Donations to not-for-profit organizations are normally a win-win for organizations and their donors. Organizations receive gifts to help support their mission, and the donor receives a tax write-off. But not-for-profit organizations and donors must ensure they are in compliance with IRS substantiation requirements. The IRS requires that in order for a donor to take a deduction greater than $250, he or she must have a contemporaneous written acknowledgment (CWA) of the donation from the not-for-profit organization. CWAs must include the name of the organization, the value of the donation (if cash), a description of the donation (if non-cash), whether goods or services were provided in exchange for donation, and, if services were provided, a good faith estimate of the value of those services. If the value of the gift exceeds $5,000, in most cases, a qualified appraisal must be obtained in addition to the CWA.
Recent tax court cases indicate that regulators will be aggressive in enforcing charitable contribution tax deduction rules. Gifts made that do not meet substantiation requirements will not be eligible for a tax write-off, and therefore, could result in a huge tax cost to the donor. The following provides some situations where substantiation for charitable tax deductions could be forgotten or be more difficult to obtain.
Substantiation for Private Foundations
A question recently came up as to whether CWAs are required if an individual donates to a private foundation that they founded or where they are board members. The answer is yes. When donors give donations to their own foundations, an acknowledgement from the foundation to the founder or board member needs to be prepared by the foundation. The acknowledgement should include the information that no goods or services were received in exchange for the donation. The IRS has denied donations that don’t have a contemporaneous receipt if the donation is greater than $250.
Charitable Tax Deduction for Transactions
Businesses or business owners that sell property to a tax-exempt organization for less than its fair market value can generally take a charitable deduction for the difference between the sale price and the fair market value. However, Fakiris v. Commissioner provides a cautionary tale for using that deduction.
The petitioner’s real estate group bought an old theater in New York. It decided to donate the theater to an organization that had not yet received its tax-exempt status. Rather than wait for the exemption of the new charity, the petitioner sold the theater to an already established tax-exempt organization, which agreed to transfer the theater to the new not-for-profit organization once it received its tax-exempt status. The established not-for-profit organization transferred the theater to the new organization the day of the sale with the petitioner.
The exchange was set up that way so that the petitioner could receive the tax deduction for the sale of the theater. The IRS ruled that because the donor retained the right to transfer the theater to the new charity in the sales agreement, the transaction did not qualify as a completed gift. Therefore, the petitioner was denied a charitable contribution deduction. Had the donation been ruled a completed gift, the IRS was also seeking to deny the contribution on the grounds that no CWA was provided and there was no qualified appraisal.
A lot of grief could have been spared if the petitioner had gone through with the original plan to donate the theater to the organization waiting for its official tax-exempt status. While its tax-exempt application is pending, an organization can generally act as a 501(c)(3) organization and receive tax-deductible charitable contributions. However, if the IRS ultimately denies exempt status, none of the contributions received during that time frame can be deducted by the donors.
If Standard Language is Missing from a Donation Receipt
Not-for-profits take note—your donation receipts should clearly state that no goods or services were provided in exchange for the donation. If that language is missing, the donor could be excluded from taking the charitable tax deduction. A case played out in the tax courts to that effect, and the results were devastating to the donor. In 15 West 17th Street LLC v. Commissioner, the commissioner ruled that the donor did not receive contemporaneous written acknowledgement of a nearly $64.5 million donation of a façade easement. As a result, the donor could not take a tax deduction for the easement.
The absence of key information on the charitable contribution receipt contributed to the disallowance of the petitioner’s tax deduction in Joe A. Izen v. Commissioner. Donations of used vehicles and airplanes require additional information in their CWA, including the name and taxpayer identification number (TIN) of the donor, vehicle identification number, certification of intended use, and certification that the donation would not be transferred before completion of use. The petitioner donated interest in an airplane to a charitable organization, but the donation agreement did not include the required information. As an end result, the taxpayer could not take the charitable deduction for the interest in the plane.
What the Cases Can Tell Us about Regulatory Scrutiny
When individuals take a charitable contribution deduction, they should be prepared for potential IRS scrutiny. Prior to making a large transfer of property or assets, donors and not-for-profit organizations should ensure they have all the paperwork they need to support the contribution. Donors should also be reminded that the responsibility will fall to them to make sure all of the IRS substantiation requirements are met.
For More Information
If you have specific comments, questions or concerns about charitable contribution deductions, please contact us.
Amy O’Loughlin is a Senior Tax Manager and member of the Not-For-Profit Practice. She is located in the CBIZ Phoenix office. She can be reached at AOloughlin@cbiz.com or 602.650.6233.