charitable contribution compliance

CHARITABLE CONTRIBUTION COMPLIANCE

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2 Hour(s) - Other Federal Tax

NASBA: 116347

CTEC Provider #: 6209CTEC Course #: 6209-CE-0071

IRS Provider #: UBWMFIRS Course #: UBWMF-T-00223-21-S

The information provided in this publication is for educational purposes only, and does not necessarily reflect all laws, rules, or regulations for the tax year covered. This publication is designed to provide accurate and authoritative information concerning the subject matter covered, but it is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

To the extent any advice relating to a Federal tax issue is contained in this communication, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

COURSE OVERVIEW.............................................................................................................................................................. 7

Course Description ....................................................................................................................................................................... 7

Learning Objectives ...................................................................................................................................................................... 7

Introduction................................................................................................................................................................................... 7

OVERVIEW OF THE INCOME TAX CHARITABLE CONTRIBUTION DEDUCTION................................................................ 8

Elements of the Income Tax Charitable Contribution Deduction........................................................................................... 8

Limitations on Itemized Deductions Generally .......................................................................................................................10

Eligible Organizations.................................................................................................................................................................11

Donative Intent ...........................................................................................................................................................................14

Substantiation .............................................................................................................................................................................15

Timing of Deduction ...................................................................................................................................................................16

CALCULATING THE INCOME TAX CHARITABLE CONTRIBUTION DEDUCTION ............................................................. 16

In General ....................................................................................................................................................................................16

Percentage Limits .......................................................................................................................................................................16

Valuation ......................................................................................................................................................................................18

Special Rules for Contributions of Inventory...........................................................................................................................20

Special Rules for Specific Types of Property............................................................................................................................21

CONTRIBUTIONS OF PARTIAL INTERESTS IN PROPERTY ............................................................................................... 23

In General ....................................................................................................................................................................................23

Split Interest Trusts.....................................................................................................................................................................24

Qualified Conservation Contributions......................................................................................................................................24

Fractional Contributions of Tangible Personal Property .......................................................................................................26

THE ESTATE AND GIFT TAX CHARITABLE DEDUCTIONS ................................................................................................. 26

Background .................................................................................................................................................................................26

EXCLUSION FROM GROSS INCOME FOR DISTRIBUTIONS FROM IRAS.......................................................................... 27

In General ....................................................................................................................................................................................27

GLOSSARY .......................................................................................................................................................................... 28

Glossary .......................................................................................................................................................................................28

Course Description 7

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COURSE OVERVIEW

COURSE DESCRIPTION

Charitable contributions are subject to a wide variety of special requirements. Only certain types of contributions to certain types of organizations are deductible for tax purposes. Furthermore, special substantiation and other compliance rules apply. This course provides a description of these requirements and tips for making sure that an intended charitable contribution meets the standards for deductibility.

LEARNING OBJECTIVESAfter completing this course the participant will be able to:

Recognize the elements of a deductible charitable contribution

Differentiate between the rules applicable for contributions to public charities and private foundations

Calculate the charitable deduction when something is received in exchange for a contribution

Distinguish the charitable deduction limits applicable to individuals and corporations

Identify the special rules for vehicle donations

INTRODUCTIONOn Schedule A of their 2011 federal return Kenneth and Susan Kunkel claimed a charitable contribution deduction of $42,455. Most of this amount represented property contributions to four charitable organizations: The Upper Dublin Lutheran Church (“Church”), Goodwill Industries (“Goodwill”), the Military Order of the Purple Heart Service Foundation (“Purple Heart”), and Vietnam Veterans of America (“Vietnam Veterans”). The contributions to the Church consisted of items they allegedly donated to its annual flea market, including books valued at $8,000, household items valued at $1,303, clothing valued at $1,000, toys valued at $822, telescopes valued at $800, jewelry valued at $780, and household furniture valued at $410, for a total of $13,115.

Upon audit, however, the Kunkel’s failed to produce a receipt or an acknowledgment from the Church for their donations of any of these items. The Church was evidently equipped to provide such receipts, because Kenneth and Susan claimed to have a receipt from the Church for their contributions to the subsequent year’s flea market. They produced no evidence, such as photographs, that any of the listed items were actually delivered to the Church. The Church did not inform them whether any of the items allegedly contributed were sold or at what price.

The couple’s contributions to Goodwill, Purple Heart, and Vietnam Veterans allegedly consisted of clothing valued at $20,920, household furniture valued at $2,680, household items valued at $350, and toys valued at $250, for a total of $24,200. They produced no documentary evidence, and had no recollection, as to which items were donated to which charity. They produced a spreadsheet, created during the IRS audit that listed various items -- e.g., 67 blouses, 45 dresses, 70 dress shirts, 22 dress coats, and 100 baby outfits -- and assigned “estimated amounts” as the fair market values of these items. All they could say was that these items, in the aggregate, were divided in some manner among the three charities.

The Kunkel’s said that they took batches of items at various times to a Goodwill location. They generally made these trips in the early morning or evening, when the Goodwill warehouse was unattended. They placed soft goods in large bins intended for after-hours drop-offs. They left large items, such as furniture, outside the warehouse door. They were careful to ensure that the items in each batch were worth less than $250 because they thought this eliminated the need to get receipts.

For Purple Heart and Vietnam Veterans, the couple allegedly scheduled a pickup and left the items outside their house. The charity sent a truck to pick up the items, generally while petitioners were away, and usually left a doorknob hanger

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8 Overview of the Income Tax Charitable Contribution Deduction

saying, “Thank you for your contribution.” These doorknob hangers contained no other information. They were undated, they were not specific to the Kunkel’s, and they did not list or describe the property contributed.

The Kunkel’s created index cards recording the items as they were delivered to Goodwill or left for pickup by Purple Heart or Vietnam Veterans. They later aggregated this information into a master list. When the time came to prepare their tax return, they assigned estimated values to the items. When they contested the IRS disallowance of their charitable contribution deduction in Tax Court, they did not introduce into evidence the index cards they allegedly prepared or any other contemporaneous records supporting their contention that they made the alleged gifts. They supplied no evidence concerning their cost bases in these items or the manner in which they determined fair market values.

As discussed in more detail below, Internal Revenue Code (“Code”) section 170 allows as a deduction any contribution made to a charitable organization. Such deductions are allowed, however, only if the taxpayer satisfies statutory and regulatory substantiation requirements. The nature of the required substantiation depends on the size of the contribution and on whether it is a gift of cash or property.

For all contributions of $250 or more, the taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. Additional substantiation requirements are imposed for contributions of property with a claimed value exceeding $500. Still more rigorous substantiation requirements, including the need for a “qualified appraisal,” are imposed for contributions of property with a claimed value exceeding $5,000.

In this case Kenneth and Susan Kunkel contended that they did not need to get written acknowledgments because they made all of their contributions in batches worth less than $250. The Tax Court, however, did not find this testimony credible. For example, they allegedly donated property worth $13,115 to the Church; this donation occurred in conjunction with a single event, the Church's annual flea market. Their testimony that they intentionally made all other contributions in batches worth less than $250 requires the assumption that they made these donations, with an alleged value of $24,200, on 97 distinct occasions. The court found this assumption to be implausible and noted that there was no evidentiary support for that assertion. Moreover, Kenneth and Susan testified that they did not assign values to the donated items until they prepared their tax return. That being so, it is hard to see how they could have ensured, at the time they contributed the property, and that each individual batch was worth less than $250.

The couple did not provide a contemporaneous written acknowledgment from any of the four charitable organizations. They produced no acknowledgment of any kind from the Church or Goodwill and the doorknob hangers left by the truck drivers from Vietnam Veterans and Purple Heart clearly did not satisfy the regulatory requirements. These doorknob hangers were undated; they were not specific to the Kunkel’s, they did not describe the property contributed, and contained none of the other required information.

The Tax Court had no doubt that Kenneth and Susan did donate some property to charitable organizations. But the Code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when they consist of property rather than cash. Because the couple did not satisfy these requirements, the court was unable to allow a deduction for their claimed noncash gifts. The discussion below delves more deeply into these requirements so that practitioners can assist their clients in avoiding the fate of Kenneth and Susan Kunkel.

OVERVIEW OF THE INCOME TAX CHARITABLE CONTRIBUTION DEDUCTION

ELEMENTS OF THE INCOME TAX CHARITABLE CONTRIBUTION DEDUCTIONThe Code provides a deduction for income, estate, and gift tax purposes for contributions to certain organizations. The rules governing these deductions are found in Code sections 170 (income tax charitable deduction), 2055 (estate tax charitable deduction), and 2522 (gift tax charitable deduction). To be deductible, a charitable contribution must meet four threshold requirements.

