Charitable Giving

March 13, 2024

9064 / What are the penalties if a taxpayer overvalues property donated to charity?

<div class="Section1">If a taxpayer underpays his tax because of a substantial valuation misstatement of property donated to charity, the taxpayer may be subject to a penalty of 20 percent of the underpayment attributable to the misstatement.<a href="#_ftn1" name="_ftnref1">1</a> However, this penalty applies only if the underpayment attributable to the misstatement exceeds $5,000 ($10,000 for a corporation other than an S corporation or a personal holding company).<a href="#_ftn2" name="_ftnref2">2</a> A “substantial valuation misstatement” exists if the value claimed is 150 percent or more of the amount determined to be correct.<a href="#_ftn3" name="_ftnref3">3</a> If the value claimed is 200 percent or more of the amount determined to be correct, there is a “gross valuation misstatement,” which is subject to a 40 percent underpayment penalty.<a href="#_ftn4" name="_ftnref4">4</a></div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 6662(a), 6662(b)(3). <a href="#_ftnref2" name="_ftn2">2</a>. See IRC § 6662(d). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 6662(e)(1)(A), as amended by PPA 2006. <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 6662(h)(2)(A)(i), as amended by PPA 2006. </div>

March 13, 2024

9060 / How is the value of property donated to charity determined?

<div class="Section1">Where property other than money is donated to charity, it is necessary to calculate the property’s fair market value in order to determine the amount of the allowable charitable deduction.<div class="Section1"> As in other circumstances, fair market value for this purpose is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”<a href="#_ftn1" name="_ftnref1">1</a> The willing buyer has often been viewed as a retail consumer, not a middleman.<a href="#_ftn2" name="_ftnref2">2</a> However, there are certain circumstances where the retail consumer is not the proper benchmark. For example, in the case of unset gemstones, the ultimate consumer is generally a jeweler engaged in incorporating the gems into jewelry. Therefore, the fair market value is based on the price that a jeweler would pay a wholesaler to acquire such stones.<a href="#_ftn3" name="_ftnref3">3</a> Often, taxpayers rely on expert appraisals in determining the fair market value of property.<a href="#_ftn4" name="_ftnref4">4</a> For some gifts to charity, an appraisal is required (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9061">9061</a>). However, the value assigned by an appraiser is not always controlling and the IRS or the Tax Court may consider factors in addition to those considered by the taxpayer’s appraiser(s) which may reduce the value of the gift and, thus, the charitable deduction.<a href="#_ftn5" name="_ftnref5">5</a> The IRS has warned taxpayers that some promoters are likely to inflate the value of a charitable deduction for gemstones and lithographs, thus subjecting the taxpayer to higher taxes and possible penalties.<a href="#_ftn6" name="_ftnref6">6</a> Earlier case law has indicated that an auction price may be helpful in determining the value of art.<a href="#_ftn7" name="_ftnref7">7</a> The taxpayer claiming the charitable deduction has the burden of proof in establishing the fair market value of the property donated.<a href="#_ftn8" name="_ftnref8">8</a> Evidence of what an organization is willing to pay for copies of a manuscript may be used by the taxpayer as evidence of the value of the original manuscript, but it is not conclusive.<a href="#_ftn9" name="_ftnref9">9</a> Similarly, the price paid by a bankruptcy trustee may provide evidence of the fair market value, but in at least one case, the courts have found that the substantially higher value established by an appraiser was determinative of the property’s value.<a href="#_ftn10" name="_ftnref10">10</a> For property that is transferred to a charity and subject to an option to repurchase, fair market value under IRC Section 170 is the value of the property upon the expiration of the option.<a href="#_ftn11" name="_ftnref11">11</a> Guidelines for valuing property generally can be found in Revenue Procedure 66-49,<a href="#_ftn12" name="_ftnref12">12</a> and Announcement 2001-22.<a href="#_ftn13" name="_ftnref13">13</a> See also Crocker v. Commissioner<a href="#_ftn14" name="_ftnref14">14</a> (describing the three methods of determining fair market value of commercial real estate: (1) the replacement method, (2) the comparable sales method, and (3) the income capitalization method). <hr> Planning Point: The fair market value of publicly traded securities is equal to the average value of the high and low stock values on the date of delivery of the stock multiplied by the number of shares given to charity. The date of delivery depends on how the stock was delivered: hand delivered, mailed or electronically transferred. <hr> A taxpayer is not entitled to a charitable deduction for a contribution of clothing or a household item unless the property is in good used condition or better. A deduction for a contribution of clothing or a household item may be denied in circumstances where the donated item has minimal monetary value. These rules do not apply to a contribution of a single item if a deduction of more than $500 is claimed and a qualified appraisal is included with the return. Household items include furniture, furnishings, electronics, linens, appliances, and similar items; but not food, art, jewelry, and collections.<a href="#_ftn15" name="_ftnref15">15</a> <hr> Planning Point: It is a good idea to take photographs of household items prior to donation to document that they are in good used condition or better. <hr> Intellectual property. The American Jobs Creation Act of 2004 (AJCA 2004) provides strict rules for charitable donations of patents and intellectual property.<a href="#_ftn16" name="_ftnref16">16</a> For the temporary regulations providing guidance for the filing of information returns by donees relating to qualified intellectual property contributions, see Temporary Treasury Regulation Section 1.6050L-2T; TD 9206;<a href="#_ftn17" name="_ftnref17">17</a> and Announcement 2005-49.<a href="#_ftn18" name="_ftnref18">18</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.170A-1(c); Rev. Rul. 68-69, 1968-1 CB 80. <a href="#_ftnref2" name="_ftn2">2</a>.  See Goldman v. Comm., 388 F.2d 476 (6th Cir. 1967). <a href="#_ftnref3" name="_ftn3">3</a>.  Anselmo v. Comm., 80 TC 872 (1983), aff’d, 757 F.2d 1208 (11th Cir. 1985). <a href="#_ftnref4" name="_ftn4">4</a>.  See Tripp v. Comm., 337 F.2d 432 (7th Cir. 1964); Est. of DeBie v. Comm., 56 TC 876 (1971), acq. 1972-2 CB 1 and 1972-2 CB 2. <a href="#_ftnref5" name="_ftn5">5</a>.  See Williford v. Comm., TC Memo 1992-450 (involving oversized artwork); Doherty v. Comm., TC Memo 1992-98 (involving artwork of questionable quality and authenticity); Arbini v. Comm., TC Memo 2001-141 (involving newspapers and holding that the appropriate market for purposes of determining the fair market value of the newspapers is the wholesale market). <a href="#_ftnref6" name="_ftn6">6</a>.  IR 83-89. <a href="#_ftnref7" name="_ftn7">7</a>.  Mathias v. Comm., 50 TC 994 (1968), acq. 1969-2 CB xxiv. But see McGuire v. Comm., 44 TC 801 (1965), acq. in result 1966-2 CB 6. <a href="#_ftnref8" name="_ftn8">8</a>.  See Weil v. Comm., TC Memo 1967-78; Schapiro v. Comm., TC Memo 1968-44. <a href="#_ftnref9" name="_ftn9">9</a>.  Barringer v. Comm., TC Memo 1972-234. See also Kerner v. Comm., TC Memo 1976-12. <a href="#_ftnref10" name="_ftn10">10</a>.  Herman v. U.S. and Brown v. U.S. (consolidated actions), 99-2 USTC ¶ 50,889 (E.D. Tenn. 1999). <a href="#_ftnref11" name="_ftn11">11</a>.  TAM 9828001. <a href="#_ftnref12" name="_ftn12">12</a>.  1966-2 CB 1257, as modified by Rev. Proc. 96-15, 1996-2 CB 627. <a href="#_ftnref13" name="_ftn13">13</a>.  2001-11 IRB 895. <a href="#_ftnref14" name="_ftn14">14</a>.  TC Memo 1998-204. <a href="#_ftnref15" name="_ftn15">15</a>.  IRC § 170(f)(16), as added by PPA 2006. <a href="#_ftnref16" name="_ftn16">16</a>.  See IRC §§ 170(e)(1)(B), 6050L; IRC § 170(m). See also Rev. Rul. 2003-28, 2003-11 IRB 594; Notice 2005-41, 2005-23 IRB 1203; Notice 2004-7, 2004-3 IRB 310; and IRS News Release IR-2003-141 (12-22-2003). <a href="#_ftnref17" name="_ftn17">17</a>.  70 Fed. Reg. 29450 (5-23-2005). <a href="#_ftnref18" name="_ftn18">18</a>.  2005-29 IRB 119. See also Notice 2005-41, 2005-23 IRB 1203. </div></div>

