Small Business Taxes & ManagementTM--Copyright 2015, A/N Group, Inc.
Charitable contributions of property aren't unusual. Some taxpayers make such donations on a regular basis just to dispose of outgrown or unwanted clothing, a deceased relative's possessions, etc. Some taxpayers donate artwork, real estate, antiques, appreciated property, etc. That's a much more involved issue which we'll leave for another article.
Property contributions can present more of a documentation issue for a number of reasons. First, there are some rules and procedures specific to property contributions and valuation issues. Second, while most charitable organizations automatically send out contribution acknowledgments and you'll have a canceled check, credit card documentation, etc. to support cash contributions, that's generally not true for property donations.
The IRS knows this area is often easy money on an audit--and the line of court cases attest to that. That's even more true for property contributions. In some cases the claimed contribution was never made or grossly inflated. But in many more the contribution was real but the documentation was lacking--and that alone can be reason for denying a deduction. Most tax preparers see clients bring in an unsigned receipt from the charity with a notation "5 bags of clothing" and expect the preparer to value the contribution. That's not the documentation the IRS had in mind when they wrote the regulations.
Two recent cases highlight some of the problems. In the first case the taxpayers claimed a noncash charitable contribution of $37,315, which the IRS disallowed in its entirety. The items were donated to three charities a church, Goodwill Industries (Goodwill), the Military order of the Purple Heart Service Foundation (Purple Heart), and Vietnam Veterans of American (Vietnam Veterans). Contributions to the church for their flea market included books valued at $8,000, household items valued at $1,303, clothing valued at $1,000, toys for $822, telescopes for $800, jewelry valued at $780, and household furniture valued at $410, for a total of $13,115.
The taxpayers did not 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 the taxpayers claimed to have a receipt from the church for their contributions to the flea market in the following year. 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 taxpayers' noncash 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. The taxpayers 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. They contended that these items, in the aggregate, were divided in some manner among the three charities.
For Goodwill, the taxpayers testified 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 dropoffs. They left large items, such as furniture, outside the warehouse door. The taxpayers testified that 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 taxpayers allegedly scheduled a pickup and left the items outside their house. The charity sent a truck to pick up the items, generally while they were away, and usually left a doorknob hanger saying, "Thank you for your contribution." These doorknob hangers contained no other information. They were undated; they were not specific to the taxpayers; and they did not list or describe the property contributed.
The taxpayers testified that they 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 2011 tax return, they assigned estimated values to the items. 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.
The Court recited the basic rules for documentation of charitable contributions. For all contributions of $250 or more, the taxpayer generally must obtain a contemporaneous written acknowledgment from the donee.
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. "Similar items of property" must be aggregated in determining whether gifts exceed the $500 and $5,000 thresholds. The term "similar items of property" is defined to mean "property of the same generic category or type," such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.
The aggregation rules may need a quick example. During the year you donate 800 books with various values totaling $2,400 to your local library. You donate another 200 books worth $1,600 to a local college. Finally, you donate ten books with a claimed value of $1,200 to the local historical society. The total claimed value is $5,200, $200 more than the $5,000 threshold. You need an appraisal for the whole lot.
The law provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with "a contemporaneous written acknowledgment of the contribution by the donee organization." This acknowledgment must:
(1) include "a description (but not value) of any property other than cash contributed";The acknowledgment is "contemporaneous" if the taxpayer obtains it from the donee on or before the earlier of: (1) the date the taxpayer files a return for the year of contribution; or (2) the due date, including extensions, for filing that return.
(2) state whether the donee provided any goods or services in exchange for the gift; and
(3) if the donee did provide goods or services, include a description and good-faith estimate of their value.
The Tax Court noted that the taxpayers 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 do not satisfy the regulatory requirements. These doorknob hangers were undated; they were not specific to the taxpayers; they did not describe the property contributed; and they contained none of the other required information (as to whether any goods or services were received by the taxpayers in return).
The taxpayers contended that they did not need to get written acknowledgments because they made all of their contributions in batches worth less than $250. Because of the size of the contribution to the church, the Court found this explanation implausible. Moreover, the taxpayers testified that they did not assign values to the donated items until they prepared their tax return in 2012. That being so, it is hard to see how they could have ensured, at the time they contributed the property, that each individual batch was worth less than $250. For these reasons, the Court concluded the taxpayers were required to obtain, but did not obtain, contemporaneous written acknowledgments for their contributions of property during 2011. Their claimed deductions must accordingly be denied for lack of substantiation under Section 170(f)(8)(A).
The failure to satisfy the substantiation requirements for contributions of $250 or more was fatal to the taxpayers' claimed deduction, and the Court could have ended its opinion. But, for the sake of completeness, it briefly addressed the other applicable substantiation requirements. For non-cash contributions in excess of $500, taxpayers are required to maintain additional reliable written records with respect to each item of donated property. These records must include, among other things:
(1) the approximate date the property was acquired and the manner of its acquisition;The taxpayers allegedly made noncash contributions to four different charities of seven categories of items, each with a claimed value exceeding $500. But they did not maintain written records establishing when or how these items were acquired or what their cost bases were. Nor did they maintain written records establishing how they calculated the items' fair market value.
(2) a description of the property in detail reasonable under the circumstances;
(3) the cost or other basis of the property;
(4) the fair market value of the property at the time it was contributed; and
(5) the method used in determining its fair market value.
The law provides that no deduction is allowed for "any contribution of clothing or a household item" unless such property is "in good used condition or better." "The term 'household items' includes furniture, furnishings, electronics, appliances, linens, and other similar items." Most of the items the taxpayers allegedly donated consisted of clothing and household items. They failed to present credible evidence that these items were "in good used condition or better," and they did not furnish a qualified appraisal with their return. For all these reasons, the taxpayers did not satisfy the substantiation requirements for donations of property valued over $500.