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Elements of the Income Tax Charitable Contribution Deduction 9

First, the recipient of the transfer must be eligible to receive deductible charitable contributions. To be eligible to receive deductible charitable contributions, the recipient must be in an organization or entity described in Code section 170(c), 2055(a), or 2522(a). These Code sections generally include those organizations that are organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals. Furthermore, no part of the net earnings of the recipient may inure to the benefit of any private shareholder or individual and the organization must not engage in any impermissible lobbying or political campaign activities. For the most part, the eligible recipients are charitable organizations exempt from taxation under Code section 501(c)(3).

Second, the transfer must be made with donative intent and without the expectation of a benefit of substantial economic value in return. Charitable recipients are free to engage in “exchange transactions” in which something of value is returned to the person transferring assets to the organization, but there is no charitable contribution deduction to the extent that a return value is received.

Example:

Charity Hospital is holding its annual gala in a fancy downtown hotel. Tickets are $200 each, and the organization estimates that the fair value of the event is $125. Since a purchaser of tickets is receiving the right to attend a $125 event, in return for the ticket price, the charitable contribution deduction is limited to $75 ($200 ticket price - $125 value received). Furthermore, it does not matter if the ticket purchaser actually attends the event; it is the value of the right to attend that reduces the deduction.

Practice Tip:

When an individual or organization wants to support a charity’s special event, but does not plan to actually attend the event, recommend that they make a direct contribution rather than purchasing tickets. In the example above purchasing a ticket yields only a $75 deduction, whereas a direct donation of the same amount would result in a $200 deduction.

Third, the transfer must be “complete” and unconditional. If property is being contributed, the transaction must be a transfer of the donor’s entire interest in the contributed property (i.e., not a contingent or partial interest contribution). The complete transfer rule most commonly arises in the context of a transfer made to a trust. The essence of a completed gift in trust is the donor’s abandonment of control over the property put in trust. If the donor reserves a power to change his or her disposition, the gift will be incomplete in whole or in part, depending on all the facts of the case. Thus, where the donor reserves the power to take back title to the property or to name new beneficiaries or change the interests of the beneficiaries as between themselves, the gift generally will not be considered complete.

Fourth, the transfer must be of money or property—contributions of services are not deductible. For example, the value of time spent volunteering for a charitable organization is not deductible, even if the volunteer work involves professional services. Note that, for financial accounting purposes, the charitable organization may have to recognize the value of donated services as revenue; this does not change the non-deductibility of those services by the provider. Incidental expenses such as mileage, supplies, or other expenses incurred while volunteering for a charitable organization, however, may be deducted.

In addition to these four threshold requirements, the transfer must be adequately substantiated. The specific type of substantiation needed varies depending on the amount and nature of the contribution. These substantiation requirements are discussed in greater detail below.

Special rules limit a taxpayer’s charitable contributions in a given year to a percentage of income, and those rules, in part, turn on whether the organization receiving the contributions is a public charity or a private foundation. Other special rules determine the deductible value of contributed property for each type of property. Each of these limitations is described in greater detail later.

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LIMITATIONS ON ITEMIZED DEDUCTIONS GENERALLYBecause the charitable contribution deduction is an itemized deduction, taxpayers who do not itemize deductions will receive no tax benefit from a charitable contribution. Thus, the actual ability to deduct a charitable contribution depends on circumstances specific to the individual taxpayer.

Increased Standard Deduction (Special Deduction for 2020 and 2021)

CARES ACT UPDATE: Individual taxpayers can claim an "above-the-line" deduction of up to $300 per return for qualified cash donations made to charity during 2020. The $300 special deduction is designed especially for people who take the standard deduction, rather than itemizing their deductions. Previously, charitable contributions could only be deducted if taxpayers itemized their deductions. Contributions of non-cash property do not qualify for this relief. Cash contributions include those paid by cash, check, electronic funds transfer, credit card, debit card, or payroll deduction. They don't include securities, household items, or other property.

The Consolidated Appropriations Act, 2021 increased this special deduction up to $600 for married filing jointly but only for 2021. For 2020, the charitable deduction was up to $300 per “tax unit”—meaning those married filing jointly can only get up to a $300 deduction. For 2021, married filing jointly can each take up to a $300 deduction, for a total deduction of up to $600.

The increased standard deduction for 2021 cash contributions is $600 for married filing jointly and $300 for all other filers.

If the taxpayer is taking the standard deduction, the special deduction for cash charitable contributions is an adjustment to income. If the taxpayer is not taking the standard deduction, the taxpayer may claim cash and non-cash charitable contributions as an itemized deduction, subject to the normal limits.

The Consolidated Appropriations Act, 2021 also increased the penalty for overstatement of this special deduction. Any portion of an underpayment that is attributable to an overstatement of the special deduction shall be 50% instead of 20%.

Furthermore, the Omnibus Budget Reconciliation Act of 1990, introduced a provision authored by Congressman Donald Pease (D-OH), that limited the total itemized deduction (other than medical expenses, investment interest, and casualty, theft, or wagering losses) of higher-income taxpayers beginning in 1991. This has since been known as the “Pease Limitation.” Although the Pease Limitation was temporarily repealed, it became effective again beginning in 2013.

The Tax Cuts and Jobs Act of 2017 (TCJA) repeals the overall limitation on itemized deductions (the "Pease Limitation"). This provision is effective for taxable years beginning after December 31, 2017, and does not apply to taxable years beginning after December 31, 2025.

For 2021, there is no limit on total itemized deductions.

Prior to the enactment of the TCJA, in computing the reduction under the Pease Limitation, the total amount of most otherwise allowable itemized deductions (other than the deductions for medical expenses, investment interest, and casualty, theft or gambling losses) was limited for certain upper-income taxpayers. The otherwise allowable total amount of itemized deductions was reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeded a threshold amount, with a maximum reduction of 80%.

For 2017, the threshold amounts were $261,500 for single taxpayers, $287,650 for heads of household, $313,800 for married couples filing jointly, and $156,900 for married taxpayers filing separately.

Eligible Organizations 11

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ELIGIBLE ORGANIZATIONS

Organizations eligible to receive deductible contributions are generally referred to as “charitable organizations.” Charitable organizations are in turn classified as either public charities or private foundations. The status of an organization as a public charity or private foundation may affect the charitable contribution deduction of donors. Although contributions to both public charities and private foundations generally are deductible, the computation of the deduction may differ.

Public charities and private foundations are primarily distinguished from each other based on the sources of their financial support. Traditionally, a private foundation receives support primarily from a limited number of sources, such as a single family or corporation. Public charities, on the other hand, receive revenue from a broad range of public sources.

Practice Tip:

Be aware that the term “foundation” is often used imprecisely in the context of tax-exempt organizations. The fact that an organization includes the word “foundation” as part of its name does not necessarily indicate that it is a private foundation. In fact, many public charities use that term as part of the organization’s name. Furthermore, the use of “foundation” in an organization’s name generally has no legal effect; in other words, an organization calling itself a “foundation” may actually be a for-profit enterprise.

The tax-exempt sector in the United States includes a wide variety of organizations, both charitable and noncharitable. Section 501(a) exempts many of these organizations from federal income tax. Code section 501(c) describes the tax-exempt purposes of these organizations and the additional legal requirements they must meet to maintain tax-exempt status. A limited number of types of organizations are eligible to receive deductible charitable contributions under section 170. Specifically, Code section 170 permits donors to deduct contributions to the following kinds of organizations:

Governmental entities. A state (including Indian tribal governments) or United States possession (or political subdivision of either), or the United States or the District of Columbia, if the contribution is made exclusively for public purposes.

Domestic charitable organizations. Specifically, a community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.

Veteran’s organizations. A war veteran’s organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions.

Domestic fraternal societies. The society must operate under the lodge system, and the contribution must be used solely for charitable, religious, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals.

Cemetery companies. A nonprofit cemetery company may receive a deductible contribution if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.

The domestic charitable organization category includes organizations that engage in a wide range of socially beneficial activities. Examples include churches and other religious organizations, disaster relief organizations such as the Red Cross, schools and other educational organizations, hospitals, and arts organizations. Donors may determine whether an organization is eligible to receive tax-deductible contributions by consulting IRS Publication 78, which lists eligible organizations by name and location.

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Publication 78 data may be searched on the IRS website at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search. Publication 78 includes all organizations that have filed for recognition of tax-exempt status under a qualifying Code section and received a favorable determination from the IRS. Organizations that are not required to file for recognition of tax-exempt status are not listed in Publication 78. For example, governmental units; churches, their integrated auxiliaries, and conventions or associations of churches; subordinate organizations exempt from tax under a group exemption letter, and public charities whose annual gross receipts are normally not more than $5,000, may be treated as tax-exempt without filing an application.