March 13, 2024

9062 / What appraisal requirements may be required in connection with substantiating a charitable deduction that exceeds certain valuation thresholds?

<div class="Section1">In addition to satisfying the requirements described in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9061">9061</a>, a qualified appraisal is required in connection with the charitable donation of certain highly valued property. The qualified appraisal requirement for contributions of property for which a deduction of more than $5,000 is claimed is met if the individual, partnership, or corporation: <blockquote>(1)   Obtains a qualified appraisal of the property; and (2)   Attaches to the tax return information regarding the property and the appraisal (as the Secretary may require).<a href="#_ftn1" name="_ftnref1">1</a></blockquote> Donors who claim a deduction for a charitable gift of property (except publicly traded securities) valued in excess of $5,000 ($10,000 for nonpublicly traded stock) are required to obtain a qualified appraisal report, attach an appraisal summary (containing the information specified in regulations) to their return for the year in which the deduction is claimed, and maintain records of certain information related to the contribution.<a href="#_ftn2" name="_ftnref2">2</a> If a taxpayer fails to obtain the required appraisal for a gift of nonpublicly traded stock, the IRS may deny the deduction even if it does not dispute the value of the gift.<a href="#_ftn3" name="_ftnref3">3</a> The Tax Court distinguished its holding in Hewitt from a 1993 decision in which it had permitted a deduction to a taxpayer who substantially, though not fully, complied with the appraisal requirement. In the earlier ruling, the taxpayer had obtained an appraisal from a qualified appraiser, completed and attached Form 8283, but had failed to include all the information required of an appraisal summary.<a href="#_ftn4" name="_ftnref4">4</a> The Fourth Circuit agreed with the Tax Court’s analysis, stating that “Bond does not suggest that a taxpayer who completely fails to observe the appraisal regulations has substantially complied with them.” The Fourth Circuit further found that a deduction may still be permitted in situations where the taxpayers make a good faith effort to comply with the appraisal requirements, but that the deduction will be denied for taxpayers who ignore the requirement entirely. (For more information about the appraisal and summary requirements, see the instructions for Schedule A, Form 1040, and IRS Publication 526, Charitable Contributions.) A qualified appraiser must not be the taxpayer, a party to the transaction in which the taxpayer acquired the property, the donee, an employee of any of the above, any other person who might appear not to be totally independent, or one who is regularly used by the taxpayer, a party to the transaction or the charity, and does not perform a majority of appraisals for other persons.<a href="#_ftn5" name="_ftnref5">5</a> See, for example, Davis v. Commissioner,<a href="#_ftn6" name="_ftnref6">[6]</a> where appraisals were upheld where the appraiser was determined to be financially independent of the donor, and no conspiracy or collusive relationship was established. In Wortmann v. Commissioner,<a href="#_ftn7" name="_ftnref7">7</a> the Tax Court substantially reduced the taxpayers’ charitable deduction (from $475,000 to $76,200) after it concluded that the property appraisal was dubious and not well supported by valuation methodology. An appraisal will not be upheld if the appraiser bases his fee on a percentage of the appraisal value, unless the fee is based on a sliding scale that is paid to a generally recognized association regulating appraisers.<a href="#_ftn8" name="_ftnref8">8</a> If the donor gives similar items of property (such as books, stamps, paintings, etc.) to the same donee during the taxable year, only one appraisal and summary is required. If similar items of property are given during the same taxable year to several donees, and the aggregate value of the donations exceeds $5,000, a separate appraisal and summary must be made for each donation.<a href="#_ftn9" name="_ftnref9">9</a> The appraisal summary must be signed and dated by the donee as an acknowledgement of the donation.<a href="#_ftn10" name="_ftnref10">10</a> Taxpayers making contributions of art appraised at $50,000 or more may wish to request a “Statement of Value” from the IRS (which is the equivalent of a letter ruling as to the value of a particular transfer that is made at death, by inter vivos gift, or as a charitable contribution).<a href="#_ftn11" name="_ftnref11">11</a> The request must include specified information, including a description of the artwork, the cost, manner and date of acquisition, and a copy of an appraisal (which meets requirements set forth in Section 8 of the revenue procedure). The IRS charges a fee of $2,500 for obtaining a Statement of Value that can cover up to three items of art.<a href="#_ftn12" name="_ftnref12">12</a> The regulations state that taxpayers are not required to obtain a qualified appraisal of securities whose claimed value exceeds $5,000 if the donated property meets the definition of “publicly traded securities.” Publicly traded securities are (1) listed on a stock exchange in which quotations are published on a daily basis or (2) regularly traded in a national or regional over-the-counter market for which published quotations are available.<a href="#_ftn13" name="_ftnref13">13</a> Securities that do not meet the above requirements may still be considered publicly traded securities if they meet the following five requirements: <blockquote>(1)   The issue is regularly traded during the computational period in a market that is reflected by the existence of an interdealer quotation system for the issue; (2)   The issuer or its agent computes the issue’s average trading price for the computational period; (3)   The average price and total volume of the issue during the computational period are published in a newspaper of general circulation throughout the U.S. not later than the last day of the month following the end of the calendar quarter in which the computational period ends; (4)   The issuer or its agent keeps books and records that list for each transaction during the computational period involving each issue covered by this procedure the date of the settlement of the transaction, the name and address of the broker or dealer making the market in which the transaction occurred, and the trading price and volume; and (5)   The issuer or agent permits the IRS to review the books and records.<a href="#_ftn14" name="_ftnref14">14</a></blockquote> The “computational period” is weekly during October through December and monthly during January through September. Taxpayers who are exempted from obtaining a qualified appraisal because the securities meet these five requirements must attach a partially completed appraisal summary (section B of Form 8283) to the appropriate returns. The summary must contain the information required by parts I and II of the Form.<a href="#_ftn15" name="_ftnref15">15</a> For property contributions for which a deduction of more than $500,000 is claimed, the individual, partnership, or corporation must attach the qualified appraisal of the property to the tax return for the taxable year.<a href="#_ftn16" name="_ftnref16">16</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 170(f)(11)(C), 170(f)(11)(E). <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.170A-13(c)(2). <a href="#_ftnref3" name="_ftn3">3</a>.  Hewitt v. Comm., 109 TC 258 (1997), aff’d, 166 F.3d 332 (4th Cir. 1998). <a href="#_ftnref4" name="_ftn4">4</a>.  See Bond v. Comm., 100 TC 32 (1993). <a href="#_ftnref5" name="_ftn5">5</a>.  Treas. Reg. § 1.170A-13(c)(5)(iv). <a href="#_ftnref6" name="_ftn6">6</a>.  TC Memo 1999-250. <a href="#_ftnref7" name="_ftn7">7</a>.  TC Memo 2005-227. <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.170A-13(c)(6). <a href="#_ftnref9" name="_ftn9">9</a>.  Treas. Reg. § 1.170A-13(c)(4)(iv)(B). <a href="#_ftnref10" name="_ftn10">10</a>.  Treas. Reg. § 1.170A-13(c)(4)(iii). <a href="#_ftnref11" name="_ftn11">11</a>.  See Rev. Proc. 96-15, 1996-1 CB 627, as modified by Ann. 2001-22, 2001-11 IRB 895. <a href="#_ftnref12" name="_ftn12">12</a>.  Rev. Proc. 96-15, above, § 7.01(2). <a href="#_ftnref13" name="_ftn13">13</a>.  Treas. Reg. § 1.170A-13(c)(7)(ix)(A). <a href="#_ftnref14" name="_ftn14">14</a>.  Treas. Reg. § 1.170A-13(c)(7)(ix)(B). <a href="#_ftnref15" name="_ftn15">15</a>.  Ann. 86-4, 1986-4 IRB 51. <a href="#_ftnref16" name="_ftn16">16</a>.  IRC §§ 170(f)(11)(D), 170(f)(11)(E). </div></div>

