Presentation Transcript

1. Charitable Contributions:Substantiation and Disclosure Requirements

   Marquette Law School May 13, 2013 With support from the Helen Bader FoundationH
2. Charitable Contributions Generally This presentation aims to: Explain the federal tax law for organizations such as charities and churches that receive tax-deductible contributions and for taxpayers who make contributions. There are recordkeeping and substantiation rules imposed on donors of charitable contributions and disclosure rules imposed on charities that receive certain quid pro quo contributions (partial gifts and partial payments in exchange for a return benefit).
3. Our Roadmap for Today Historical Origins Policy Issues Eligible Recipients Form and Timing What is a Charitable Gift? Percentage Limitations and Carryovers Substantiation Requirements Noncash Contributions Note: Examples will be used along the way to illustrate concepts.
4. Historical Origins The charitable income tax deduction was first enacted in 1917 to raise funds to finance World War I. The deduction has been prominent feature of the income tax system since that date. Estate tax charitable deduction enacted in 1918 (IRC 2055) (two years after enactment of first federal estate tax) Gift tax charitable deduction (IRC 2522) 1917 version limited deduction to up to 15% of taxpayer’s income for the year. 1917 statute quite short (less than a page). Current statute is 34 pages and the related treasury regulations are over 100 pages.
5. Policy Issues Debate over charitable deduction similar to tax exemption debate. Is this a subsidy? Should support among 501(c)(3)s be undifferentiated Do most donations go to the benefit of the elite? (universities and art museums) Inefficient incentives? (higher benefits to wealthy) Little incentive for low and middle income taxpayers to donate (non-itemizers) Are contributions personal consumption?
6. Eligible Recipients Who can a donor make a gift to and claim a charitable tax deduction? 170(c) clarifies 5 categories of organizations qualify to receive: Governmental entities Domestic corporations, community chests, funds, or foundations that are organized and operated exclusively for religious, charitable, scientific, literary or educational purposes… Veterans organizations Domestic fraternal lodges… Nonprofit cemetery companies
7. What if a donor wants to provide funding for the renovation of the British Museum in London? If he/she gives the money directly to the museum, no tax deduction because of the “domestic” limitation. However, can give to a United States based entity that will then grant money to the British Museum and claim tax deduction (typical “friends of” org).
8. How to Verify the Organization is an Eligible Recipient? If considering a gift, how can a donor verify what organizations it can give money to and claim a charitable tax deduction? IRS Publication 78 on IRS website Or Guidestar.org In general, a contributor may rely on Publication 78 until the IRS publishes a formal notice of revocation or change of classification. However, no reliance if donor knows the organization’s exempt status was revoked, was aware that revocation was imminent, or was responsible for or aware of the circumstances leading to the revocation. Rev. Proc. 82-39.
9. International Giving Growth of global philanthropy in recent years. Result has been a greater interest in tax planning for US donors for use of money outside the US. Remember, IRC 170(c) requires gift to a “domestic” organization (i.e., one formed in the US. Note: no limit on where money is used by that organization.
10. Revenue Ruling 63-252 Issue: are donations by a US taxpayer to a US organization deductible if the organization transmits some or all of money to a foreign charitable organization? Generally deductible, if… Organization must be validly created or organized in the US (or possession). So, gifts to a Bermuda nonprofit would not generate a US tax deduction. Organization must be organized and operated exclusively for religious, charitable, etc. purposes.
11. Quote from Rev. Rul. 63-252 “Moreover, it seems clear that the requirements of section 170(c)(2)(A) of the Code would be nullified if contributions inevitably committed to go to a foreign organization were held to be deductible solely because, in the course of transmittal to the foreign organization, they came to rest momentarily in a qualifying domestic organization. In such cases the domestic organization is only nominally the done; the real done is the ultimate foreign recipient.”
12. Fiscal Sponsors What if short term or embryonic project that needs to be eligible to receive tax deductible contributions? Project might not justify the work and expense of creating a separate tax-exempt entity. Answer = fiscal sponsorship Project looks for a 501(c)(3) sponsor to receive the funds and pass them on to the project. Gregory L. Colvin, Fiscal Sponsorship: 6 Ways to Do it Right (2005). Fiscal sponsorships are contractual arrangements documented by a written agreement.
13. Sponsors typically provide accounting, gift processing and other administrative services in exchange for a fee. Sponsor retains legal control over the project’s finances even though the project retains practical control over its mission and programs and is responsible for fundraising. To comply with IRS guidelines, the sponsoring exempt organization should not act as a mere agent of the nonexempt project. Rather, the charity must retain legal control and ensure that the project furthers the charity’s exempt purposes and does not result in any inurement or private gain to the project leaders. Id.