In general, no income tax deduction is available for gifts to individuals or to organizations that are not listed under section 170(c). Thus, a contribution directly to a local family that has been victimized by a fire or natural disaster will not qualify for the charitable contribution deduction. However, a donation to a recognized charitable organization that itself uses funds for such a purpose will be deductible, so long as the gift to the organization was not restricted solely for transfer to the effected family. The taxpayer cannot deduct these contributions, even if they are made to a qualified organization, or if they are intended only for the benefit of a specific person. But a deduction is allowed for a contribution to a qualified organization that helps needy or worthy individuals as long as the donor does not indicate that the contribution is for a specific person.

Other non-permissible deductions include contributions to fraternal societies made for the purpose of paying medical or burial expenses of members and payments to a member of the clergy that can be spent as he or she wishes, such as for personal expenses. Furthermore, a taxpayer cannot deduct expenses paid for another person who provided services to a qualified organization. For example, suppose the taxpayer’s son does missionary work and the taxpayer pay his expenses. The taxpayer would not be able to claim a deduction for the son's unreimbursed expenses related to his contribution of services. Finally, payments to a hospital that are for a specific patient’s care or for services for a specific patient cannot be deducted, even if the hospital is operated by a city, state, or other qualified organization.

Contributions to the following types of organizations typically are not deductible as charitable contributions: most social welfare organizations under Code section 501(c)(4) ; labor organizations under Code section 501(c)(5); business leagues and chambers of commerce under Code section 501(c)(6); homeowners' associations; and charities that are not in the proper organizational form or are organized in a foreign jurisdiction.

For a charitable organization to be eligible to receive income tax deductible charitable contributions, it must meet the following basic requirements:

Organizational form. The charity must be in the proper organizational form. Specifically, it must be a corporation, trust, community chest, fund, or foundation.

Domestic. The charity must be organized in the United States. Foreign charitable organizations are not eligible to receive income tax deductible charitable contributions directly, even if they receive a favorable determination letter from the IRS that they meet the requirements of section 501(c)(3).

Charitable purpose. The charity must be organized and operated exclusively for one or more of the following tax-exempt purposes: religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster international amateur sports competition, or for the prevention of cruelty to children or animals. No charitable deduction is available for gifts to organizations run for personal profit or organizations that confer substantial private benefits on some noncharitable group or class.

No private inurement. No part of the net earnings of a charity may inure to the benefit of any private shareholder or individual (e.g., the organization may not pay dividends to organization insiders).

No excessive lobbying and no political intervention. In addition, no substantial part of the activities of a charity may consist of carrying on propaganda, or otherwise attempting to influence legislation, and such organization may not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office.

No charitable deduction is available for gifts to groups with a substantial purpose of lobbying or which engage in political intervention.

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https://www.irs.gov/charities-non-profits/tax-exempt-organization-search

https://www.irs.gov/charities-non-profits/tax-exempt-organization-search

Eligible Organizations 13

As noted above, an organization qualifying for tax-exempt status under section 501(c)(3) is further classified as either a public charity or a private foundation. Private foundations are either private operating foundations or private nonoperating foundations. In general, private operating foundations operate their own charitable programs in contrast to private nonoperating foundations, which generally are grant-making organizations. Most private foundations are nonoperating foundations. Operating foundations are not subject to the payout requirements of private foundations and are not considered a private foundation for purposes of the charitable contribution deduction rules.

The Code does not expressly define the term “public charity,” but rather provides exceptions to those entities that are treated as private foundations. In other words, a 501(c)(3) organization is deemed to be a private foundation unless it can demonstrate that it qualifies as a public charity.

An organization may qualify as a public charity in several ways. Certain organizations are classified as public charities per se, regardless of their sources of support. These include churches, certain schools, hospitals and other medical organizations, certain organizations providing assistance to colleges and universities, and governmental units.

Other organizations qualify as public charities because they are broadly publicly supported. First, a charity may qualify as publicly supported if at least one-third of its total support is from gifts, grants or other contributions from governmental units or the general public. Alternatively, it may qualify as publicly supported if it receives more than one-third of its total support from a combination of gifts, grants, and contributions from governmental units and the public plus revenue arising from activities related to its exempt purposes (e.g., fee for service income). In addition, this category of public charity must not rely excessively on endowment income as a source of support.

To meet this requirement, the organization must normally receive more than one-third of its support from a combination of: (1) gifts, grants, contributions, or membership fees and (2) certain gross receipts from admissions, sales of merchandise, performance of services, and furnishing of facilities in connection with activities that are related to the organization’s exempt purposes. In addition, the organization must not normally receive more than one-third of its public support in each taxable year from the sum of: (1) gross investment income and (2) unrelated business taxable income net of the tax payable thereon.

A so-called “supporting organization” is an organization that provides support to another Code section 501(c)(3) entity that is not a private foundation and meets the requirements of the Code. Supporting organizations are themselves classified as public charities. Supporting organizations are further classified as Type I, II, or III depending on the relationship they have with the organizations they support. A Type I supporting organization is a subsidiary of the charity it supports, while Type II describes a brother-sister organizational relationship with the supported charity. All other supporting organizations are classified as Type III.

A Code section 501(c)(3) organization that does not fit within any of the above categories is a private foundation. Unlike public charities, private foundations are subject to tax on their net investment income at a rate of two percent (one percent in some cases). Private foundations also are subject to more restrictions on their activities than are public charities. For example, private foundations are prohibited from engaging in self-dealing transactions, are required to make a minimum amount of charitable distributions each year, are limited in the extent to which they may control a business, may not make speculative investments, and may not make certain expenditures. Violations of these rules result in excise taxes on the foundation and, in some cases, may result in excise taxes on the managers of the foundation.

While contributions to a public charity generally are deductible up to 60 percent of an individual donor’s contribution base for most gifts by cash and 50 percent of an individual donor’s contribution base for non-cash gifts (30 percent for capital gain property), contributions to most private foundations generally are deductible up to 30 percent of an individual donor’s contribution base (20 percent for capital gain property). In addition, gifts of capital gain property to a public charity generally are deductible at the property’s fair market value, whereas gifts of capital gain property

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(other than certain publicly-traded stock) to most private foundations are deductible at the taxpayer’s basis (cost) in the property.

CARES ACT UPDATE: The CARES Act temporarily suspends limits on certain cash contributions made in 2020. Individuals may deduct qualified contributions of cash up to 100% of adjusted gross income. Contributions of non-cash property do not qualify for this relief. This relief also applies to qualified cash contributions made in 2021, as the relief was extended by the Consolidated Appropriations Act, 2021.

Cash contributions include those paid by cash, check, electronic funds transfer, credit card, debit card, or payroll deduction.

DONATIVE INTENTA deductible charitable contribution must be voluntary, non-reciprocal, and unconditional. A transfer that meets these requirements is said to be made with donative intent. If such transfer is made to an eligible organization (discussed above) and properly substantiated (discussed below), it may be deducted as a charitable contribution on Schedule A.

“Voluntary” simply means that the transfer must not be made under compulsion of some contractual obligation or court order. A transfer is “non-reciprocal” only to the extent nothing of value is received in return for the transfer.

For this purpose, an item with a cost to the charity (not retail value) of $11.30 or less (2021 low cost article), that bears the name or logo of the organization is not taken into account if it is given in exchange for a donation of more than $56.50 (2021). These are considered a "low cost articles" and is considered a “de minimis” amount. Examples of items that often qualify under the de minimis exception are coffee mugs, key chains, bookmarks, and calendars. Furthermore, if a ministry sends unsolicited, low-cost items at no charge to the donor as part of a fundraising effort, donors are not required to reduce the deductible amount for the value of such items. Finally, a donor can take a full deduction if the fair market value of the benefits received in connection with a gift does not exceed 2% of the donation or $113 (2021), whichever is less.

So, for example, if a donor buys a ticket to a charity’s annual gala dinner for $1,000 and the value of the event is $200, the donor is deemed to have engaged in an exchange transaction (“quid pro quo”) with the charity in the amount of $200. The remaining $800 of the ticket price is a charitable contribution. Whenever the donor transfers $75 or more and receives anything of value in exchange (subject to the de minimis amount described above), the charitable organization is required to provide the donor with a statement indicating the value of the item received in exchange. In the case of a gala or other special event, this notice is often contained on the ticket itself.

Note that it is the charity’s best estimate of the value of the event, not necessarily its cost, which is relevant. Suppose, for example, that a charity puts on a formal fundraising dinner with high-cost catering, entertainment, and décor. Assume the charity’s cost per attendee is $150 but the charity’s best estimate of the value of the event (i.e., what someone would pay in a commercial setting) is $200. If the ticket price was $1,000, only $800 would be considered a deductible contribution.