March 13, 2024

9067 / Can an individual deduct the fair market value of appreciated real estate or intangible personal property such as stocks or bonds given to a charity?

<div class="Section1">If an individual makes a charitable contribution of real property or intangible personal property to a public charity, the sale of which would have resulted in long-term capital gain (see below), the taxpayer is generally entitled to deduct the full fair market value of the property. However, the deduction for the gift is limited to the lesser of 30 percent of adjusted gross income or the unused portion of the 60 percent limit (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9065">9065</a>).<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> A deduction denied because it exceeds 30 percent of the individual’s adjusted gross income may be carried over and treated as a contribution of capital gain property in each of the next five years.<a href="#_ftn2" name="_ftnref2">2</a> <blockquote>Example: In 2022, Jaclyn had adjusted gross income of $600,000. She made a charitable contribution of long-term capital gain stock worth $200,000 to her church. Her deduction is limited to $180,000 (30 percent of $600,000). In 2023, Jaclyn’s adjusted gross income is $700,000. She contributes $100,000 worth of long-term capital gain bonds to the church. She may deduct $120,000 in 2023 ($100,000 plus $20,000 carried forward from 2022), since the total does not exceed 30 percent of her adjusted gross income for 2023 ($210,000).</blockquote> An individual may elect to take a gift of long-term capital gain property into account at its adjusted basis instead of its fair market value. If the taxpayer makes this election, the income percentage limit for the contribution is increased to 60 percent instead of 30 percent. However, such an election applies to all such contributions made during the taxable year.<a href="#_ftn3" name="_ftnref3">3</a> The election is generally irrevocable.<a href="#_ftn4" name="_ftnref4">4</a> If the charitable contribution consists of property that, if sold at the time of the contribution, would result in income that would not otherwise qualify for long-term capital gain treatment (such as short-term capital gain property), the deduction must be reduced by the amount of gain that would not be long-term capital gain.<a href="#_ftn5" name="_ftnref5">5</a> If the entire gain would be income other than long-term capital gain, the allowable deduction would be limited to the taxpayer’s adjusted basis in the contributed property. Special rules apply to charitable contributions of S corporation stock in determining whether gain on the stock would have been long-term capital gain if the stock were sold by the taxpayer.<a href="#_ftn6" name="_ftnref6">6</a> Donors making charitable contributions of the long-term capital gain portion of futures contracts must mark the contracts to market as of the dates the contracts are transferred to the donee and recognize the accrued long-term capital gains as income.<a href="#_ftn7" name="_ftnref7">7</a> The amount of taxable gain or deductible loss recognized by the transferor at the time of the charitable transfer equals the difference between the fair market value of the futures contract at the time of the transfer and the transferor’s tax basis in the futures contract, as adjusted under IRC Section 1256(a)(2), to account for gains and losses already recognized in prior tax years under the mark to market rules.<a href="#_ftn8" name="_ftnref8">8</a> In one case, taxpayers who transferred appreciated stock to charitable organizations in the midst of an ongoing tender offer and merger were taxed on the gain on the stock under the “anticipatory assignment of income doctrine” where the charitable gifts occurred after the taxpayers’ interests in a corporation had ripened into rights to receive cash.<a href="#_ftn9" name="_ftnref9">9</a> But where taxpayers assigned warrants to four charities after receiving a letter announcing that all issued and outstanding stock of the company would be purchased, the Tax Court held that under Revenue Ruling 78-197<a href="#_ftn10" name="_ftnref10">10</a> the IRS could treat the proceeds of the sales of the warrants by the charities as income to the donors only if at the time the assignments took place, the charitable donees were legally bound or could be compelled to sell the warrants.<a href="#_ftn11" name="_ftnref11">11</a> A taxpayer who donated stock to a supporting organization where the voting rights had been transferred for a business purpose to a third party many years ago was permitted to claim a charitable deduction.<a href="#_ftn12" name="_ftnref12">12</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  See IRC § 170(b)(1)(C); Treas. Reg. § 1.170A-8(d)(1). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC §§ 170(b)(1)(C); Treas. Reg. § 1.170A-10(c). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC §§ 170(b)(1)(C)(iii), 170(e)(1). <a href="#_ftnref4" name="_ftn4">4</a>.  Woodbury v. Comm., 90-1 USTC ¶ 50,199 (10th Cir. 1990), aff’g TC Memo 1988-272. <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 170(e)(1)(A); Treas. Reg. § 1.170A-4(a). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 170(e)(1). <a href="#_ftnref7" name="_ftn7">7</a>.  Greene v. U.S., 79 F.3d 1348 (2d Cir. 1996). <a href="#_ftnref8" name="_ftn8">8</a>.  Greene v. U.S., 185 F.3d 67, 84 AFTR 2d 99-5415 (2d Cir. 1999). <a href="#_ftnref9" name="_ftn9">9</a>.  See Ferguson v. Comm., 174 F.3d 997 (9th Cir. 1999). <a href="#_ftnref10" name="_ftn10">10</a>.  1978-1 CB 83. <a href="#_ftnref11" name="_ftn11">11</a>.  Rauenhorst v. Comm., 119 TC 157 (2002). <a href="#_ftnref12" name="_ftn12">12</a>.  Let Rul. 200108012. </div></div>

