In a recent issue of Church Law & Tax Report, Richard Hammar detailed a case in which the United States Tax Court disallowed a married couple’s $37,315 charitable contribution deduction. The couple claimed to have donated books, clothes, toys, furniture, and other items to a church and three other charitable organizations. At issue was the couple’s inability to meet specific substantiation requirements for noncash contributions. The case serves as both a warning and a reminder that churches and donors must know and follow these requirements.
Requirements for a proper and timely acknowledgement
Federal tax law requires that for any contribution valued at $250 or more, the donor must obtain a proper acknowledgment. Here are the requirements for the acknowledgment:
- Legal name of donee organization.
- Name of donor (no other identifying information about the donor is required, such as address and especially not the donor’s Social Security number).
- Date of gift.
- Description—but not the value—of property donated.
- Statement that no goods or services were provided in exchange for the contribution. Note: If any goods or services are provided to the donor in exchange for the contribution, the donee organization must follow special rules for quid pro quo contributions. These rules are outlined in “Charitable Contributions” (chapter 3) of the book Church Finance.
- The donor must obtain the acknowledgment on or before the earlier of these two dates: (1) the date the donor files his or her return for the year of the contribution; (2) the due date, including extensions, for filing the return.
A separate acknowledgment may be provided for each single contribution of $250 or more, or one acknowledgment, such as an annual summary, may be used to substantiate several single contributions of $250 or more, so long as the annual summary provides itemized detail of the individual contributions.
No specific Internal Revenue Service forms or formats are required for an acknowledgment. For example, a letter, postcard, email, or email attachment is acceptable.
The IRS applies the requirements for a proper and timely acknowledgment very strictly. As demonstrated in the case Hammar dealt with in the July/August issue of Church Tax & Law Report, the courts have consistently and relentlessly sided with the IRS in cases where donors do not have acknowledgments that meet the requirements stated above.
Note that the IRS and the courts have held that Form 8283 (covered in the next section) does not satisfy the substantiation requirements for obtaining a proper acknowledgment from the donee organization.
Requirements for noncash contributions valued over $500
In addition to the proper acknowledgment, the donor must file Form 8283 with his or her return if the total value for all noncash property donations exceeds $500. The purpose of Form 8283 is to provide additional supporting information about the donated property.
If a single item or group of similar items donated is valued at more than $5,000, a “qualified appraisal” is generally required, and the appraiser must sign the Form 8283. However, an appraisal is not required for publicly traded securities or for nonpublicly traded securities valued at $10,000 or less.
How to Help Noncash Donors
Churches that accept donated clothing and household items should do what they can to help donors who want tax deductions for their contributions (not all do). One solution: encourage donors to prepare a detailed list of items to be donated before they drop off the donation, using a web-based form made available by the church. Donors can print the form (with the item descriptions) and bring it with them to the church’s donation center. When the donation is made, the church can formally validate the contribution by adding a special stamp or seal. The form can state that it represents a valid contribution acknowledgment only if the church’s validation stamp appears in a particular place on the form.
Generally, a copy of the appraisal (when required) does not need to be submitted with the Form 8283. There are, however, exceptions. An appraisal must be included for the following types of property:
- Art valued at $20,000 or more.
- Easements on buildings in historical districts.
- Any property valued at more than $500,000.
- Certain clothing and household items not in “good used condition or better.”
- The following information is required on Form 8283:
- Description of the donated property.
- Date of contribution.
- Date property was acquired by donor.
- How property was acquired by donor.
- Donor’s cost or “adjusted basis.”
- Fair market value of property (at time of donation).
- Method used to determine fair market value.
- A brief summary of the “overall physical condition of the property at the time of the gift,” for tangible personal property valued at more than $5,000.
When a single item or group of similar items of donated property is valued at more than $5,000 (except in the case of publicly traded securities), the donor must complete Section B of Form 8283 and an authorized official of the donee charity must sign the Form 8283, acknowledging receipt of the property—but not the value. By signing the Form 8283, the donee charity is also pledging to file Form 8282 in the event the property is disposed of within three years of the donation date.
Requirements for donations of clothing and household items
A donor cannot take a deduction for clothing or household items unless they are in “good used condition or better.” An exception applies for a contribution of an item of clothing or a household item that is not in good used condition or better if the donor deducts more than $500 for it and includes a qualified appraisal of its fair market value with his or her return.
Failure to properly substantiate clothing donations is a reason many donors end up in court. It’s also the main reason Congress keeps eyeing the deduction for clothing and household items for reduction or even elimination.
Special rules for cars, boats, and airplanes
Special rules apply for deductions related to contributions of cars, boats, and airplanes. See Form 1098-C and IRS Publication 4303 for specific information and details.
Guiding the process
Disallowance of large noncash contributions due to inadequate substantiation has become a significant problem for some taxpayers. Because large contributions of noncash property are not made in the ordinary course of operations like regular cash contributions, many charities fail to provide the donor with a proper acknowledgment in a timely manner. Form 8283 does not serve that purpose. Failure by the donor to obtain a proper acknowledgment within the required time frame will likely result in a loss of the deduction in the event of an IRS audit.
Briefly, here’s what treasurers can do to help noncash donors:
- Issue a proper acknowledgment for all noncash contributions for which the donor requests the church to sign Form 8283. The acknowledgement should be issued at the time of the signing of Form 8283.
- Issue proper acknowledgements in connection with other noncash gifts in a timely manner.
- Create an organizational calendar item each year in January to review the year’s history for noncash gifts. Provide proper acknowledgments for any that may have been missed during the year.
This article is adapted from conference material developed by Michael Batts. Used with permission.