A transfer that is conditioned on some future circumstance or event is not considered a completed gift until that circumstance or event takes place. For example, if a donor transfers a sum to a charity on the condition that all or part of the transfer will be returned, if the charity fails to complete a specific program or obtain matching funds, the amount subject to return may not be deducted until the condition is met. To the extent a payment exceeds the fair market value of the benefit received from the charity, the excess portion may be deductible provided that the donor can demonstrate that he or she transferred the excess to charity with the intention of making a gift.

Examples:

David contributes cash to a local school board, which is a political subdivision of a state, to help build a school gym. The school board will refund the money to David if it does not collect enough to build the gym. Under these circumstances, David cannot deduct the contribution until there is no chance (or only a negligible chance) of a refund.

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Substantiation 15

Betty donates land to a city for as long as the city uses it for a public park. The city plans to use the land for a park, and there is no chance (or only a negligible chance) of the land being used for any different purpose. Betty can deduct your charitable contribution.

Other examples of transfers to charitable or tax-exempt organizations that do not qualify as deductible donations include tuition a parent pays to a university for a child’s education. That tuition payment is not deductible even though the university may be a charitable organization because the tuition is a fee for educational services, a substantial return benefit. Likewise, a payment of membership dues, fees, or other bills to country clubs, lodges, fraternal orders, or similar groups generally are not deductible, even if such groups may qualify as eligible recipients of charitable contributions, because such payments typically are in exchange for services rendered.

A mistake that is commonly made is deducting the cost of a raffle, bingo or lottery ticket purchased from a charitable organization. The “value” of a chance to win a prize under these circumstances is deemed to be equal to the cost of the change, so by definition, the purchaser has received value equal to his or her payment. For that reason, such payments are not deductible to the extent that the payment entitles the purchaser to a chance of winning a valuable prize.

SUBSTANTIATION

A donor who claims a deduction for a charitable contribution must maintain reliable written records regarding the contribution, regardless of the value or amount of such contribution. In the case of a charitable contribution of money, regardless of the amount, applicable recordkeeping requirements are satisfied only if the donor maintains as a record of the contribution, a bank record or a written communication from the donee showing the name of the donee’s organization, the date of the contribution, and the amount of the contribution. In such cases, the recordkeeping requirements may not be satisfied by maintaining other written records. Thus, a taxpayer who tosses loose change into the church collection plate or into the holiday kettle of a charitable organization will generally not be entitled to a deduction.

Furthermore, no charitable contribution deduction is allowed for a separate contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the charity indicating whether the charity provided any good or service (and an estimate of the value of any such good or service) to the taxpayer in consideration for the contribution. Such acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the donee provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any such goods or services. Donors, sometimes mistakenly, believe that the charitable organization is required to value any donated property and that the charity’s valuation determines the deductible amount. This is not the case. The burden is on the taxpayer to establish the value and the charity’s opinion of value, if given, is at best merely one piece of evidence to that effect. If the charity has not conducted a professional appraisal, its estimate of value is of little probative significance.

In addition, as noted above, any charity receiving a contribution exceeding $75 made partly as a gift and partly as consideration for goods or services furnished by the charity (a “quid pro quo” contribution) is required to inform the contributor in writing of an estimate of the value of the goods or services furnished by the charity and that only the portion exceeding the value of the goods or services is deductible as a charitable contribution.

Finally, if the total charitable deduction claimed for noncash property is more than $500, the taxpayer must attach a completed Form 8283 (Noncash Charitable Contributions) to the taxpayer’s return or the deduction is not allowed. In general, taxpayers are required to obtain a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return. Note that a taxpayer cannot deduct as a charitable contribution any fees paid to an appraiser for purposes of determining the fair market value of donated property. But they may be able to claim them, subject to the 2%-of-adjusted-gross-income limit, as a miscellaneous itemized deduction on

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16 Calculating the Income Tax Charitable Contribution Deduction

Schedule A (NOTE: the TCJA suspends all miscellaneous itemized deductions that are subject to the 2% floor for tax years 2018 through 2025).

TIMING OF DEDUCTIONCharitable contributions can be deducted only in the year the taxpayer actually makes them in cash or other property (or possibly in a later carryover year if certain limitations are applicable for the year of the contribution. This applies whether the taxpayer uses the cash or an accrual method of accounting.

Usually, contribution is made at the time of its unconditional delivery. A check mailed to a charity is considered delivered on the date it was mailed. Thus, a check mailed to a charity on December 31, 20x1 qualifies for the charitable contribution deduction for 20x1 even though it will not be received and cashed until 20x2. Contributions charged on a bank credit card are deductible in the year the taxpayer makes the charge. Thus, a charge incurred on December 31, 20x1 is deductible in 20x1 even though it does not appear on the taxpayer’s statement until 20x2 and is not paid to the bank until much later.

Contributions made by text message are deductible in the year the taxpayer sends the text message if the contribution is charged to the taxpayer’s telephone or wireless account. Contributions made through a pay-by-phone account are considered delivered on the date the financial institution pays the amount. This date should be shown on the statement the financial institution sends to the taxpayer.

A properly endorsed stock certificate is considered delivered on the date of mailing or other delivery to the charity or to the charity’s agent. However, if the taxpayer gives a stock certificate to his or her broker or to the issuing corporation for transfer to the name of the charity, the contribution is not delivered until the date the stock is transferred on the books of the corporation. If the taxpayer grants a charity an option to buy real property at a bargain price, it is not a contribution until the charity exercises the option.

A promissory note or pledge does not, by itself, represent a charitable contribution. If the taxpayer issues and delivers a promissory note to a charity as a contribution, it is not a contribution until the taxpayer actually makes the note payments. However, a cash contribution made with borrowed funds is fully deductible when made, regardless of when the loan is paid by the taxpayer. For example, suppose Shelley borrows $500 from Lewis and contributes the $500 to a qualified charity on December 1, 20x1. Shelley re-pays the loan amount to Lewis in 20x2. Even though Shelley repaid the loan in 20x2, she is entitled to a charitable contribution deduction in 20x1.

CALCULATING THE INCOME TAX CHARITABLE CONTRIBUTION DEDUCTION

IN GENERALFor federal income tax purposes, the deductible portion of a charitable contribution generally is limited to a percentage of the taxpayer’s income. Applicable percentage limits for individual and corporate taxpayers are discussed below. In addition, in determining the deductible value of a charitable contribution for income tax purposes, the Code sometimes requires a reduction from the fair market value of appreciated property, resulting in a deductible amount (before considering percentage limits on deductibility) equal to the taxpayer’s basis in the property or to some other amount that is less than the fair market value of the property. These valuation rules are also below.

PERCENTAGE LIMITSINDIVIDUAL TAXPAYERS

Charitable contributions by individual taxpayers are limited to a specified percentage of the individual’s “contribution base.” The contribution base is the taxpayer’s adjusted gross income (“AGI”) for a taxable year, disregarding any net operating loss carryback to the year under Code section 172. In general, more favorable (i.e., higher) percentage limits apply to contributions of cash and ordinary income property than to contributions of capital gain property. More

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Percentage Limits 17

favorable limits also generally apply to contributions to public charities (and certain operating foundations) than to contributions to nonoperating private foundations.

More specifically, the deduction for charitable contributions by an individual taxpayer of cash and non-appreciated property a charitable organization described in Code section 170(b)(1)(A) (public charities, private foundations other than nonoperating private foundations, and certain governmental units) may not exceed 60 percent of the taxpayer’s contribution base for most gifts by cash and 50 percent of the taxpayer’s contribution base for non-cash gifts. Contributions of this type of property to nonoperating private foundations generally may be deducted up to the lesser of: (1) 30 percent of the taxpayer’s contribution base or (2) the excess of: (i) 60 percent of the contribution base for cash gifts and 50 percent of the contribution base for non-cash gifts over (ii) the amount of contributions subject to the 60 percent limitation or the 50 percent limitation.

CARES ACT UPDATE: The CARES Act temporarily suspends limits on certain cash contributions made in 2020. Individuals may deduct qualified contributions of cash up to 100% of adjusted gross income. Contributions of non-cash property do not qualify for this relief. This relief also applies to qualified cash contributions made in 2021, as the relief was extended by the Consolidated Appropriations Act, 2021.

Cash contributions include those paid by cash, check, electronic funds transfer, credit card, debit card, or payroll deduction.

