The Advisor's Professional Library

Charitable Giving

March 4, 2013

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What general rules apply to charitable deductions?

An individual may deduct certain amounts for charitable contributions.[1] The amount of a contribution of property other than money is generally equal to the fair market value of the property.[2] However, under certain circumstances, the deduction for a gift of property must be reduced.

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. An individual who does not itemize deductions may not take a charitable deduction.

As a general rule, a gift of less than an individual’s entire interest in property is not deductible, but certain exceptions are provided.

For a charitable contribution to be deductible, the charity must receive some benefit from the donated property.[3] In addition, the donor cannot expect to receive some economic benefit (aside from the tax deduction) from the charity in return for the donation.[4] For instance, if a taxpayer contributes substantially appreciated property, and later reacquires it from the charity under a prearrangement, 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 recognizes gain on the contribution.[5] 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 a 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).[6]

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 2-part test set forth in United States v. American Bar Endowment.[7] In order for a charitable contribution to be deductible, a taxpayer must (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.[8] 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.[9]

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.[10]

Where a company transfers an amount it holds on a taxpayer’s behalf to a charity: (1) the payment received by the company from the Internet vendor is a rebate (resulting from prior purchases from the vendor) and, thus, is not includable in the taxpayer’s gross income; and (2) the amount transferred is a charitable contribution that is deductible by the taxpayer in the year that the company (acting as the taxpayer’s agent) transfers the taxpayer’s rebate to charity.[11]

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.[12] These items include goods or services that have an insubstantial value under IRS guidelines, certain annual membership benefits received for a payment of $9.90 or less in 2012, and certain admissions to events.[13]

If an otherwise deductible charitable contribution to a university (or other institution of higher learning) directly or indirectly entitles the donor to purchase tickets for athletic events in a stadium of the institution, the contribution is 80% deductible, to the extent that the contribution is not a payment for the tickets themselves.[14] The Service has determined that the portion of the payment made to a state university’s foundation, for which the donor (an S corporation) received the right to purchase tickets for seating in a skybox at athletic events in an athletic stadium of the university, was deductible under IRC Section 170(l). The Service 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; thus, 80% of such portion was deductible. The Service also stated 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.[15]

The IRS determined 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 Service determined that the requirements of Rev. Rul. 60-37[16] had been satisfied.[17]

Charitable split dollar. Responding to perceived abuses, in 1999 Congress passed legislation that denies a charitable deduction for certain transfers associated with split dollar insurance arrangements.[18] Charitable split-dollar insurance reporting requirements are set forth in Notice 2000-24.[19] For the split dollar rules, see Treas. Reg. §1.7872-15.[20] See also Roark v. Comm.[21] (denying charitable income tax deductions where charitable split dollar life insurance policies were involved).


[1] .IRC Sec. 170(a).
[2] .Treas. Reg. §1.170A-1(c)(1).
[3] .See Winthrop v. Meisels, 180 F.Supp. 29 (DC NY 1959), aff’d 281 F.2d 694 (2d Cir. 1960).
[4] .Stubbs v. U.S., 70-2 USTC ¶9468 (9th Cir.), cert. den. 400 U.S. 1009 (1971).
[5] .Blake v. Comm., 83-1 USTC ¶9121 (2nd Cir. 1982).
[6] .Sheppard v. U.S., 361 F.2d 972 (Ct. Cl. 1966).
[7] .477 U.S. 105 (1986).
[8] .Treas. Reg. §1.170A-1(h)(1).
[9] .Treas. Reg. §1.170A-1(h)(2).
[10] .See Sklar v. Comm., 125 TC 281 (2005); see also Sklar v. Comm., 2002-1 USTC ¶50,210 (9th Cir. 2002), aff’g TC Memo 2000-118.
[11] .Let. Rul. 200142019. See also Let. Ruls. 200228001, 200230039.
[12] .Treas. Regs. §§1.170A-1(h), 1.170A-13(f)(8).
[13] .Treas. Reg. §1.170A-13(f)(8). See also Rev. Proc. 2011-51; 2011-44 IRB.
[14] .IRC Sec. 170(l).
[15] .See TAM 200004001.
[16] .1960-2 CB 73.
[17] .Let. Rul. 9829053. See also Let. Ruls. 200003013, 199929050.
[18] .See IRC Sec. 170(a)(10); see also Notice 99-36, 1999-26 CB 1284.
[19] .2000-1 CB 952.
[20] .TD 9092, 68 Fed. Reg. 54336 (9-17-2003); Notice 2002-8, 2002-1 CB 398.
[21] .TC Memo 2004-271; Addis v. Comm., 2004-2 USTC ¶50,291 (9th Cir. 2004) (cert. denied) aff’g 118 TC 528 (2002); and Weiner v. Comm., TC Memo 2002-153, cert. denied.


