The documentation requirements taxpayers must maintain in order to take a charitable contribution deduction on their tax return have been in place for almost 20 years. They are worth repeating however, as two recent tax court cases have upheld the necessity of following these rules and denied contribution deductions to taxpayers who did not have the necessary documentation.
As a review a donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the recipient organization. Although it is a donors responsibility to obtain a written acknowledgement, charities should be very mindful of these rules because certainly donor relations are at stake if something goes wrong. IRS publication 1771 outlines these requirements.
In a 2012 case, David and Veronda Durden were denied a tax deduction for contributions made to their church because the original acknowledgement letter received from the Church did not clearly stipulate that no goods or services were provided to the donors in exchange for their donation ( TC Memo 2012-140). To correct this problem, the Church issued a second acknowledgement letter with the required statement but it was rejected by the Court because it was not considered to be contemporaneous.
To be considered contemporaneous, the documentation must be obtained on or before the earlier of:
There are rules outlining necessary steps if a non-cash donation of over $5000 is claimed for what is required to take a deduction for non-cash property (real estate, furniture, computer equipment, clothing etc.). The donor is required to file a Form 8283 with their standard return and it must include the signature of a “qualified appraiser” as to the value assigned to the donated property.
The tax court case of Joseph and Shirley Mohamed (TC memo 2012-152) also ruled against the taxpayers (who had taken a deduction of millions of dollars for donated real estate) because they did not properly comply with the rules regarding Form 8283 and did not obtain a qualified appraisal. This case resulted in a really draconian result for the taxpayer who had clearly donated substantially valuable property to their presumably valid charitable remainder trust, yet were denied the deduction due to improper reporting of the gift as far as completing the requirements of IRS Form 8283.
In both of these cases, the Tax Court has sent a strong message that the substantiation rules DO MATTER and failure to follow them closely will result in the loss of a contribution deduction.
The fall-out over the valuation of donated medicine continues with the nonprofit watchdog site, Charity Navigator, landing in the news because of its controversial approach to rating organizations that have changed their values due to adopting more a conservative estimate.
Charity Navigator has decided that instead of punishing organizations that would suffer bad ratings due to a severe drop in revenue based on a more conservative calculation, that they will allow the organizations to file revised financial information for past periods. This would effectively apply the change in value retroactively so that revenue is more comparative.
Opponents to this decision argue that it lets organizations that overstated the value of their donations off the hook and that the excessive balances reported were never supportable under existing accounting rules anyway.
Supporters of the decision say it is a realistic approach to the change in accounting rules.
Organizations that want to file revised financial information have to provide adjusted Form 990 returns, have audit committee sign off, and the revised information must be available on the organization’s website.
Read more about it here.
FASB issued Proposed Accounting Standards Update (ASU) No. EITF-12B, Not-for-Profit Entities (Topic 958): Personnel Services Received from an Affiliate for Which the Affiliate Does Not Seek Compensation (a consensus of the FASB Emerging Issues Task Force). The FASB will be accepting comments on this proposed accounting update until September 20, 2012. The proposed update would modify the current that guidance which indicates that only those contributed services that (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals possessing those skills, and typically would need to be purchased if not provided by donation should be recognized. In addition, under this accounting update the value of the services would be measured at the cost recognized by the affiliate for the personnel providing those services. For more detail read the full FASB exposure draft.
Frequently nonprofit organizations receive services from a parent or affiliate’s employees or there may be shared administrative support for which the recipient organization doesn’t pay or incur costs. But what do you do to capture the value of the work provided? What is fair value in this case and what qualifies as a “specialized skill” (sidenote: unrelated donated services must qualify as a specialized skill or one that creates or enhances non-financial assets)?
The Emerging issues Task Force (EITF)’s job is to hash out those insidious little details that are left in grey territory by the FASB. They began discussing this topic in March which I helpfully translated into dramatic narrative here. Or, you can read all about it in their own words here. They go through possible scenarios and discuss if changes should be retrospective. At their June meeting, EITF reached what is referred to as “consensuses-for exposure” which is to say they agreed on an approach and now the FASB needs to chime in.
What was agreed upon was this: The recipient organization should record donated service revenue and expense for all work done on their behalf by an affiliate’s employees at cost. Retrospective application is optional. Early adoption is permitted.
The Tax Court recently denied a taxpayer’s large charitable contribution deduction for donated real estate valued at $18.5 Million. The Court denied the deduction because the taxpayer did not have the proper substantiation of the value under the tax code rules. The Court acknowledged the taxpayer did make the donation and also stated that the property’s value was probably greater than the amount the taxpayer was claiming. (TC Memo 2012-152)
In order to take charitable deductions of more than $5,000 worth of noncash property, there are very strict substantiation rules that must be followed. Among the rules is the requirement for the taxpayer to obtain a qualified appraisal for any noncash single item or grouping of items donated and valued by the taxpayer at over $5,000.
If you are a nonprofit 501(c)(3) receiving noncash donations, or a taxpayer who wishes to donate such items and take the charitable deduction applicable, we strongly advise you talk to your nonprofit tax specialist early in the process to make sure the taxpayer meets all the substantiation requirements so the desired tax deduction can be taken.