14. Form and Timing A contribution is tax-deductible if it is made either “to” or “for the use” of a qualified donee. Gifts made to individuals, even if needy, are not deductible. “For the use of” allows gifts made in trust for an organization’s benefit to be tax deductible. Supreme Court has interpreted this strictly to require legal power to enforce for deduction to be allowed. 1990 Supreme Court case David v. United States. What if parents pay money to children to support work as Mormon missionaries? Not deductible as contributions “to or for the use of” the church unless funds actually given to church or put in legally binding trust for church.
15. Out-of-Pocket Expenses Unreimbursed expenses of volunteers may be deducted even though not paid to the charity, subject to the restriction that deduction not allowed if there is a “significant element of personal pleasure, recreation or vacation in such travel.” IRC 170(j). Note: Special nonprofit mileage reimbursement rate - currently only 14 cents per mile.
16. Form and Timing When to Claim Deduction? Deduction can be claimed in year when unconditionally paid. Treas. Reg. section 1.170A-1(a) Payment is made when the property is beyond the dominion and control of the donor. Check that clears in due course will be effective as of the date of mailing, even if it is not received and deposited by the charity until the following year. Treas. Reg. section 1.170A-1(b) Contributions made by credit card are deductible when the charge is made to the donor’s account, regardless of when the cardholder pays the bank. Rev. Rul 78-38. Gifts of stock are made when stock is transferred on the corporation’s books. Treas. Reg. section 1.170A-1(b)
17. Pledges: Generally not deductible until satisfied or paid, even if enforceable under state law. Rev. Rul 68-174 and Treas. Reg. section 1.170A-1(a) Corporate Donors: A corporation using the accrual method of accounting may elect to deduct contributions authorized by its board of directors before the end of its taxable year and paid on or before the fifteenth day of the third month of the following year. IRC 170(a)(2) and Treas. Reg. section 1.170A-11(b) Option: Deduction not allowed at time of the grant, but only when option is exercised. Rev. Rul 82-197
18. What is a Charitable Gift? What if return benefits for the gift? To be tax- deductible, a charitable contribution must be made with donative intent. Generally, no tax deduction if return benefit with measurable fair market value. Burden: The burden is on the taxpayer to show (i) intent to make gift and (ii) money given exceeded fair market value of goods or services received from the done. Treas. Reg. section 1.170A-1(h) The Supreme Court defined a gift as a transfer of money or property without adequate consideration and with no expectation of a return benefit. Commissioner v. Duberstein, 363 U.S. 278 (1960) A payment of money cannot constitute a charitable contribution if the contributor expects a substantial benefit in return. US v. American Bar Endowment, 477 U.S. 105 (1986). So, focus on whether donor expected a return benefit.
19. Revenue Ruling 67-246 Advice requested on fund-raising practices frequently employed by charitable organizations to verify when donations will be tax deductible despite the presence of some sort of return benefit. Focus on charity galas, bazaars, banquets, etc. Frequent misunderstandings and erroneous tax filings. 12 examples to illustrate when deductions may be claimed. Highlight difference between contribution and purchase. Where money is paid for an item of value, the IRS presumes that there was no gift and that the value paid was the purchase price. Burden is on taxpayer to show part of the payment was for the value of the item and part of it was a gift.
20. Donee Estimates of Return Benefit Charity should provide a good faith estimate of the value of the return benefit. Use any reasonable method to determine value. Generally look at average price of item or experience on market. Or compare with comparable goods and services. Example of museum private event in treasury regulations donor can hold private event in return for a large “donation.” Use value of leasing ballroom at local hotel with similar amenities and capacity for FMV determination. Treas Reg. section 1.6115-1(a)(3) What if a celebrity present? Can disregard.
21. Benefits with Insubstantial Value Administrative guidelines and safe harbors for charities to advise donors about benefits received in return for contributions. Rev. Proc. 90-12. What if really small item in return? Some small items deemed too difficult or burdensome to value. IRS guidance to avoid administrative burden for such situations. IRS guidelines provide that a benefit may be so inconsequential or insubstantial that the full amount of a contribution may be deducted.