What verification is required to substantiate a deduction for a charitable contribution?

A charitable contribution is allowable as a deduction only if verified as required under regulations.[1]

Enhanced Recordkeeping Requirement for Contributions of Money

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.[2]

The IRS has issued guidance on how charitable contributions made by payroll deduction may meet the requirements of IRC Section 170(f)(17). The Service clarified that unlike IRC Section 170(g)(8), which only applies to contributions of $250 or more (see below), IRC Section 170(f)(17) applies toany contribution of a cash, check, or other monetary gift. For a charitable contribution made by payroll deduction, a pay stub, Form W-2, or other employer-furnished document that sets forth the amount withheld for payment to a donee organization, along with a pledge card prepared by or at the direction of the donee organization, will be deemed to be a written communication from the donee organization for this purpose.[3]

Contributions of $250 or More

Charitable contributions of $250 or more (whether in cash or property) generally must be substantiated by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization.[4]

The 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.[5] 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.[6] Substantiation is not required if the information is reported on a return filed by the charitable organization.[7] An organization can provide the acknowledgement electronically, such as via an e-mail addressed to the donor.[8]

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 need not be stated on the receipt.[9]

Generally, charitable contributions of $250 or more made by an employee through payroll deduction may be substantiated with a combination of two documents: (1) a pay stub, Form W-2, or a document furnished by the taxpayer’s employer that sets forth the amount withheld from the taxpayer’s wages, and (2) a pledge card or document prepared by or at the direction of the donee organization that states that the organization does not provide goods or services as whole or partial consideration for any contributions made by payroll deduction. The amount withheld from each paycheck is treated as a separate contribution. Therefore, the substantiation requirements of IRC Section 170(f)(8) will not apply to such contributions unless the employer deducts $250 or more from a single paycheck for the purpose of payment to a donee organization.[10]

Certain goods or services received by a contributing taxpayer (quid pro quo contributions) may be disregarded for substantiation purposes.

Contributions Exceeding $500

A deduction for a contribution of property with a claimed value exceeding $500 will generally be denied to any individual, partnership, or corporation that fails to satisfy the property description and appraisal requirements.[11] (However, there are two exceptions to the general rule. Under the first exception, the appraisal requirements, for property valued at more than $5,000 and at more than $500,000 (see below), do not apply to readily valued property, such as cash, publicly traded securities, and any “qualified vehicle” for which an acknowledgment is provided. Under the second exception, the general rule does not apply if it is shown that the failure to meet the requirements is due to reasonable cause and not to willful neglect.[12]For purposes of determining the thresholds, property (and all similar items of property) donated to one charity will be treated as one property.[13]

If the claimed value of the donated property exceeds $500, the taxpayer must include with the tax return a description of the property.[14]Specifically, the taxpayer must complete and attach to his tax return Form 8283 (Noncash Charitable Contributions), which includes a description of the property 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 (see below) or $500,000 (see below).[15]

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.[16]

Contributions Exceeding $5,000

In addition to satisfying the requirements described above, 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: (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).[17] 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.[18]

A taxpayer who failed to obtain such an appraisal for a gift of nonpublicly traded stock was denied a deduction, even though the IRS did not dispute the value of the claimed gift.[19] 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.[20] The Fourth Circuit Court of Appeals concurred in 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 stated: “[I]n Bond, the taxpayers made a good faith effort to comply with the appraisal requirement. In the case at bar, the Hewitts utterly ignored the appraisal requirement.” (For more information about the appraisal and summary, 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 doesn’t perform a majority of his/her appraisals for other persons.[21] See e.g., Davis v. Comm.[22] (appraisals upheld where appraiser was determined to be financially independent of the donor, and no conspiracy or collusive relationship was established).

In Wortmann v. Comm.,[23] 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.