March 13, 2024

9069 / How is the charitable contribution deduction computed when property is sold to a charity at a reduced price (in a “bargain sale”)?

<div class="Section1">If property is sold to a charity for less than its fair market value (a bargain sale), the individual must first determine whether a charitable deduction is allowable under the general rules governing charitable deductions (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9059">9059</a>). The taxpayer must then determine the amounts of the allowable deduction and gain (if any) that will result from the transaction. The taxpayer first calculates the percentage of the property’s fair market value that is being contributed and what percentage is being sold. (The fair market value of the contributed portion is the fair market value of the entire property less the amount realized on the sale.<a href="#_ftn1" name="_ftnref1">1</a> The fair market value of the portion sold is the amount realized on the sale.)<div class="Section1"> To determine the permissibility and the amount of the deduction for the contributed portion, the value of the contributed portion must be reduced by any gain that would not have been realized as long-term capital gain had the contributed portion been sold, taking into account the basis allocated to it.<a href="#_ftn2" name="_ftnref2">2</a> If the sale of the contributed portion by the donor would have resulted in long-term capital gain (see example 2, below), no reduction is required unless the gift is tangible personal property and the use of the gift will be unrelated to the function of the charity.<a href="#_ftn3" name="_ftnref3">3</a> After any such reduction required by IRC Section 170(e)(1) has been made, the remaining amount of the contribution is the allowable deduction. The taxpayer’s adjusted basis in the property is then allocated to each portion in these proportions.<a href="#_ftn4" name="_ftnref4">4</a> It is allocated between the portions contributed and sold, based on their relative proportions of the property’s fair market value.<a href="#_ftn5" name="_ftnref5">5</a> Gain is recognized on the sale portion to the extent the amount realized exceeds the allocated basis. However, no loss is recognized if the sale amount is less than the allocated basis of the sold portion.<a href="#_ftn6" name="_ftnref6">6</a> The amount of the deduction for the contributed portion is determined as if property having the allocated basis and allocated fair market value were given. The end result of this analysis is that essentially two separate transactions take place: (1) a sale of property that may result in taxable income, and (2) a deductible contribution of property to the charity. In some cases, the application of these rules may result in a taxable gain in excess of the allowed deduction. If the property is subject to a liability, the amount of the liability is treated as an amount realized.<a href="#_ftn7" name="_ftnref7">7</a> <blockquote>Example 1. Dale sells ordinary income property to his church for $4,000, which is the amount of his adjusted basis. The property has a fair market value of $10,000. The contribution portion of the transaction has a value of $6,000 ($10,000 fair market value less $4,000 amount realized) that represents 60 percent of the value of the property. The amount realized represents 40 percent of the value of the property ($4,000/$10,000). The adjusted basis ($4,000) is therefore allocated as follows: 40 percent of it ($1,600) becomes Dale’s basis in the “sold” portion and 60 percent of it ($2,400) becomes his basis in the “contributed” portion. The $6,000 “contribution portion” of the transaction has an allocated basis of $2,400. If it were sold, he would recognize $3,600 of ordinary income. The deduction for the $6,000 contribution is therefore reduced by $3,600. Dale has a charitable deduction of $2,400. Because Dale is receiving $4,000 for the “sold” portion and has an allocated basis in it of $1,600, he recognizes $2,400 of ordinary income with respect to the sale part of the transaction. The church’s basis in the property received will be $6,400; this consists of the sum of the bargain sale price ($4,000) and the amount of Dale’s basis ($2,400) in the gift portion.<a href="#_ftn8" name="_ftnref8">8</a> Example 2. The facts are the same as in Example 1, except that the property was long-term capital gain stock. Dale’s allocations of basis are the same as above; therefore, he recognizes $2,400 on the sale portion of the transaction. However the contributed portion is not subject to a reduction; thus, he is permitted a deduction of $6,000. The church’s basis in the stock will be $6,400, determined the same way as in Example 1.</blockquote> A taxpayer who makes charitable contributions of long-term capital gain property may elect to apply the provisions of IRC Section 170(e)(1) to all such contributions, thus using adjusted basis instead of fair market value to determine the value of the gifts. This election permits the individual to take a higher proportion of income as charitable deductions than would otherwise be allowed (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9065">9065</a>). In the context of a bargain sale, the Tax Court has found that the charitable deduction was properly claimed in the year that the sale was completed, because sufficient benefits and burdens of ownership had passed to the charitable organization in that year.<a href="#_ftn9" name="_ftnref9">9</a> Bargain sale treatment was denied to a taxpayer who inflated his valuation to a figure that would enable him to recover his original investment in his property (in the form of cash plus tax savings from the inflated tax deduction).<a href="#_ftn10" name="_ftnref10">10</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 1.170A-4(c)(3). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 170(e)(1)(A); Treas. Reg. § 1.1011-2(a). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 170(e)(1)(B). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 1011(b); Treas. Reg. §§ 1.170A-4(c)(2)(i), 1.1011-2. <a href="#_ftnref5" name="_ftn5">5</a>.  IRC §§ 170(e)(2), 1011(b); Treas. Reg. § 1.170A-4(c)(2). <a href="#_ftnref6" name="_ftn6">6</a>.  Treas. Reg. § 1.1001-1(e). <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.1011-2(a)(3). <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.170A-4(d), Example 5. <a href="#_ftnref9" name="_ftn9">9</a>.  See Musgrave v. Comm., TC Memo 2000-285. <a href="#_ftnref10" name="_ftn10">10</a>.  Styron v. Comm., TC Summ. Op. 2001-64. </div></div>

March 13, 2024

9066 / When is the deduction for charitable donations taken?