22. Insubstantial FMV if payment received in context of fundraising campaign and: FMV of all benefits is not more than 2% of the payment or $50 (whichever is less) ($50 indexed for inflation to $96 in 2010); or The payment is $25 (adjusted for inflation it was $48 in 2010) or more and the only benefits received in return are token items (bookmarks, calendars, key chains, coffee mugs) bearing the organization’s name or logo. For this purpose, the cost (note not FMV) of all the articles must be within the limits established for “low cost articles” under IRC 513(h)(2). Rev. Proc. 90-12 Low cost articles approx. $10
23. Membership Dues Generally deductible only to extent they exceed return benefits. But de minimus benefits may be disregarded if received in return for annual payment of $75 or less (free or discounted admission, parking, discounts on purchase of goods and services). Treas. Reg. section 1.170A-13(f)(8)(i)(B)
24. Information Disclosures of Return Benefits A charity that receives a payment of more than $75 that is part of a contribution and in part consideration for goods and services provided to the payor (a “quid pro quo” contribution) must provide the donor with a written statement that includes a good faith estimate of the value of those goods and services AND informs the donor that only the excess of the contribution over the value of the return benefits is deductible. IRC section 6115(a).
25. Intangible Religious Benefits Quid pro quo contribution defined to not include instangible religious benefits that generally are not sold ina commercial transaction outside the donative context. Sklar v. Commissioner, US Court of Appeals, Ninth Circuit, 549 F.3d 1252 (2008): tuition payments to Jewish day school not intangible religious benefits.
26. Percentage Limitations and Carryovers This deduction is not unlimited. Since its beginning in 1917, the charitable deduction has always been limited to a certain percent of the taxpayer’s income. In 1917, it was 15% of the taxpayer’s net income “Since then, Congress has become so enamored of the percentage limitation concept that it has constructed a mind numbing web of often overlapping rules that contributes to the corpulence of section 170.” Fishman and Schwarz, Nonprofit Organizations: Cases and Materials (Fourth Edition) 2010. Point of limitation: no taxpayer should be able to completely avoid taxes due to charitable contributions. Limitations affect few taxpayers (just the most generous philanthropists).
27. Today, % limitations depend on The type of organization receiving the gift (public charity or private foundation); and The type of property given (cash, ordinary income or capital gains property) In short, qualified recipients of charitable contributions are divided into two different categories: 50 percent charities include schools, hospitals, churches, government entities, publicly supported charities and certain operating and supporting foundations (IRC section 170(b)(1)(A)) 30 percent charities are generally private foundations.
28. Gifts of Capital Gain Property The basic percentage limitations described above apply to gifts of cash and ordinary income property. Additional limitations are imposed on gifts of long-term capital gain property (securities, art and other collectibles and most investment real estate). IRC section 170(b)(1)(C)(iv). A capital asset is long term when it has been held for more than one year. IRC section 1222(3) 30% limitation applies for gifts of capital gain property to 50% charities with a five year carryover. IRC section 170(b)(1)(C). Further limitations on gifts of capital gain property to private foundations (30 percent charities). First, reduce amount of gift by long term capital gain that would be recognized if sold. IRC section 170(e)(1)(B)(ii). Then deduct that amount only up to 20% of the donor’s contribution base. IRC section 170(b)(1)(D)
29. Order of Taking Deductions: First 50% gifts that year, then carryovers of 50% gifts, then 30% gifts that year, then 30% carryovers. Corporate Contributions: Limited to 10% of the corporation’s taxable income generally. IRC section 170(b)(2) With a five year carryover. IRC section 170(d)(2)
30. Substantiation Requirements Taxpayers list their aggregate gifts on Schedule A of IRS Form 1040. Taxpayers must also substantiate their gifts. Historically, taxpayers used cancelled checks, receipts from donee or “other reliable written records.” Treas. Reg. section 1.170A-13(a) Since 2006, more rigorous substantiation and disclosure requirements.
31. Are the proper acknowledgments being provided to your donors? New requirements for acknowledgements to donors under the Pension Protection Act of 2006. All Contributions: A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return. Contributions of $250 or more: A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return. Contributions where goods or services are received in exchange: A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75. Note: special rules for contributions of cars, boats or airplanes.
32. Recordkeeping Requirement for ALL Contributions A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return. A bank record includes a canceled check, bank statement or credit card statement. A written communication from the nonprofit should include: Name of nonprofit; Date of contribution; and Amount of contribution Old rule permitted any reliable written record and donors often kept diaries or notes from the time of donation. Those types of records are no longer sufficient. TIP: To assist donors, nonprofits may wish to begin substantiating all cash charitable gifts with a letter or other form of written receipt.
33. Recordkeeping Requirements for Contributions of $250 or More A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return. The written acknowledgment MUST include: Name of organization; Amount of cash contribution; Description (but not value) of non-cash contribution; Statement that no goods or services were provided by the organization in return for the contribution, if that was the case; Description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution; and Statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
34. Tips for Such Acknowledgments TIP: An annual summary may be used to substantiate several single contributions of $250 or more. Acknowledgments may be provided via an email addressed to the donor. Separate contributions of less than $250 each will not be aggregated (e.g., a church need not provide this type of acknowledgment to a parishioner who contributes $50 each week, even though total annual contributions are $250 or more).