The appraiser cannot base 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.[24]

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.[25] The appraisal summary is signed and dated by the donee as an acknowledgement of the donation.[26]

Taxpayers making contributions of art appraised at $50,000 or more may wish to request from the IRS a “Statement of Value” (which appears to be 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).[27] 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 user fee for obtaining a Statement of Value is $2,500 for up to three items of art.[28]

The regulations state that taxpayers need not 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 those (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.[29]

Securities that do not meet the above requirements may still be considered publicly traded securities if they meet the following five requirements: (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.[30]

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.[31]

Substantiation for contributions of more than $500,000. 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.[32]

Subsequent Disposition by Charity

If the charitable donee disposes of “charitable deduction property” that is subject to the above rules within three years after its receipt, the donee must provide an information return to the IRS. Charitable deduction property includes any property (other than publicly traded securities) for which a charitable deduction was taken under IRC Section 170 where the claimed value of the property (plus the claimed value of all similar items of property donated by the donor to one or more donees) was in excess of $5,000.[33] The return must show the name, address, and taxpayer identification number of the donor, a description of the property, the date of the contribution, the date of disposition, and the amount received on disposition. A copy of the return must be provided to the donor. Failure to file the return may subject the donee to a penalty.[34] However, final regulations will provide that donee reporting is not required upon disposition of donated property within three years of receipt if the value of the property (as stated in the donor’s appraisal summary) was not in excess of $5,000 at the time the donee signed the summary. In addition, no reporting will be required if the donee consumes or distributes property without receiving anything in exchange and the consumption or distribution is in furtherance of the donee’s charitable purpose (such as the distribution of medical supplies by a tax-exempt relief agency).[35]


[1] .IRC Sec. 170(a)(1).
[2] .IRC Sec. 170(f)(17), as added by PPA 2006.
[3] .Notice 2006-110, 2006-51 IRB 1127.
[4] .IRC Sec. 170(f)(8)(A).
[5] .IRC Sec. 170(f)(8)(B); Treas. Reg. §1.170A-13(f)(2).
[6] .IRC Sec. 170(f)(8)(C); Treas. Reg. §1.170A-13(f)(3).
[7] .IRC Sec. 170(f)(8)(D).
[8] .Publication 1771.
[9] .Treas. Reg. §1.170A-13(b)(1).
[10] .Treas. Reg. §1.170A-13(f)(11).
[11] .IRC Sec. 170(f)(11)(A)(i).
[12] .IRC Sec. 170(f)(11)(A)(ii).
[13] .IRC Sec. 170(f)(11)(F).
[14] .IRC Sec. 170(f)(11)(B).
[15] .IRC Secs. 170(f)(11)(C), 170(f)(11)(D).
[16] .IRC Sec. 170(f)(11)(G).
[17] .IRC Secs. 170(f)(11)(C), 170(f)(11)(E).
[18] .Treas. Reg. §1.170A-13(c)(2).
[19] .Hewitt v. Comm., 109 TC 258 (1997), aff’d, 166 F.3d 332 (4th Cir. 1998).
[20] .See Bond v. Comm., 100 TC 32 (1993).
[21] .Treas. Reg. §1.170A-13(c)(5)(iv).
[22] .TC Memo 1999-250.
[23] .TC Memo 2005-227.
[24] .Treas. Reg. §1.170A-13(c)(6).
[25] .Treas. Reg. §1.170A-13(c)(4)(iv)(B).
[26] .Treas. Reg. §1.170A-13(c)(4)(iii).
[27] .See Rev. Proc. 96-15, 1996-1 CB 627, as modified by Announcement 2001-22, 2001-11 IRB 895.
[28] .Rev. Proc. 96-15, above, Sec. 7.01(2).
[29] .Treas. Reg. §1.170A-13(c)(7)(ix)(A).
[30] .Treas. Reg. §1.170A-13(c)(7)(ix)(B).
[31] .Ann. 86-4, 1986-4 IRB 51.
[32] .IRC Secs. 170(f)(11)(D), 170(f)(11)(E).
[33] .IRC Sec. 6050L.
[34] .IRC Sec. 6721; Treas. Reg. §1.6050L-1. See SCA 200101031.
[35] .Instructions for IRS Form 8282


What verification is required to substantiate a deduction for a charitable contribution of a qualified vehicle?