Contributions of appreciated capital gain property to public charities and other organizations described in Code section 170(b)(1)(A) generally are deductible up to 30 percent of the taxpayer’s contribution base (after taking into account contributions other than contributions of capital gain property). An individual may elect, however, to bring all these contributions of appreciated capital gain property for a taxable year within the 50 percent limitation category by reducing the amount of the contribution deduction by the amount of the appreciation in the capital gain property. Contributions of appreciated capital gain property to nonoperating private foundations are deductible up to the lesser of: (1) 20 percent of the taxpayer’s contribution base or (2) the excess of (i) 30 percent of the contribution base over (ii) the amount of contributions subject to the 30 percent limitation.

Finally, more favorable percentage limits sometimes apply to contributions to the donee charity than to contributions that are for the use of the donee charity. Contributions of capital gain property for the use of public charities and other organizations described in section 170(b)(1)(A) also are limited to 20 percent of the taxpayer’s contribution base. In contrast to property contributed directly to a charitable organization, property contributed for the use of an organization generally has been interpreted to mean property contributed in trust for the organization. Charitable contributions of income interests (where deductible) also generally are treated as contributions for the use of the donee organization.

CORPORATE TAXPAYERS

A corporation generally may deduct charitable contributions up to 10 percent of the corporation’s taxable income for the year. For this purpose, taxable income is determined without regard to: (1) the charitable contributions deduction; (2) any net operating loss carryback to the taxable year; (3) deductions for dividends received; (4) deductions for dividends paid on certain preferred stock of public utilities; and (5) any capital loss carryback to the taxable year.

CARES ACT UPDATE: The CARES Act temporarily increases the limit on qualified cash contributions made in 2020. A corporation may deduct qualified contributions of cash up to 25 percent of its taxable income. This relief also applies to qualified cash contributions made in 2021, as the relief was extended by the Consolidated Appropriations Act, 2021. Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash charitable contributions as a deduction, subject to the normal limit (10 percent of its taxable income).

A transfer of property by a corporation to a charity might qualify as either a deductible charitable contribution or a deductible business expense, but not both. No deduction is allowed as a business expense under Code section 162 for

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any contribution that would be deductible as a charitable contribution but for the percentage limitations on the charitable contributions deduction (or certain other limits on deductibility under section 170). In addition, a business transfer made with a reasonable expectation of a return benefit is not deductible as a charitable contribution under Code section 170, because the transferor lacks donative intent. The same transfer, however, might be deductible as a business expense under Code section 162.

Charitable contributions that exceed the applicable percentage limit generally may be carried forward for up to five years. In general, contributions carried over from a prior year are taken into account after contributions for the current year that are subject to the same percentage limit. Excess contributions made for the use of (rather than to) an organization generally may not be carried forward.

The Tax Cuts and Jobs Act of 2017 includes three modifications to the present-law charitable contribution rules

In addition to the increase in the percentage limit for charitable contributions of cash to public charities, the Tax Cuts and Jobs Act of 2017 (TCJA) also denies a charitable deduction for payments made in exchange for college athletic event seating rights and repeals the substantiation exception for certain contributions reported by the donee organization.

The TCJA included these three modifications to the present-law charitable contribution rules:

Increase in the percentage limit for charitable contributions of cash to public charities – The provision increases the income-based percentage limit described in section 170(b)(1)(A) for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations from 50-percent to 60-percent. This provision is effective for contributions made in taxable years beginning after December 31, 2017.

Note: The income-based percentage limit for certain charitable contributions by an individual taxpayer of non-cash to public charities and certain other organizations remains at 50-percent.

Denial of a charitable deduction for payments made in exchange for college athletic event seating rights – The provision amends section 170(l) to provide that no charitable deduction shall be allowed for any amount described in paragraph 170(l)(2), generally, a payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. This provision is effective for contributions made in taxable years beginning after December 31, 2017.

Repeal of the substantiation exception for certain contributions reported by the donee organization – The provision repeals the section 170(f)(8)(D) exception to the contemporaneous written acknowledgment requirement. This provision is effective for contributions made in taxable years beginning after December 31, 2016.

No charitable contribution deduction is allowed for a separate contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgment of the contribution from the charity indicating whether the charity provided any good or service (and an estimate of the value of any such good or service) to the taxpayer in consideration for the contribution

Subsection 170(f)(8)(D) provided an exception to the contemporaneous written acknowledgment requirement (of $250 or more). Under the exception, a contemporaneous written acknowledgment is not required if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, that includes the same content.

VALUATION

For purposes of the income tax charitable deduction, the value of property contributed to charity may be limited to the fair market value of the property, the donor’s tax basis in the property, or some other amount.

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Valuation 19

Charitable contributions of cash are deductible in the amount contributed, subject to the percentage limits discussed earlier. In addition, a taxpayer generally may deduct the full fair market value of long-term capital gain property contributed to charity. Contributions of tangible personal property also generally are deductible at fair market value if the use by the recipient charitable organization is related to its tax-exempt purpose.

However, a special rule enacted as part of the Pension Protection Act of 2006 provides for recovery of the excess tax benefit for charitable contributions of tangible personal property with respect to which a fair market value deduction in excess of $5,000 is claimed and which is not used for exempt purposes. Under this provision, if a donee organization disposes of applicable property within three years of the contribution of the property, the donor is subject to an adjustment of the tax benefit.

If the disposition occurs in the tax year in which the contribution is made, the donor’s deduction is generally limited to the donor’s basis and not fair market value. If the disposition occurs in a subsequent year, the donor must include as ordinary income for its taxable year in which the disposition occurs an amount equal to the excess (if any) of: (i) the amount of the deduction previously claimed by the donor as a charitable contribution with respect to such property, over (ii) the donor’s basis in such property at the time of the contribution. This rule does not apply if the charity certifies that the use of the property by the charitable donee was substantial and related to the purpose or function constituting the basis for the organization’s exemption under Code section 501 and describes how the property was used and how such use furthered such purpose or function, or which both: (1) states the intended use of the property by the donee at the time of the contribution, and (2) certifies that such intended use has become impossible or infeasible to implement.

Example:

On October 1, 20x1 Phyllis donates an antique desk to a charitable organization. Assume the desk is valued at $6,000 and Phyllis has a basis in it of $500. The charity does not use the desk in its exempt purpose, but instead sells it for $1,000 on December 1, 20x1. Under these circumstances, Phyllis’s deduction is limited to $500 unless the charity provides the certification described above. If the charity were to sell the desk after the close of 20x1 but before October 1, 20x4, Phyllis would have to “recapture” $5,500 as ordinary income.

In other cases, Code section 170(e), also limits the deductible value of the contribution of appreciated property to the donor’s tax basis in the property. This limitation of the property’s deductible value to basis generally applies, for example, for: (1) contributions of inventory or other ordinary income or short-term capital gain property ; (2) contributions of tangible personal property if the use by the recipient charitable organization is unrelated to the organization’s tax-exempt purpose ; and (3) contributions to or for the use of a private foundation (other than certain private operating foundations).

Certain contributions of patents or other intellectual property also generally are limited to the donor’s basis in the property. Under a special rule described in greater detail below, the taxpayer is permitted additional charitable deductions beyond the donor’s tax basis in certain situations. In addition, under a special rule enacted as part of the Pension Protection Act of 2006, the deduction for a charitable contribution of taxidermy property that is contributed by the person who prepared, stuffed, or mounted the property (or by any person who paid or incurred the cost of such preparation, stuffing, or mounting) is limited to basis. For purposes of determining a taxpayer’s basis in such taxidermy property, only the cost of the preparing, stuffing, and mounting may be included. Indirect costs, such as transportation, may not be deducted under Code section 170.

For contributions of qualified appreciated stock, the above-described rule that limits the value of property contributed to or for the use of a private nonoperating foundation to the taxpayer’s basis in the property does not apply; therefore, subject to certain limits, contributions of qualified appreciated stock to a nonoperating private foundation may be deducted at fair market value. Qualified appreciated stock is stock that is capital gain property and for which (as of the date of the contribution) market quotations are readily available on an established securities market.

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Contributions of property with a fair market value that is less than the donor’s tax basis generally are deductible at the fair market value of the property.

SPECIAL RULES FOR CONTRIBUTIONS OF INVENTORYAs noted above, a taxpayer’s deduction for charitable contributions of inventory property generally is limited to the taxpayer’s basis in the inventory, or if less, the fair market value of the property. For certain contributions of inventory, however, C corporations (but not other taxpayers) may claim an enhanced deduction equal to the lesser of: (1) basis plus one-half of the item’s appreciation (i.e., basis plus one-half of fair market value in excess of basis) or (2) two times basis.