<div class="Section1">Generally, the deduction for a contribution is taken in the year the gift is made.<a href="#_ftn1" name="_ftnref1">1</a> However, if the contribution is a future interest in tangible personal property (such as stamps, artwork, etc.), the contribution is considered made (and the deduction allowable) only “when all intervening interests in, and rights to the actual possession or enjoyment of, the property have expired” or are held by parties unrelated to the donor.<a href="#_ftn2" name="_ftnref2">2</a><div class="Section1"> <blockquote>Example: If a donor creates a charitable remainder trust and funds it with a piece of artwork, the donor may not take a charitable income tax deduction for the contribution to the charitable remainder trust until the year the trustee sells the artwork.</blockquote> This rule does not apply to gifts of undivided present interests, or to gifts of future interests in real property or in intangible personal property.<a href="#_ftn3" name="_ftnref3">3</a> A grant of stock options by a company to a charitable trust resulted in a deduction in the year in which the options were exercised.<a href="#_ftn4" name="_ftnref4">4</a> Where real estate was transferred to a charity and subject to an option to repurchase, the IRS determined that fair market value under IRC Section 170 was equal to the value of the property upon the expiration of the option.<a href="#_ftn5" name="_ftnref5">5</a> A fixture that is to be severed from real property is treated as tangible personal property.<a href="#_ftn6" name="_ftnref6">6</a> The deduction for a charitable contribution made by an accrual basis (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9045">9045</a>) S corporation is properly passed through to shareholders and taken in the year that the contribution is actually paid.<a href="#_ftn7" name="_ftnref7">7</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9071">9071</a> for an explanation of the treatment given to gifts of partial interests. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 170(a)(1). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 170(a)(3). See also Treas. Reg. § 1.170A-5. <a href="#_ftnref3" name="_ftn3">3</a>.  Treas. Reg. §§ 1.170A-5(a)(2), 1.170A-5(a)(3). <a href="#_ftnref4" name="_ftn4">4</a>.  Let. Ruls. 200202034, 8849018. <a href="#_ftnref5" name="_ftn5">5</a>.  TAM 9828001. <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 170(a)(3). <a href="#_ftnref7" name="_ftn7">7</a>.  TAM 200004001. See also Rev. Rul. 2000-43, 2000-2 CB 333. </div></div>

March 13, 2024

9071 / Can a deduction be taken for a charitable contribution of less than the donor’s entire interest in property?

<div class="Section1">Usually not. Generally, a taxpayer may not deduct a charitable contribution that is less than the entire interest in property unless the contribution is made in trust. (A deduction of a partial interest will be allowed to the extent a deduction would be allowed if the interest had been transferred in trust.<a href="#_ftn1" name="_ftnref1">1</a>) However, a taxpayer may deduct contributions of partial interests if they are made to each of several charities, with the result that the entire interest in the property has been given to charitable organizations. An individual may make a gift of a partial interest in property if that is the individual’s entire interest, but not if partial interests were created to avoid the application of the rule prohibiting gifts of less than the individual’s entire interest.<a href="#_ftn2" name="_ftnref2">2</a></div> <div class="Section1"> Exceptions: A deduction is allowed for a contribution of less than the donor’s entire interest in property in the following instances: <blockquote>(1) The taxpayer donates an irrevocable remainder interest in a personal residence or farm;<a href="#_ftn3" name="_ftnref3">3</a> (2) The taxpayer makes a qualified conservation contribution;<a href="#_ftn4" name="_ftnref4">4</a> or (3) The taxpayer donates an undivided portion of his entire interest.<a href="#_ftn5" name="_ftnref5">5</a> An undivided portion is a fraction or percentage of each and every substantial interest or right owned by the donor in property and the fraction or percentage extends over the entire term of the donor’s interest in the property and in other property into which that property is converted.<a href="#_ftn6" name="_ftnref6">6</a> The right to possession of an undivided portion of the taxpayer’s entire interest has been held sufficient to constitute a charitable gift, even where the donee did not actually choose to take possession.<a href="#_ftn7" name="_ftnref7">7</a> The possibility that a charity’s undivided fractional interest may be divested upon the occurrence or nonoccurrence of some event has been determined not to defeat an otherwise deductible contribution where the possibility is deemed so remote as to be negligible.<a href="#_ftn8" name="_ftnref8">8</a></blockquote> The IRS has also found that a charitable gift of an “overriding royalty interest” or a “net profits interest” in an oil and gas lease did not constitute an undivided portion of the donor’s entire interest in an oil and gas lease where the donor owned a working interest under the lease.<a href="#_ftn9" name="_ftnref9">9</a> The IRS has ruled privately that a donor’s transfer of a life insurance policy to a charity, where the donor retained bare legal title, was not a retention of a substantial interest for purposes of the partial interest rule. Thus, the donor did not violate the partial interest rule, and was allowed to claim the charitable contribution deduction on the first day following the end of the 30-day cancellation period.<a href="#_ftn10" name="_ftnref10">10</a> In a case involving the contribution of a patent to a qualified charity, the IRS found that no deduction is allowed if: (1) the taxpayer retains any substantial right in the patent; or (2) the taxpayer’s contribution of a patent is subject to a conditional reversion, unless the likelihood of the reversion is so remote as to be negligible. On the other hand, a contribution of a patent subject to a license or transfer restriction will be deductible, but the restriction reduces what would otherwise be the fair market value of the patent at the time of the contribution and, therefore, reduces the amount of the charitable contribution.<a href="#_ftn11" name="_ftnref11">11</a> A charitable deduction is not allowed for a contribution of an undivided portion of the donor’s entire interest in tangible personal property unless, before the contribution, all interests in the property were held by the donor or the donor and the charity. In the case of any additional contribution of interests in the same property, the fair market value (FMV) of such contributions will be equal to the lesser of (1) the FMV at the time of the initial fractional contribution, or (2) the FMV at the time of the additional contribution.<a href="#_ftn12" name="_ftnref12">12</a> <blockquote>Example. Mark contributed 10 percent of a painting valued at $100,000 to an art museum in 2024 (a related use gift). The charitable deduction for the 10 percent interest was $10,000 in 2024. In 2025, Mark contributes another 10 percent interest in the painting to the art museum when the painting is valued at $110,000. However, for charitable deduction purposes, the fair market value of the painting cannot exceed the $100,000 value at the time of the initial contribution. Therefore, the charitable deduction is limited to $10,000 (10 percent of $100,000) in 2024.</blockquote> The charitable deduction for a contribution of an undivided portion of the donor’s entire interest in tangible personal property is recaptured (plus interest) if the donor does not contribute all of the remaining interests in the property to charity within 10 years of the initial fractional contribution or before death, whichever is earlier. Recapture is also required if the charity did not have substantial physical possession or make related use of the property during that period. The income tax on the recaptured amount is increased by 10 percent of the amount recaptured.<a href="#_ftn13" name="_ftnref13">13</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 170(f)(3)(A); Treas. Reg. § 1.170A-7(a). <a href="#_ftnref2" name="_ftn2">2</a>. Treas. Reg. § 1.170A-7(a)(2)(i). <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 170(f)(3)(B)(i); Treas. Reg. §§ 1.170A-7(b)(3), 1.170A-7(b)(4). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 170(f)(3)(B)(iii). <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 170(f)(3)(B)(ii). <a href="#_ftnref6" name="_ftn6">6</a>. Treas. Reg. § 1.170A-7(b)(1). See Rev. Rul. 57-293, 1957-2 CB 153 (undivided ¼ ownership and ¼ possession of art object); Rev. Rul. 72-419, 1972-2 CB 104 (undivided 20 percent remainder interest which was the donor’s only interest in the property). See also See Let. Ruls. 8145055, 8639019. <a href="#_ftnref7" name="_ftn7">7</a>. See Winokur v. Comm., 90 TC 733 (1988), acq. 1989-1 CB 1. See also Let. Ruls. 200223013, 200223014 (the gift of a fractional interest in any work of the donors’ collection accepted by the donee (subject to the gift and loan agreement) would qualify as a gift of an undivided portion of the donors’ entire interest in the work, relying on Winokur, above; thus, the undivided fractional interest would be deductible). <a href="#_ftnref8" name="_ftn8">8</a>. Let. Rul. 9303007. <a href="#_ftnref9" name="_ftn9">9</a>. Rev. Rul. 88-37, 1988-1 CB 522. <a href="#_ftnref10" name="_ftn10">10</a>. Let. Rul. 200209020. <a href="#_ftnref11" name="_ftn11">11</a>. Rev. Rul. 2003-28, 2003-1 CB 594. <a href="#_ftnref12" name="_ftn12">12</a>. IRC § 170(o), as added by PPA 2006. <a href="#_ftnref13" name="_ftn13">13</a>. IRC § 170(o)(3)(B). </div>