General

No deduction is allowed for a contribution of a “qualified vehicle” (see below) with a claimed value of more than $500 unless:

(1)the taxpayer substantiates the contribution by a “contemporaneous” (see below) written acknowledgement of the contribution by the charity that meets certain requirements (see below), and includes the acknowledgement with the tax return that includes the deduction; and

(2)if the charity sells the vehicle without any “significant intervening use or material improvement” (see below) of the vehicle by the charity, the amount of the deduction does not exceed the gross proceeds received from the sale (“gross proceeds limitation”).[1]

Note that the substantiation rules under IRC Section 170(f)(8)–applicable to contributions of more than $250–do not apply to a contribution described above.[2]

The acknowledgment must include the following information:

(A)the name and taxpayer identification number of the donor;

(B)the vehicle identification number (or similar number);

(C)in the case of a “qualified vehicle” to which (2), above, applies: (i) a certification that the vehicle was sold in an arm’s length transaction between unrelated parties; (ii) the gross proceeds from the sale; and (iii) a statement that the deductible amount may not exceed the amount of such gross proceeds;

(D)in the case of a “qualified vehicle” to which (2), above, does not apply: (i) a certification of the intended use or material improvement of the vehicle and the intended duration of such use; and (ii) a certification that the vehicle would not be transferred in exchange for money, other property, or services before completion of the use or improvement;

(E)whether the donee organization provided any goods or services in consideration, in whole or in part, for the qualified vehicle; and

(F)a description and good faith estimate of the value of any goods or services referred to in (E), above, or if such goods or services consist solely of intangible religious benefits, a statement to that effect.[3]

An acknowledgement is considered “contemporaneous” if the charity provides it within 30 days of the sale of the qualified vehicle, or in the case of an acknowledgement including a certification as described in (D), above, the contribution of the qualified vehicle.[4]

The term “qualified vehicle” means any motor vehicle manufactured primarily for use on public streets, roads, and highways, boat, or airplane. But the term does not include any property described in IRC Section 1221(a)(1) (i.e., inventory).[5]

A charity is required to provide an acknowledgement containing the required information to the Secretary. The information must be provided at the time and in the manner prescribed by the Secretary.[6] A charity that knowingly furnishes a false or fraudulent acknowledgment, or that knowingly fails to furnish such an acknowledgment in the manner, at the time, and showing the required information (see above), will be subject to a penalty.[7]

The Secretary will prescribe such regulations or other guidance (see below) as may be necessary to carry out the purposes of these requirements. In addition, the Secretary may prescribe regulations or other guidance that exempt sales of vehicles by the charity that are in direct furtherance of the charity’s charitable purposes from the requirements that (1) the donor may not deduct an amount in excess of the gross proceeds from the sale, and (2) the charity certify that the vehicle will not be transferred in exchange for money, other property, or services before completion of a significant use or material improvement by the charity.[8] The Conference Committee conferees intend that such guidance may be appropriate, for example, if an organization directly furthers its charitable purposes by selling automobiles to needy persons at a price significantly below fair market below. The conferees further intend that the Service strictly construe the requirement of “significant use or material improvement.”[9]

Charities should report the contribution of qualified vehicles on IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes). Form 1098-C may also be used to provide the donor with a contemporaneous written acknowledgement of the contribution.

Interim Guidance on Qualified Vehicle Contributions

The Service has provided interim guidance regarding charitable contributions of qualified vehicles.[10] The guidance is generally effective for contributions made after 2004. The rules stated below apply until regulations become effective.

Deductions Exceeding $500

Disposition or use by charity. If the claimed value of a donated “qualified vehicle” (see above) exceeds $500, the amount of the deduction may be limited depending on the use of the qualified vehicle by the charity:

(1)If the qualified vehicle is sold by the charity without a significant intervening use or material improvement by the charity, then (except as provided in item (3), below) the deduction claimed by the donor may not exceed the gross proceeds received from the sale of the qualified vehicle (“the gross proceeds limitation”). The Service cautions that in no event may the deduction for a donated vehicle exceed the amount otherwise allowable under IRC Section 170(a) (i.e., the fair market value).

(2)If the charity makes a significant intervening use of or material improvement to a qualified vehicle, the donor is not subject to the gross proceeds limitation. However, the deduction claimed by the donor may not exceed the fair market value of the qualified vehicle.

(3)The gross proceeds limitation in item (1), above, does not apply to: (a) a sale occurring after 2004, of a qualified vehicle to a needy individual at a price significantly below fair market value; or (b) a gratuitous transfer to a needy individual, in direct furtherance of a charity’s charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation (pursuant to IRC Section 170(f)(12(F)).[11] Mere application of the proceeds from the sale of a qualified vehicle to a needy individual to any charitable purpose does not directly further a charity’s charitable purpose.[12]

For items (1), (2) and (3), above, the donor must obtain an acknowledgment from the charity that meets the contemporaneous written acknowledgment requirements below. Furthermore, with respect to items (2) and (3), above, the donor must also substantiate the fair market value in the manner described below (see “Fair Market Value”).[13]