Despite that the Court believed the taxpayers did donate some property, the fact they did not meet the substantiation requirements made the Court unable to allow a deduction for noncash gifts.
In the second Tax Court case the taxpayer's noncash contributions were much smaller, but the Court noted that most of the receipts lacked one or more of the following--type of property donated, value of property donated, signature of anyone acting on behalf of the donee organization, or a statement to the effect that no goods or services were received in exchange for the donated property. In addition, there was no indication of the condition of the property. At trial the taxpayer submitted amended receipts where she had filled in many of the missing fields. On cross examination, she admitted to having filled in those values on the night before the trial.
What You Need
So what do you need for each threshold? Here are the basic requirements for property contributions:
Receipt from the donee organization with:
The last requirement might need a little explaining. If you're donating a single piece of furniture, you'd want to describe it in some detail. If you're donating 20 blouses you might want to break it down by type such as short-sleeve casual, short-sleeve office, long-sleeve, etc. The greater the value, the more detail you want to provide. Taking pictures makes considerable sense since you'll also have the condition.
Contributions of $250 or More--
In addition to the requirement above, you need to have a contemporaneous written acknowledgment from the donee organization that contains a description of the property contributed and a statement detailing whether the donee provided any goods and services in exchange for the donation, and if so, a description and good-faith estimate of the value of any such goods and service given in consideration for the contribution.
This requirement is in the law so you don't give $300 in property and get a $100 gift card to a local restaurant. You can get that gift card, but you'll have to reduce your deduction by that amount. Nominal gifts are allowed with a disclosure as to the amount. The organization should know the rules on this. If you contribute cash to an organization, such a letter is generally routine. But organizations are much more lax when it comes to noncash contributions. You must have the letter by the date you file the return or the due date of the return, including extensions.
For contributions of less than $250, each contribution is treated separately for purposes of these requirements. Thus, if you make a $200 contribution in May followed by a $225 contribution in June, this acknowledgment isn't required.
Contributions of More Than $500--
You must meet all the requirements described above you must also have:
The last requirement demands additional explanation. The law specifies that no deduction is allowed for any contribution of clothing or a household item (furniture, appliances, linens, etc.) unless the property is in good used condition or better. Substantiating the condition can be difficult. The simplest approach may be to take pictures.
What's the value of used clothing or household items? At lot less than new, even if it's unworn. The best indication is what the item is selling for in the thrift store. Several charitable organizations publish suggested values, as do some of the tax programs. Go to our page Valuation Guide for Charitable Contributions for our list. If you have reasonable cause for not being able to provide the acquisition date or cost basis, you may attach an explanatory statement to be excused from the requirements. We would avoid relying on this out except in unusual circumstances. The IRS and Court's idea of reasonable cause is often difficult to meet.
Contributions of More Than $5,000--
Contributions of more than $5,000 require a formal appraisal. That means a qualified appraiser. A qualified is one who regularly appraises such property and meets certain educational requirements. There are other procedural requirements.
Remember, for this threshold you need to aggregate all similar items of property. Thus, 29 contributions of clothing between $200 and $250 each would add up to more than $5,000.
The first tip should be obvious. While the basic documentation is the same for a $100 contribution and a $30,000 contribution, clearly if you're making a $30,000 contribution of property in one year your chances of an inquiry from the IRS is far higher than for a $100 contribution. Having said that you want to make sure your documentation is all in order and you've complied with all the rules. Should the deduction be disallowed not only is the tax effect far greater, you'll most likely be assessed a 20% penalty.
While leaving bags of clothing by the front door may be convenient, if you're looking for a tax deduction, that's not a good approach. The receipt will almost surely not measure up to IRS requirements. In fact, there are several vulnerable areas with "door knockers" or mail box receipts. Take the items to the charity's store or warehouse location. Take pictures before boxing. Make a list of all the items. You can group items. For example, 5 ladies swimsuits, 6 men's suits, etc. But specific is better than vague. Five tank tops, three sleeveless blouses, etc. is far better than "20 women's tops". Some items should be separated. Designer label formal dresses, designer accessories, leather or fur coats, etc. Get an employee of the charity to sign off and date the list. Obtain a receipt from the charity as well. Remember the "received in return" requirement for contributions of $250 or more.
You're pricing the items (unless an appraisal is required), so keep documentation. Pictures are particularly important for items with a higher value, such as a leather coat worn only a couple of times.
The IRS indicates in Publication 526 that a receipt is not necessary if not practical--e.g., putting items in a clothing bin. If you keep a good diary that might work for a $100 of clothing, but not for serious spring cleaning. And we'd advise against it in general.
You might want to keep noncash contributions to $500 or less for the year. Any amount over that and you must attach Form 8283 to your return. It's not that big a deal under most circumstances, but your preparer will probably charge you an additional amount. It's worth it if your contribution is $900; probably not if the contribution is $525.
Aunt Marie just passed away and has a number of household items in excellent condition? A yard or estate sale may be the better choice. Even if the agent takes a significant cut, you'll pay no income tax on the sale and you'll end up with more in your pocket than taking a tax deduction. Aunt Marie's wish was for you to make a donation? Take the proceeds and donate the cash. But if you want to donate a number of items, talk to the charity to make sure you get the proper documentation.
The discussion above has been centered on contributions of clothing and household property because those are the most common property contributions. But there are other non-cash contributions can consist of other items such as autos, artwork, stocks and securities, etc. Many restaurants and grocery stores give surplus food. There are a number of rules specific to these other which we won't discuss here.
Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 04/28/15