To be eligible for the enhanced deduction value, the contributed property generally must be inventory of the taxpayer contributed to a charitable organization described in Code section 501(c)(3) (except for private nonoperating foundations). “Inventory” is defined as goods held by the taxpayer for resale (as opposed to some other purpose, such as use in the taxpayer’s operations). Furthermore, the charitable donee must: (1) use the property consistent with the donee’s exempt purpose solely for the care of the ill, the needy, or infants; (2) not transfer the property in exchange for money, other property, or services; and (3) provide the taxpayer a written statement that the donee’s use of the property will be consistent with such requirements. A donor making a charitable contribution of inventory must make a corresponding adjustment to the cost of goods sold by decreasing the cost of goods sold by the lesser of the fair market value of the property or the donor’s basis with respect to the inventory. Finally, to use the enhanced deduction provision the taxpayer must establish that the fair market value of the donated item exceeds basis.

For taxable years beginning after December 31, 2015, any taxpayer engaged in a trade or business, whether or not a C corporation, is eligible to claim the enhanced deduction for donations of food inventory. For taxpayers other than C corporations, the total deduction for donations of food inventory in a taxable year generally may not exceed 15 percent of the taxpayer’s net income for such taxable year from all sole proprietorships, S corporations, or partnerships (or other non C corporations) from which contributions of apparently wholesome food are made.

For example, if a taxpayer is a sole proprietor, a shareholder in an S corporation, and a partner in a partnership, and each business makes charitable contributions of food inventory, the taxpayer’s deduction for donations of food inventory is limited to 15 percent of the taxpayer’s net income from the sole proprietorship and the taxpayer’s interests in the S corporation and partnership. However, if only the sole proprietorship and the S corporation made charitable contributions of food inventory, the taxpayer’s deduction would be limited to 15 percent of the net income from the trade or business of the sole proprietorship and the taxpayer’s interest in the S corporation, but not the taxpayer’s interest in the partnership.

The 15 percent limitation does not affect the application of the generally applicable percentage limitations. For example, if 15 percent of a sole proprietor’s net income from the proprietor’s trade or business is greater than 50 percent of the proprietor’s contribution base for non-cash gifts which otherwise limits the deduction, the available deduction for the taxable year (with respect to contributions to public charities) is 50 percent of the proprietor’s contribution base for non-cash gifts. Consistent with present law, these contributions may be carried forward because they exceed the 50 percent limitation. Contributions of food inventory by a taxpayer that is not a C corporation that exceeds the 15 percent limitation but does not exceed the 50 percent limitation may not be carried forward.

For C corporations, these contributions are made subject to a limitation of 15 percent of taxable income. The general 10 percent limitation for a C corporation does not apply to these contributions, but the 10 percent limitation applicable to other contributions is reduced by the amount of these contributions. Qualifying food inventory contributions in excess of these 15 percent limitations may be carried forward and treated as qualifying food inventory contributions in each of the five succeeding taxable years in order of time.

CARES ACT UPDATE: The CARES Act temporarily increases the limit on qualified food inventory contributions made in 2020. Any taxpayer engaged in a trade or business may deduct qualified contributions of food inventory up to 25

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Special Rules for Specific Types of Property 21

percent of its taxable income. This relief also applies to qualified food inventory contributions made in 2021, as the relief was extended by the Consolidated Appropriations Act, 2021.

Additionally, if the taxpayer does not account for inventory under section 471 and is not required to capitalize indirect costs under section 263A, the taxpayer may elect, solely for computing the enhanced deduction for food inventory, to treat the basis of any apparently wholesome food as being equal to 25 percent of the fair market value of such food.

In the case of any contribution of apparently wholesome food which cannot or will not be sold solely by reason of internal standards of the taxpayer, lack of market, or similar circumstances, or by reason of being produced by the taxpayer exclusively for the purposes of transferring the food to an organization described in section 501(c)(3), the fair market value of such contribution shall be determined (1) without regard to such internal standards, such lack of market or similar circumstances, or such exclusive purpose, and (2) by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contributions (or, if not so sold at such time, in the recent past).

Under the provision, the enhanced deduction for food is available only for food that qualifies as “apparently wholesome food.” Apparently, wholesome food is defined as food intended for human consumption that meets all quality and labeling standards imposed by Federal, State, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.

SPECIAL RULES FOR SPECIFIC TYPES OF PROPERTY

Special statutory rules limit the deductible value (and impose enhanced reporting obligations on donors) of charitable contributions of certain types of property, including vehicles, intellectual property, and clothing and household items. Each of these rules was enacted in response to concerns that some taxpayers did not accurately report the value of the property for purposes of claiming a charitable deduction.

VEHICLES

The amount of deduction for charitable contributions of vehicles (generally including automobiles, boats, and airplanes for which the claimed value exceeds $500 and excluding inventory property) depends upon the use of the vehicle by the donee organization. If the donee organization sells the vehicle without any significant intervening use or material improvement of such vehicle by the organization, the amount of the deduction may not exceed the gross proceeds received from the sale. In other situations, a fair market value deduction may be allowed.

The Code imposes special substantiation requirements on contributions of vehicles for which the claimed value exceeds $500. Specifically, the charity must furnish the donor with a contemporaneous written acknowledgment on Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, or another statement containing the same information as Form 1098-C. The 1098-C or substitute must indicate whether the vehicle was sold by the charity or used for the charitable purposes of the organization. If used for charitable purposes, the 1098-C is considered contemporaneous if issued within 30 days of the contribution. If there is a sale, the charity has 30 days from the date of the sale to issue the 1098-C (or substitute).

If the taxpayer donates a qualified vehicle with a claimed fair market value of more than $500, his or her deduction is limited to the smaller of: (1) the gross proceeds from the sale of the vehicle by the organization, or (2) the vehicle’s fair market value on the date of the contribution. Also, the taxpayer must attach to his or her return Copy B of the Form 1098-C (or other statement containing the same information as Form 1098-C) that the taxpayer receives from the charitable organization. The Form 1098-C (or other statement) will show the gross proceeds from the sale of the vehicle. If Form 1098-C (or other statement) is not attached to the return the taxpayer cannot deduct the contribution.

Generally, the taxpayer must get Form 1098-C (or other statement) within 30 days of the sale of the vehicle. If the filing deadline is approaching and the taxpayer has not received a Form 1098-C, they have two choices. First, the taxpayer can get an automatic 6-month extension of time to file the return by filing Form 4868, Application for Automatic

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Extension of Time To File U.S. Individual Income Tax Return. Alternatively, the taxpayer can file the return on time without claiming the deduction for the qualified vehicle. After receiving the Form 1098-C, the taxpayer will then file an amended return claiming the deduction and attaching Copy B of Form 1098-C (or other statement) to the amended return.

Notwithstanding these rules, if the charitable organization makes a “significant intervening use” of or material improvement to the vehicle before transferring it, the taxpayer can generally deduct the vehicle’s fair market value at the time of the contribution. Also, if the charitable organization gives the vehicle, or sells it for a price well below fair market value, to a needy individual to further the organization’s charitable purpose, the taxpayer can generally deduct the vehicle’s fair market value at the time of the contribution. The Form 1098-C (or other statement) will show whether either of these exceptions apply.

Example:

Anita donates a used car to a charitable organization. She bought it 3 years ago for $9,000. A used car guide shows the fair market value for this type of car is $6,000. However, Anita gets a Form 1098-C from the organization showing the car was sold for $2,900. Neither of the exceptions discussed above apply. If Anita itemizes her deductions, she can deduct $2,900 for her donation. She must attach Form 1098-C and Form 8283 to her return.

If the charitable organization sells the vehicle for $500 or less, the taxpayer can deduct the smaller of: (1) $500, or (2) the vehicle's fair market value on the date of the contribution. If the vehicle’s fair market value is at least $250 but not more than $500, the taxpayer must have a written statement from the charitable organization acknowledging the donation.

PATENTS AND OTHER INTELLECTUAL PROPERTY

If a taxpayer contributes a patent or other intellectual property (other than certain copyrights or inventory) to a charitable organization, the taxpayer’s initial charitable deduction is limited to the lesser of the taxpayer’s basis in the contributed property or the fair market value of the property. In addition, the taxpayer is permitted to deduct certain additional amounts in the year of contribution or in subsequent taxable years based on a specified percentage of the “qualified donee income” received or accrued by the charitable donee with respect to the contributed intellectual property. For this purpose, qualified donee income includes net income received or accrued by the charity that properly is allocable to the intellectual property itself (as opposed to the activity in which the intellectual property is used).

The amount of any additional charitable deduction is calculated as a sliding-scale percentage of qualified donee income received or accrued by the charity that properly is allocable to the contributed property for the applicable taxable year of the donor. The percentage declines from 100 percent in the first and second years ending on or after the contribution to 10 percent in the 11th and 12th years. No deduction is permitted for later taxable years. An additional charitable deduction is allowed only to the extent that the aggregate of the amounts that are calculated pursuant to the sliding-scale exceed the amount of the deduction claimed upon the contribution of the patent or intellectual property. Special reporting and substantiation rules apply with respect to contributions of patents and other intellectual property.