Contemporaneous written acknowledgment. A donor must obtain a contemporaneous written acknowledgment from the charity and include the acknowledgment with the tax return on which the deduction is claimed.[14] All acknowledgments must include the name and taxpayer identification number of the donor, the vehicle identification number, and the date of the contribution. Additional information is required depending on the use of the qualified vehicle by the charity, as stated below:

(1)For a contribution of a qualified vehicle that is sold by the charity without any significant intervening use or material improvement by the charity in a sale, the acknowledgment must also contain: (a) the date the qualified vehicle was sold; (b) a certification that the qualified vehicle was sold in an arm’s length transaction between unrelated parties; (c) a statement of the gross proceeds from the sale; and (d) a statement that the deductible amount may not exceed the amount of the gross proceeds. The acknowledgment is considered to be contemporaneous if the charity furnishes the acknowledgment to the donor no later than 30 days after the date of the sale.

(2)For a contribution of a qualified vehicle for which the charity intends to make a significant intervening use of or material improvement to, the acknowledgment must also contain (a) a certification and detailed description of (i) the intended significant intervening use by the charity and the intended duration of the use, or (ii) the intended material improvement by the charity; and (b) a certification that the qualified vehicle will not be sold before completion of the use or improvement. The acknowledgment is considered contemporaneous if the charity furnishes the acknowledgment to the donor within 30 days of the date of the contribution.

(3)For a contribution of a qualified vehicle that is (a) sold at a price significantly below fair market value or (b) gratuitously transferred to a needyindividual, the acknowledgment also must contain a certification that: (i) the charity will sell the qualified vehicle to a needy individual at a price significantly below fair market value (or, if applicable, that the charity gratuitously will transfer the qualified vehicle to a needy individual); and (ii) that the sale (or transfer) will be in direct furtherance of the charity’s charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation. The acknowledgment is considered contemporaneous if the charity furnishes the acknowledgment to the donor no later than 30 days after the date of the contribution.[15]

Fair Market Value

A donor claiming a deduction for the fair market value of a qualified vehicle must be able to substantiate the “fair market value.” Fair market value 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 each having reasonable knowledge of relevant facts.[16]

A reasonable method of determining the fair market value of a qualified vehicle is by reference to an established used vehicle pricing guide. Many factors must be taken into account when using a used vehicle pricing guide to determine fair market value. A used vehicle pricing guide establishes the fair market value of a particular vehicle only if the guide lists a sales price for a vehicle that is: the same make, model, and year; and sold in the same area, in the same condition, with the same or substantially similar options or accessories, and with the same or substantially similar warranties or guarantees as the vehicle in question.[17]

Treasury intends to issue regulations under IRC Section 170 clarifying that the dealer retail value listed in a used vehicle pricing guide for a particular vehicle is not an acceptable measure of fair market value of a similar vehicle. The regulations will clarify that for contributions made after June 3, 2005 and before the date regulations become effective, an acceptable measure of the fair market value of a vehicle is an amount that does not exceed the price listed in a used vehicle pricing guide for a private party sale of a similar vehicle. The regulations limiting the fair market value of a vehicle to an amount that does not exceed the private party sale price will apply to contributions of vehicles made after June 3, 2005. In addition, Treasury will consider whether other values (e.g., the dealer trade-in value) are appropriate measures of the fair market value of a vehicle (for purposes of IRC Section 170). Any regulations limiting the fair market value of a vehicle to an amount less than the private party sale value will not apply to contributions made prior to the date that regulations to that effect become effective.[18]

Qualified Appraisal

A “qualified appraisal” is required for a deduction in excess of $5,000 for a qualified vehicle if the deduction is not limited to gross proceeds from the sale of the vehicle.[19] [20]

Deductions of $500 or Less

Contemporaneous written acknowledgment. A contribution of a qualified vehicle with a claimed value of at least $250 must be substantiated by a contemporaneous written acknowledgment of the contribution by the charity. For a qualified vehicle with a claimed value of at least $250 but not more than $500, the acknowledgment must contain the following information: (1) the amount of cash and a description (but not value) of any property other than cash contributed; (2) whether the charity provided any goods or services in consideration, in whole or in part, for the cash or property contributed; and (3) a description and good faith estimate of the value of any goods or services provided by the charity in consideration for the contribution (or, if such goods or services consist solely of intangible religious benefits, a statement to that effect).[21]

To satisfy the contemporaneous requirement, the acknowledgment must be obtained by the donor on or before the earlier of the date on which the donor files a return for the taxable year in which the contribution was made, or the due date (including extensions) of that return.