35. By what date must the charity send the acknowledgment to the donor? Generally, nonprofits send acknowledgments no later than January 31 of the year following the donation. The law requires the acknowledgment be received by the earlier of (i) the date the donor files his/her tax return or (ii) the date the tax return is due (including extensions).
36. Contributions Where Goods or Services are Received in Exchange A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75. The disclosure must: Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money contributed by the donor over the value of the goods or services provided by the organization; and Include a good faith estimate of the value of such goods or services. The written disclosure must be furnished during the solicitation of the contribution or the receipt of the contribution. The statement must be in writing and must be made in a manner that is likely to come to the attention of the donor. For example, a disclosure in small print within a larger document might not meet this requirement.
37. Important Exceptions Token: Insubstantial goods or services do not have to be described in the acknowledgment. Insubstantial goods are given in the context of a fundraising campaign and the fair market value is less than 2% of the payment or $91, or the payment is at least $45.50 and the only items provided bear the organization’s logo (e.g., calendars, mugs or posters) and the cost of the items is $9.10 or less. Note: dollar amounts are for 2008. Membership Benefits: An annual membership benefit is also considered to be insubstantial if provided in exchange for an annual payment of $75 or less and consists of privileges such as free or discounted admission, discounts on purchases from the charity’s gift shop, free or discounted parking, etc. Intangible Religious Benefits
38. Unreimbursed Expenses If a donor makes a single contribution of $250 or more in the form of unreimbursed expenses, e.g., out-of-pocket transportation expenses incurred in order to perform donated services for an organization, then the donor must obtain a written acknowledgment (similar to those described before for contributions of $250 or more), but also containing a description of the services provided by the donor The donor must maintain adequate records of the unreimbursed expenses. EXAMPLE: A chosen representative to an annual convention of a charitable organization purchases an airline ticket to travel to the convention. The organization does not reimburse the delegate for the $500 ticket. The representative should keep a record of the expenditure, such as a copy of the ticket, and should obtain from the organization a description of the services provided and a statement that he/she received no goods or services from the organization.
39. Examples of Written Acknowledgments “Thank you for your cash contribution of $300 that (organization’s name) received on December 12, 2008. No goods or services were provided in exchange for your contribution.” “Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2008. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.” “Thank you for your contribution of a used baby crib and matching dresser that (organization’s name) received on March 15, 2008. No goods or services were provided in exchange for your contribution.”
40. Timing of disclosure statement The charity must furnish the statement in connection with either the solicitation or the receipt of the quid pro quo contribution. If the disclosure statement is furnished in connection with a particular solicitation, it is not necessary for the organization to provide another statement when the associated contribution is actually received.
41. No Disclosure Statement is Required When: The goods or services given to a donor meet the standards for insubstantial value set out in Revenue Procedure 90-12, 1990-1 C.B. 471, and Revenue Procedure 92-49, 1992-1 C.B. 987 (as updated); There is no donative element involved in a particular transaction with a charity (for example, there is generally no donative element involved in a visitor's purchase from a museum gift shop); or There is only an intangible religious benefit provided to the donor. The intangible religious benefit must be provided to the donor by an organization organized exclusively for religious purposes, and must be of a type that generally is not sold in a commercial transaction outside the donative context.
42. Penalty A penalty is imposed on a charity that does not make the required disclosure in connection with a quid pro quo contribution of more than $75. Penalty: $10 per contribution up to $5,000 per fundraising event or mailing. Can be avoided if failure to meet requirements was due to reasonable cause.
43. Noncash Contributions Capital Gain Property Ordinary Income Property Tangible Personal Property Partial Interests (Not in Trust) Qualified Conservation Contribution
44. Capital Gains Property Fair market value of property is generally deductible. Attractive because donor avoids tax on the gain and may deduct full fair market value. IRC 170(b)(1)(C)
45. Ordinary Income Property
46. Tangible Personal Property
47. Household Items and Clothing Household items and clothing contributed to charity after August 17, 2006 must be in at least good used condition to be deductible. This requirement does not apply to contributions of food, paintings, antiques, other art objects, jewelry and gems, or collections, and does not apply to a contribution of an item for which a deduction of more than $500 is claimed if the taxpayer obtains a qualified appraisal of the item
48. Vehicle Donations
49. Partial Interests Not in trust
50. Qualified Conservation Contributions
51. Valuation and Appraisal Requirements
52. When is an appraisal required? For claimed contributions over $5,000, generally a qualified appraisal prepared by a qualified appraiser must be obtained. For appraisals prepared in connection with returns or submissions filed after August 17, 2006, see Notice 2006-96.