March 13, 2024

9073 / What are the tax consequences of a charitable contribution of partnership interests?

<div class="Section1">A partnership interest is a capital asset that, if sold, would be given capital gain or loss treatment except to the extent of the partner’s share of certain partnership property that, if sold by the partnership, would produce ordinary gain (i.e., the partner’s share of “unrealized receivables” and “substantially appreciated inventory”).<a href="#_ftn1" name="_ftnref1">1</a> (See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8605">8605</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8606">8606</a> regarding the treatment of capital gains and losses.) Thus, if a taxpayer makes a charitable contribution of a partnership interest, and if the taxpayer has held the interest for long enough to qualify for long-term capital gain treatment (i.e., more than one year, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8625">8625</a>), a deduction is permitted in the amount of the full fair market value of the interest less the amount of ordinary gain, if any, that would have been realized by the partnership for the partnership’s share of “unrealized receivables” and “substantially appreciated inventory.” (The deduction is subject to the otherwise applicable limits discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9065">9065</a>.)<div class="Section1"> If the partnership interest includes a liability (mortgage, etc.), the amount of the liability is treated as an amount realized on the disposition of the partnership interest.<a href="#_ftn2" name="_ftnref2">2</a> Thus, the contribution is subject to the bargain sale rules, and the transfer will be treated, in part at least, as a sale (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9069">9069</a>).<a href="#_ftn3" name="_ftnref3">3</a> (If the partner’s share of the partnership liabilities exceeds the fair market value of his partnership interest, the partner may have taxable income, but no deduction under the bargain sale rules.) In Goodman v. United States,<a href="#_ftn4" name="_ftnref4">4</a> the taxpayer contributed her partnership interest to charity, subject to her share of partnership debt. The district court held that the taxpayer recognized gain on the transfer that was equal to the excess of the amount realized over that portion of the adjusted basis of the partnership interest (at the time of the transfer) allocable to the sale under IRC Section 1011(b).<a href="#_ftn5" name="_ftnref5">5</a> The following steps must be taken to determine the taxpayer’s taxable income and the amount of the charitable deduction under the bargain sale rules: <ol> <li>Determine the taxable gain on the sale portion. Under the bargain sale rules, part of the donor’s basis is allocated to the portion sold. The basis allocated to the sold portion is the amount of basis that bears the same ratio to the entire basis as the amount realized bears to the market value of the property. Presumably, the sold portion includes the same proportionate part of the donor’s share of unrealized receivables and substantially appreciated inventory as it does basis.</li> </ol> <blockquote>Example: Adam owns a 10 percent interest in a partnership that he has held for three years. The fair market value of his interest is $100,000 and his adjusted basis is $50,000. His share of a mortgage on partnership property is $40,000, and his share of “unrealized receivables” (potential depreciation recapture on the mortgaged property) is $5,000 in which the partnership’s basis is zero. He donates his entire interest to charity. He is deemed to have received $40,000, his share of partnership liabilities, on the transfer. In effect there are two transactions–a sale for $40,000 and a contribution of $60,000. Of Adam’s $50,000 basis in his partnership interest, $20,000 is allocated to the sale portion: $40,000 (amount realized)/$100,000 (fair market value) × $50,000 (total adjusted basis). The fair market value of the sold portion is $40,000 (amount realized). Adam must recognize a gain of $20,000 ($40,000 realized less $20,000 adjusted basis allocated to the sold portion). Of that gain, $2,000 is allocable to unrealized receivables ($5,000 unrealized receivables × $40,000/$100,000). Because the partnership has no basis in the unrealized receivables, the entire $2,000 would be ordinary income. Adam must report a taxable long-term capital gain of $18,000 and a taxable ordinary gain of $2,000.</blockquote> <ol start="2"> <li>Determine the charitable contribution deduction. Generally, the fair market value of the portion given to charity is deductible except to the extent the property would have generated ordinary income if sold. Consequently, the allowable deduction for the gift portion must be reduced to the extent the portion of the partnership interest given to the charity would produce ordinary income if sold.</li> </ol> <blockquote>Example: The fair market value of Adam’s gift to charity is $60,000. Because 60 percent of the partnership interest was given to the charity ($60,000/$100,000), 60 percent of Adam’s share of partnership “unrealized receivables,” or $3,000 ($5,000 × 60 percent = $3,000), is considered included in the gift. The balance of the gift would be long-term capital gain on sale. Because $3,000 would be ordinary income on a sale, Adam’s contribution is reduced by $3,000, and his charitable contribution deduction is $57,000.</blockquote> Other special rules may apply under certain circumstances, for example, if the partnership owns property subject to tax credit recapture, if it has made installment sales, or (as might occur in the case of an oil and gas partnership) if it is receiving income in the form of “production payments.” </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 741. <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.1001-2. See Crane v. Comm., 331 U.S. 1 (1947). <a href="#_ftnref3" name="_ftn3">3</a>.  Rev. Rul. 75-194, 1975-1 CB 80. <a href="#_ftnref4" name="_ftn4">4</a>.  2000-1 USTC ¶ 50,162 (S.D. Fl. 1999). <a href="#_ftnref5" name="_ftn5">5</a>.  Citing Rev. Rul. 75-194 and Treas. Reg. § 1.1001-2. </div></div>