Additional charitable deductions are not available for patents or other intellectual property contributed to a private foundation (other than a private operating foundation or certain other private foundations described in Code section 170(b)(1)(E)). No charitable deduction is permitted with respect to any revenues or income received or accrued by the charitable donee after the expiration of the legal life of the patent or intellectual property, or after the tenth anniversary of the date the contribution was made by the donor.

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In General 23

CLOTHING AND HOUSEHOLD ITEMS

Charitable contributions of clothing and household items generally are subject to the charitable deduction rules applicable to tangible personal property. The term “household items” includes furniture, furnishings, electronics, appliances, linens, and other similar items.

If such contributed property is appreciated property in the hands of the taxpayer and is not used to further the donee’s exempt purpose, the deduction is limited to basis. In most situations, however, clothing and household items have a fair market value that is less than the taxpayer’s basis in the property. Because property with a fair market value less than basis generally is deductible at the property’s fair market value, taxpayers generally may deduct only the fair market value of most contributions of clothing or household items, regardless of whether the property is used for exempt or unrelated purposes by the donee organization.

Furthermore, a special rule generally provides that no deduction is allowed for a charitable contribution of clothing or a household item unless the item is in “good used or better” condition. The IRS is authorized to deny a deduction for any contribution of clothing or a household item that has minimal monetary value, such as used socks and used undergarments.

Practice Tip:

In order to substantiate the fact that a donated item of clothing or a household item is in “good or better” conditions, taxpayers are well advised to take pictures of such items on their cell phone, especially if they are claiming a significant deduction for the donation.

Notwithstanding the general rule, a charitable contribution of clothing or household items not in good used or better condition with a claimed value of more than $500 may be deducted if the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property.

The taxpayer must establish a reasonable basis for the valuation of clothing and household items. The fair market value of used clothing and other personal items is generally far less than the price the taxpayer paid for them. There are no fixed formulas or methods for finding the value of items of clothing. The taxpayer should claim the price that buyers of similar items actually pay in used clothing stores, such as consignment or thrift shops.

For example, suppose Kristin donated a coat to a thrift store operated by her church. She paid $300 for the coat 3 years ago. Similar coats in the thrift store sell for $50. The fair market value of the coat is $50 and Kristin’s donation is limited to $50. The proper measure of value is essentially “yard sale” value – the amount the taxpayer could expect to receive in an actual arm’s length sale.

Likewise, the fair market value of used household items is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. For these reasons, formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value.

Several organizations have lists on their websites that can assist in the process of determining a reasonable value for such items. In all cases the taxpayer should support the valuation with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items are also useful. None of this evidence should be included with the tax return.

CONTRIBUTIONS OF PARTIAL INTERESTS IN PROPERTY

IN GENERALIn general, a charitable deduction is not allowed for income, estate, or gift tax purposes if the donor transfers an interest in property to a charity while retaining an interest in that property or transferring an interest in that property

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to a noncharity for less than full and adequate consideration. This rule of nondeductibility, often referred to as the “partial interest rule,” generally prohibits a charitable deduction for contributions of income interests, remainder interests, or rights to use property.

A charitable contribution deduction generally is not allowable for a contribution of a future interest in tangible personal property. For this purpose, a future interest is one “in which a donor purports to give tangible personal property to a charitable organization, but has an understanding, arrangement, agreement, etc., whether written or oral, with the charitable organization which has the effect of reserving to, or retaining in, such donor a right to the use, possession, or enjoyment of the property.”

A gift of an undivided portion of a donor’s entire interest in property generally is not treated as a nondeductible gift of a partial interest in property. For this purpose, an undivided portion of a donor’s entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and must extend over the entire term of the donor’s interest in such property. A gift generally is treated as a gift of an undivided portion of a donor’s entire interest in property if the donee is given the right, as a tenant in common with the donor, to possession, dominion, and control of the property for a portion of each year appropriate to its interest in such property.

Other exceptions to the partial interest rule are provided for, among other interests: (1) remainder interests in charitable remainder annuity trusts, charitable remainder unitrusts, and pooled income funds; (2) present interests in the form of a guaranteed annuity or a fixed percentage of the annual value of the property; (3) a remainder interest in a personal residence or farm; and (4) qualified conservation contributions.

SPLIT INTEREST TRUSTSCertain so-called “split interest” transfers, are not subject to the partial interest rule, which generally bars deductions for contributions of partial interests in property. Split interest trust transfers generally allow a taxpayer to make a deductible charitable contribution in trust while retaining an interest in the property for some period of time. The most common types of split interest transfers are to charitable remainder trusts and charitable lead trusts.

For example, provided the transaction satisfies all applicable technical requirements, a donor may make a charitable contribution using a charitable remainder trust. Charitable remainder trusts generally are structured such that the donor or another individual receives an income or similar interest from the trust for some period of time, after which a qualified charitable organization receives the trust property (the remainder interest). Although the remainder interest is a partial interest in property, the donor generally is entitled to a charitable deduction at the time of the transfer to the trust equal to the present value of the charitable remainder interest. As an alternative, a donor may make a charitable contribution using a charitable lead trust, another type of partial interest gift for which a charitable deduction is allowed. In a charitable lead trust structure, the charity generally receives specified payments from the trust for some period of time (the lead interest), with the remainder interest reverting to the donor or passing to other beneficiaries.

QUALIFIED CONSERVATION CONTRIBUTIONS

Qualified conservation contributions are not subject to the partial interest rule. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire interest of the donor other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction (granted in perpetuity) on the use that may be made of the real property (generally, a conservation easement).

Qualified organizations include certain governmental units, public charities that meet certain public support tests, and certain supporting organizations. Conservation purposes include: (1) the preservation of land areas for outdoor recreation by, or for the education of, the general public; (2) the protection of a relatively natural habitat of fish,

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wildlife, or plants, or similar ecosystem; (3) the preservation of open space (including farmland and forest land) where such preservation will yield a significant public benefit and is either for the scenic enjoyment of the general public or pursuant to a clearly delineated Federal, State, or local governmental conservation policy; and (4) the preservation of a historically important land area or a certified historic structure.

For contributions made in taxable years beginning after December 31, 2014, preferential percentage limits and carryforward rules apply for qualified conservation contributions. Under the provision, the 30 percent contribution base limitation on deductions for contributions of capital gain property by individuals does not apply to qualified conservation contributions (as defined under present law). Instead, individuals may deduct the fair market value of any qualified conservation contribution to the extent of the excess of 50 percent of the contribution base for non-cash gifts over the amount of all other allowable charitable contributions. These contributions are not taken into account in determining the amount of other allowable charitable contributions.

Individuals are allowed to carry over any qualified conservation contributions that exceed the 50 percent limitation for up to 15 years.

For example, assume an individual with a contribution base of $100 makes a qualified conservation contribution of property with a fair market value of $80 and makes other non-cash charitable contributions subject to the 50 percent limitation of $70. The individual is allowed a deduction of $50 (50 percent of the $100 contribution base) in the current taxable year for the other non-cash charitable contributions (the non-conservation contributions) and is allowed to carry over the excess $20 ($70 other non-cash charitable contributions – $50 deduction allowed) for up to 5 years. No current deduction is allowed for the qualified conservation contribution, but the entire $80 qualified conservation contribution may be carried forward for up to 15 years.

In the case of an individual who is a qualified farmer or rancher for the taxable year in which the contribution is made, a qualified conservation contribution is deductible up to 100 percent of the excess of the taxpayer’s contribution base over the amount of all other allowable charitable contributions.

In the above example, if the individual is a qualified farmer or rancher, in addition to the $50 deduction for non-conservation contributions, an additional $50 for the qualified conservation contribution of $80 is allowed and $30 ($80 qualified conservation contribution – $50 allowed) may be carried forward for up to 15 years as a contribution subject to the 100 percent limitation.

In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher for the taxable year in which the contribution is made, any qualified conservation contribution is deductible up to 100 percent of the excess of the corporation’s taxable income (as computed under section 170(b)(2)) over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100 percent limitation.

As an additional condition of eligibility for the 100 percent limitation, with respect to any contribution of property in agriculture or livestock production, or that is available for such production, by a qualified farmer or rancher, the qualified real property interest must include a restriction that the property remains generally available for such production. (There is no requirement as to any specific use in agriculture or farming, or necessarily that the property be used for such purposes, merely that the property remain available for such purposes.)

A qualified farmer or rancher means a taxpayer whose gross income from the trade or business of farming (within the meaning of section 2032A(e)(5)) is greater than 50 percent of the taxpayer’s gross income for the taxable year.

