions as follows:
… petitioner presented some very general testimony that she had used Paypal linked to her bank account to make contributions throughout the year. She reviewed contributions from a prior tax year to estimate the contributions for the year in issue. Petitioner did not provide any documentation from her bank or Paypal in support and provided only one receipt for $100 contributed to “Fund for Animals.”
Given the receipt, the court concluded that the taxpayer only substantiated $100 of cash contributions.
The non-cash contributions included donation of clothes, shoes and jewelry Goodwill and Dress for Success. The court describes the substantiation as follows:
She testified she donated bags containing clothing, shoes, and jewelry to Goodwill and Dress for Success. While she provided some receipts to respondent before trial, other receipts were presented for the first time at the trial. She described the items in the bags as “used clothing in good condition” and valued the items at cost, discounted by 50%. No further description was provided through receipts or testimony as to the contents of the bags or the ages or the costs of the contents.
The court noted the circumstances and its effort to value the contributions:
While we have no doubt that petitioner made some contributions of clothing and other items, the failure to provide sufficient and timely receipts until trial, despite requests from the IRS, works against her. The record lacks approximate dates of acquisition of the items, detailed descriptions of the items, and the costs or other bases. Under these circumstances, the Court is burdened with attempting to place a value on property with insufficient information.
The court allowed $500 for these non-cash contributions.
This shows how the court applies these rules. It weighs the credibility of the taxpayer via their testimony and records. Once it determines that some contributions were in fact made to a charity, it evaluates the records. Expenses that have the required records are usually allowed. Those that are not supported by records may be allowed, but the court will round down in determining the amount. It does this with non-cash contributions by, as in this case, estimating the fair market value of the property contributed.
This case shows that contemporaneous records and an appraisal by a qualified appraiser can go a long way in ensuring that charitable contribution deductions are allowed. Most taxpayers do not go to these lengths. Instead, they gather what records and receipts they can only after their tax returns are selected for audit. With nominal deductions, this may be sufficient. If the deductions are more than a few hundred dollars, taxpayers should assume the IRS will audit and review the deduction and plan accordingly. Larger contributions or contributions where there are substantial services or benefits to the taxpayer warrant consulting with a tax attorney. Tax planning for charitable contributions should also be run by a tax attorney.