March 13, 2024

9059 / What deduction is an individual allowed to take with respect to gifts made to charitable organizations?

<div class="Section1">An individual may deduct certain amounts for charitable contributions.<a href="#_ftn1" name="_ftnref1">1</a> The allowable deduction for a contribution of property other than money is generally equal to the fair market value of the property.<a href="#_ftn2" name="_ftnref2">2</a> However, under certain circumstances, the deduction for a gift of property must be reduced (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9071">9071</a>). See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9061">9061</a> for a discussion of the fair market value determination.<div class="Section1"> The amount that may be deducted in any one year is subject to certain income percentage limits that depend on the type of property, the type of charitable organization to which the gift is made, and whether the contribution is made directly “to” the charity or “for the use of” the charity (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9064">9064</a>). Taxpayers are required to itemize deductions in order to take a charitable deduction. Generally, a gift of less than an individual’s entire interest in property is not deductible, though certain exceptions to this rule exist (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9070">9070</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9071">9071</a>). For a charitable contribution to be deductible, the charity must receive some benefit from the donated property.<a href="#_ftn3" name="_ftnref3">3</a> In addition, the donor cannot expect to receive an economic benefit (aside from the tax deduction) from the charity in return for the donation.<a href="#_ftn4" name="_ftnref4">4</a> For instance, if a taxpayer contributes substantially appreciated property, and later reacquires it from the charity under a prearranged transaction, or if the charity sells the appreciated property and uses the proceeds to purchase other property from the taxpayer under a similar arrangement, the taxpayer is required to recognize gain on the contribution.<a href="#_ftn5" name="_ftnref5">5</a> However, where there is no arrangement and no duty on the part of the charity to return the property to the donor, the taxpayer is entitled to the deduction. In addition, if the charity does return the property, the taxpayer receives a new basis in the property (i.e., the price he paid to reacquire it).<a href="#_ftn6" name="_ftnref6">6</a> In determining whether a payment that is partly in consideration for goods or services (i.e., a quid pro quo contribution) qualifies as a charitable deduction, the IRS has adopted the two-part test set forth in United States v. American Bar Endowment.<a href="#_ftn7" name="_ftnref7">7</a> Under these circumstances, for a charitable contribution to be deductible, a taxpayer must: <blockquote>(1)   Intend to make a payment in excess of the fair market value of the goods or services received; and (2)   Actually make a payment in an amount that exceeds the fair market value of the goods or services.<a href="#_ftn8" name="_ftnref8">8</a></blockquote> The deduction amount may not exceed the excess of (1) the amount of any cash paid and the fair market value of the goods or services over (2) the fair market value of the goods or services provided in return.<a href="#_ftn9" name="_ftnref9">9</a> The Tax Court has held that tuition payments paid by taxpayers to religious day schools for the secular and religious education of their children were not deductible as a charitable contribution, including amounts paid to one of the schools for after-school religious education classes.<a href="#_ftn10" name="_ftnref10">10</a> Certain goods or services received in return for a charitable contribution may be disregarded for purposes of determining whether a taxpayer has made a charitable contribution, the amount of any charitable contribution, and whether any goods or services have been provided that must be substantiated or disclosed.<a href="#_ftn11" name="_ftnref11">11</a> These items include goods or services that have an insubstantial value under IRS guidelines ($13.60 in 2025 (projected)y, $13.20 in 2024, $12.50 in 2023 and $11.70 in 2022), certain annual membership benefits and certain admissions to events.<a href="#_ftn12" name="_ftnref12">12</a> Prior to 2018, if a taxpayer made an otherwise deductible charitable contribution to a university (or other institution of higher learning) that directly or indirectly entitled the donor to purchase tickets for athletic events in the institution’s stadium, the contribution was only 80 percent deductible and only to the extent that the contribution was not found to be a payment for the tickets themselves.<a href="#_ftn13" name="_ftnref13">13</a> The 2017 tax reform legislation changed this rule so that no deduction is permitted. Prior to reform, the IRS had determined that the portion of the payment made to a state university’s foundation was deductible under IRC Section 170(l) even though the donor (an S corporation) received the right to purchase tickets for seating in a skybox at events in an athletic stadium of the university. The IRS reasoned that the portion of the payment to the foundation for the right to buy the tickets for seating was considered as being paid for the benefit of the university and, as such, 80 percent of such portion was deductible. The IRS found that the remainder of the payment (consisting of the ticket purchase, the right to use the skybox, the passes to visit the skybox, and the parking privileges) was not deductible.<a href="#_ftn14" name="_ftnref14">14</a> The IRS has found that contributions made to a university for the purpose of constructing a building providing meeting space for campus organizations qualified for a charitable deduction under IRC Section 170. With the exception of the meeting rooms leased to individual sororities, the facilities in the building would be open to all students. Because the facts indicated that the contributions were indeed gifts to the college, and not gifts to the sororities using the college as a conduit, the IRS determined that the requirements of Revenue Ruling 60-367,<a href="#_ftn15" name="_ftnref15">15</a> which discussed the circumstances under which donations that benefitted a college fraternity would be considered a gift to an educational institution, had been satisfied.<a href="#_ftn16" name="_ftnref16">16</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 170(a). <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.170A-1(c)(1). <a href="#_ftnref3" name="_ftn3">3</a>.  Winthrop v. Meisels, 180 F. Supp. 29 (DC NY 1959), aff’d, 281 F.2d 694 (2d Cir. 1960). <a href="#_ftnref4" name="_ftn4">4</a>.  Stubbs v. U.S., 70-2 USTC ¶ 9468 (9th Cir.), cert. den., 400 U.S. 1009 (1971). <a href="#_ftnref5" name="_ftn5">5</a>.  Blake v. Comm., 83-1 USTC ¶ 9121 (2d Cir. 1982). <a href="#_ftnref6" name="_ftn6">6</a>.  Sheppard v. U.S., 361 F.2d 972 (Ct. Cl. 1966). <a href="#_ftnref7" name="_ftn7">7</a>.  477 U.S. 105 (1986). <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.170A-1(h)(1). <a href="#_ftnref9" name="_ftn9">9</a>.  Treas. Reg. § 1.170A-1(h)(2). <a href="#_ftnref10" name="_ftn10">10</a>.  Sklar v. Commissioner, 125 TC 281 (2005); see also Sklar v. Comm., 282 F.3d 610 (9th Cir. 2002), aff’g TC Memo 2000-118. <a href="#_ftnref11" name="_ftn11">11</a>.  Treas. Reg. §§ 1.170A-1(h), 1.170A-13(f)(8). <a href="#_ftnref12" name="_ftn12">12</a>.  Treas. Reg. § 1.170A-13(f)(8). See also Rev. Proc. 2021-45, Rev. Proc. 2022, Rev. Proc. 2023-34. <a href="#_ftnref13" name="_ftn13">13</a>.  IRC § 170(l). <a href="#_ftnref14" name="_ftn14">14</a>.  See TAM 200004001. <a href="#_ftnref15" name="_ftn15">15</a>.  1960-2 CB 73. <a href="#_ftnref16" name="_ftn16">16</a>.  Let. Rul. 9829053. See also Let. Ruls. 200003013, 199929050. </div></div>