For contributions made in taxable years beginning after December 31, 2015, the provision also includes special rules for qualified conservation contributions by certain Native Corporations. For this purpose, the term Native Corporation has the meaning given such term by section 3(m) of the Alaska Native Claims Settlement Act. In the case of any qualified conservation contribution which is made by a Native Corporation and is a contribution of property that was land conveyed under the Alaska Native Claims Settlement Act, a deduction for the contribution is allowed to the extent that the aggregate amount of such contributions does not exceed the excess of 100 percent of the taxpayer’s taxable

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income over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100 percent limitation. The provision shall not be construed to modify the existing property rights validly conveyed to Native Corporations under the Alaska Native Claims Settlement Act.

FRACTIONAL CONTRIBUTIONS OF TANGIBLE PERSONAL PROPERTYAs discussed above, an exception to the partial interest rule permits a charitable deduction for a contribution of an undivided portion of a donor’s entire interest in property. Under this exception, a donor generally may take a deduction for a charitable contribution of a fractional interest in tangible personal property (such as a painting), provided the donor satisfies the requirements for deductibility (including the requirements concerning contributions of partial interests and future interests in property), and in subsequent years make additional charitable contributions of undivided, fractional interests in the same property. However, special valuation and deductibility rules apply to charitable contributions of fractional interests in tangible personal property, such as a contribution of a painting to a museum.

First, the value of a donor’s charitable deduction for the initial contribution of a fractional interest in an item of tangible personal property (or collection of such items) is determined under generally applicable rules (e.g., based upon the fair market value of the artwork at the time of the contribution of the fractional interest and considering whether the use of the artwork will be related to the donee’s exempt purposes). For purposes of determining the deductible amount of each additional contribution of an interest (whether or not a fractional interest) in the same item of tangible personal property for income tax purposes, however, special rules apply. Specifically, the fair market value of the item is the lesser of: (1) the value used for purposes of determining the charitable deduction for the initial fractional contribution; or (2) the fair market value of the item at the time of the subsequent contribution.

Second, the income tax charitable deduction and gift tax charitable deduction for a contribution of a partial interest in tangible personal property may be recaptured under certain circumstances, such as where the donor fails to contribute all of the donor’s remaining interest in such property within a specified period of time, or where the charity fails to take substantial physical possession of the item or fails to use the item for an exempt use during such period of time, as required by the Code. In any case in which there is a recapture of a deduction, the provision also imposes an additional tax in an amount equal to 10 percent of the amount recaptured.

In addition, an income or gift tax charitable deduction generally is not allowed for a contribution of a fractional interest in an item of tangible personal property unless immediately before such contribution all interests in the item are owned: (1) by the donor or (2) by the donor and the donee charitable organization.

THE ESTATE AND GIFT TAX CHARITABLE DEDUCTIONS

BACKGROUNDA charitable deduction also is available for federal estate and gift tax purposes. In determining the value of a decedent’s taxable estate for federal estate tax purposes, the value of bequests or other transfers to certain qualified public or charitable organizations is subtracted from the value of the decedent’s gross estate.

Similarly, in computing a taxpayer’s taxable gifts for a year for federal gift tax purposes, the value of gifts made to certain qualified public and charitable organizations during the year is subtracted from the value of the taxpayer’s total gifts for the year. Therefore, in general, the effect of the charitable deductions for estate and gift tax purposes is to remove the value of charitable transfers from the estate or gift tax base, such that these transfers escape estate or gift taxation.

The basic requirements for a deductible charitable contribution for estate or gift tax purposes generally are the same as the requirements a deductible charitable contribution for income tax purposes. For example, as with the income tax, to qualify for an estate or gift tax charitable deduction, the contribution must be made with donative intent and

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must be made to an eligible donee. The lists of eligible donees for estate and gift tax purposes, also largely are coextensive with the list of eligible donees for income tax purposes.

In contrast to the income tax charitable deduction, there are no percentage limits on the deductibility of a charitable contribution for estate or gift tax purposes. The amount of the deduction also does not differ based on the type of donee organization (e.g., a public charity versus a nonoperating private foundation) or the type of property contributed (e.g., ordinary income property versus capital gain property). For estate tax purposes, however, the deduction generally is limited to the value of the property transferred to charity that is required to be included in the decedent’s gross estate.

EXCLUSION FROM GROSS INCOME FOR DISTRIBUTIONS FROM IRAS

IN GENERALA rule provides an exclusion from gross income for otherwise taxable IRA distributions from a traditional or a Roth IRA in the case of qualified charitable distributions made in taxable years beginning after December 31, 2014. The exclusion from gross income may not exceed $100,000 per taxpayer per taxable year.

Special rules apply in determining the amount of an IRA distribution that is otherwise taxable. The otherwise applicable rules regarding taxation of IRA distributions and the deduction of charitable contributions continue to apply to distributions from an IRA that are not qualified charitable distributions. A qualified charitable distribution is taken into account for purposes of the minimum distribution rules, applicable to traditional IRAs, to the same extent the distribution would have been taken into account under such rules had the distribution not been directly distributed under the qualified charitable distribution provision. An IRA does not fail to qualify as an IRA as a result of qualified charitable distributions being made from the IRA.

A qualified charitable distribution, is any distribution from an IRA directly by the IRA trustee, to an organization described in Code section 170(b)(1)(A) (other than a supporting organization or a donor advised fund). Distributions are eligible for the exclusion only if made on or after the date the IRA owner attains age 70-½, and only to the extent the distribution would be includible in gross income (without regard to this provision).

If the IRA owner has any IRA that includes nondeductible contributions, a special rule applies in determining the portion of a distribution that is includible in gross income (but for the qualified charitable distribution provision) and thus is eligible for qualified charitable distribution treatment. Under the special rule, the distribution is treated as consisting of income first, up to the aggregate amount that would be includible in gross income (but for the qualified charitable distribution provision) if the aggregate balance of all IRAs having the same owner were distributed during the same year. In determining the amount of subsequent IRA distributions includible in income, proper adjustments are to be made to reflect the amount treated as a qualified charitable distribution under the special rule.

The exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.

Distributions that are excluded from gross income by reason of the qualified charitable distribution provision are not taken into account in determining the deduction for charitable contributions under section 170.

In the absence of the special rule for qualified charitable distributions, an IRA owner who arranges for an IRA distribution to be made to charity (or receives an IRA distribution and subsequently transfers the funds to charity) recognizes gross income by reason of the distribution and may deduct the contribution to charity. The charitable contribution, however, is subject to the individual percentage limits, discussed earlier, potentially reducing the taxpayer’s charitable deduction such that it does not fully offset the amount of the distribution included in income.

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Therefore, a taxpayer whose charitable contribution otherwise would be limited by reason of the individual percentage limits may reduce her taxable income by arranging for a qualified charitable distribution from her IRA.

A taxpayer who elects to take the standard deduction may also benefit from a qualified charitable distribution. In the absence of the special exclusion for qualified charitable distributions, a standard deduction taxpayer who takes a distribution from an IRA and contributes the amount to charity will have additional taxable income. She may not, however, deduct the contribution to charity.

In some situations, making a charitable contribution of an amount distributed from an IRA (other than as a qualified charitable distribution) could cause a taxpayer’s itemized deductions to exceed the standard deduction. But the taxpayer may in certain situations still be better off by excluding the distribution as a qualified charitable distribution and claiming the standard deduction (e.g., because of the percentage limits on charitable contributions).

Practice Tip:

In the absence of the special rule regarding qualified charitable distributions, and IRA distribution increases a taxpayer’s AGI. Additional AGI may, in certain instances, cause a taxpayer to pay Social Security tax at a higher rate. Therefore, a taxpayer who must take a required minimum distribution from her IRA, but does not need the funds to meet living expenses, may, in certain situations, reduce his or her Social Security tax liability by arranging for a qualified charitable distribution.

GLOSSARY

GLOSSARY

contemporaneous Existing, occurring, or originating during the same time.

donee A recipient of a gift.

donor A person or group that gives something (such as money, food, or clothes) in order to help a person or organization.

exchange transactions A transaction in which something of value is returned to the person transferring assets to the organization, but there is no charitable contribution deduction to the extent that a return value is received.

itemized deductions A legal deduction from one's personal taxable income for money spent on specific goods and services, such as property taxes and charitable contributions. These deductions must be itemized — that is, individually listed and documented — on one's tax return.

substantiation To establish by proof or competent evidence; in this instance usually a receipt or other written acknowledgement of the contribution.

supporting organization

An organization that provides support to another Code section 501(c)(3) entity that is not a private foundation and meets the requirements of the Code. Supporting organizations are themselves classified as public charities.

tax-exempt Tax exemption refers to a monetary exemption which reduces taxable income. Tax exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items.

charitable contribution compliance

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