March 13, 2024

9061 / What verification is required to substantiate a deduction for a charitable donation?

<div class="Section1">A charitable contribution is allowable as a deduction only if verified as required under regulations.<a href="#_ftn1" name="_ftnref1">1</a> The required substantiation varies based upon the type and value of the contribution.<div class="Section1"> A charitable deduction is not allowed for any contribution of a check, cash, or other monetary gift unless the donor retains a bank record or a written communication from the charity showing the name of the charity and the date and the amount of the contribution.<a href="#_ftn2" name="_ftnref2">2</a> A taxpayer who donates cash or property to charity that has a value of $250 or more must obtain substantiation in the form of a contemporaneous written acknowledgment of the contribution that is supplied by the charitable organization.<a href="#_ftn3" name="_ftnref3">3</a> This acknowledgment must include the following information: (1) the amount of cash contributed and a description (excluding value) of any property contributed, (2) a statement of whether the charitable organization provided any goods or services in consideration for the contribution, and (3) a description and good faith estimate of the value of any such goods or services, or (4) a statement to the effect that the goods or services provided consisted solely of intangible religious benefits.<a href="#_ftn4" name="_ftnref4">4</a> The acknowledgment will be considered “contemporaneous” if it is obtained by the taxpayer on or before the earlier of (1) the date the taxpayer files his return for the year, or (2) the due date (including extensions) for filing the return.<a href="#_ftn5" name="_ftnref5">5</a> Prior to 2018, substantiation was not required if the information was reported on a return filed by the charitable organization.<a href="#_ftn6" name="_ftnref6">6</a> This exception was eliminated by the 2017 tax reform legislation. An organization could provide the acknowledgement electronically, such as via an e-mail addressed to the donor.<a href="#_ftn7" name="_ftnref7">7</a> For contributions of property other than money, the taxpayer is generally required to maintain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property. The value does not have to be stated on the receipt.<a href="#_ftn8" name="_ftnref8">8</a> If a taxpayer donates property with a value that exceeds $500, the taxpayer must satisfy certain appraisal requirements in addition to the property description requirements outlined below.<a href="#_ftn9" name="_ftnref9">9</a> The appraisal requirements that generally apply to property valued at more than $5,000 and at more than $500,000 do not apply to readily valued property, such as cash, publicly traded securities and certain qualified vehicles for which an acknowledgement is provided. Further, the general appraisal requirement does not apply if the taxpayer can show that the failure was due to reasonable cause and not willful neglect.<a href="#_ftn10" name="_ftnref10">10</a> For purposes of the valuation thresholds, property (and all similar items of property) donated to one charity will be treated as one property.<a href="#_ftn11" name="_ftnref11">11</a> If the claimed value of the donated property exceeds $500, the taxpayer must include with the tax return a description of the property.<a href="#_ftn12" name="_ftnref12">12</a> Specifically, the taxpayer must attach a completed Form 8283 to the relevant tax return (Noncash Charitable Contributions), which includes a property description and an acknowledgment by the organization of the amount and value of the gift. (The property description requirement does not apply to a C corporation that is not a personal service corporation or a closely-held C corporation.) In addition, a qualified appraisal must be obtained when the claimed value of the property exceeds $5,000 or $500,000.<a href="#_ftn13" name="_ftnref13">13</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9062">9062</a> for a detailed discussion of the appraisal requirements that must be satisfied for certain charitable donations. Under the special rule for pass-through entities (partnerships or S corporations), the above requirements will be applied at the entity level; however, the deduction will be denied at the partner or shareholder level.<a href="#_ftn14" name="_ftnref14">14</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 170(a)(1). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 170(f)(17), as added by PPA 2006. <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 170(f)(8)(A). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 170(f)(8)(B); Treas. Reg. § 1.170A-13(f)(2). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 170(f)(8)(C); Treas. Reg. § 1.170A-13(f)(3). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 170(f)(8)(D). <a href="#_ftnref7" name="_ftn7">7</a>.  Publication 1771. <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.170A-13(b)(1). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 170(f)(11)(A)(i). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 170(f)(11)(A)(ii). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 170(f)(11)(F). <a href="#_ftnref12" name="_ftn12">12</a>.  IRC § 170(f)(11)(B). <a href="#_ftnref13" name="_ftn13">13</a>.  IRC §§ 170(f)(11)(C), 170(f)(11)(D). <a href="#_ftnref14" name="_ftn14">14</a>.  IRC § 170(f)(11)(G). </div></div>