Sale of qualified vehicle yields gross proceeds of $500 or less. If a donor contributes a qualified vehicle that is subsequently sold (in a sale not described in item (3), above) without any significant intervening use or material improvement by the charity, and the sale yields gross proceeds of $500 or less, the donor may be allowed a deduction equal to the lesser of: (1) the fair market value of the qualified vehicle on the date of the contribution; or(2) $500 (subject to the terms and limitations of IRC Section 170). Under these circumstances, the donor must substantiate the fair market value, and, if the fair market value is $250 or more, must substantiate the contribution with an acknowledgment that meets the requirements of IRC Section 170(f)(8).[22]

Other Guidance

The Service has released a series of questions and answers concerning the new rules for vehicle donations.[23] In addition, the Service has provided information reporting guidance to donee organizations that receive contributions of certain motor vehicles, boats, and airplanes.[24] For additional information on vehicle donations, see Publication 4303, A Donor’s Guide to Vehicle Donations, and Publication 4302, A Charity’s Guide to Vehicle Donations.

The Service has announced its awareness of questionable practices involving charities selling donated vehicles at auction price, but claiming that the sales were to needy individuals at prices significantly below fair market value. By so doing, these charities have claimed that the sales trigger an exception to the general rule that the deduction allowed to the donor is limited to the proceeds from the charity’s sale. The Service’s position is that vehicles sold at auction are not sold at prices significantly below fair market value. Therefore, the Service will not treat vehicles sold at auction as qualifying for the exception for sales to needy individuals at prices below fair market value.[25]

The charity does not need to sell the vehicle in 2011, for example, in order for the donor who donated the vehicle in 2011 to receive a deduction for 2011. A taxpayer can take a charitable contribution deduction only for the year the vehicle is transferred to the charity, even if the vehicle is not sold by the charity until a later year. However, a taxpayer cannot take a charitable contribution deduction of $500 or more for a vehicle donation unless the taxpayer has received a written acknowledgment of the donation from the charity and attached the acknowledgment to the return. If the taxpayer receives the written acknowledgment after filing the tax return for the year of the donation, the taxpayer may, after receiving the acknowledgment, file an amended return for that year and claim the deduction on the amended return. The taxpayer must attach the acknowledgment to the amended return.[26]


[1] .IRC Sec. 170(f)(12)(A).
[2] .IRC Sec. 170(f)(12)(A)(i).
[3] .IRC Secs. 170(f)(12)(B).
[4] .IRC Sec. 170(f)(12)(C).
[5] .IRC Sec. 170(f)(12)(E).
[6] .IRC Sec. 170(f)(12)(D).
[7] .IRC Sec. 6720.
[8] .IRC Sec. 170(f)(12)(F).
[9] .H.R. Conf. Rep. No. 108-755.
[10] .Notice 2005-44, 2005-25 IRB 1287. Notice 2006-001 supplements Notice 2005-44.
[11] .See H.R. Conf. Rep. No. 755, 108th Cong., 2nd Session 750 (2004).
[12] .Notice 2005-44, above. Notice 2006-001 supplements Notice 2005-44.
[13] .Notice 2005-44, above. Notice 2006-001 supplements Notice 2005-44.
[14] .IRC Sec. 170(f)(12).
[15] .Notice 2005-44, above. Notice 2006-001 supplements Notice 2005-44.
[16] .Treas. Reg. §1.170A-1(c)(2).
[17] .See, e.g., Rev. Rul. 2002-67, 2002-47 IRB. 873.
[18] .Notice 2005-44, above.
[19] .IRC Sec. 170(f)(11)(A)(ii)(I).
[20] .Notice 2005-44, above.
[21] .IRC Sec. 170(f)(8).
[22] .Notice 2005-44, above.
[23] .See IRS Information Letter INFO 2005-0129.
[24] .See Notice 2006-1, 2006-4 IRB 347.
[25] .IR-2005-145.
[26] .IR-2005-149.


What penalty applies if a taxpayer overvalues property donated to charity?

If a taxpayer underpays his tax because of a substantial valuation misstatement of property donated to charity, he may be subject to a penalty of 20% of the underpayment attributable to the misstatement.[1] 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).[2] A “substantial valuation misstatement” exists if the value claimed is 150% or more of the amount determined to be correct.[3] If the value claimed is 200% or more of the amount determined to be correct, there is a “gross valuation misstatement,” which is subject to a 40% underpayment penalty.[4]

For guidance on the circumstances under which the disclosure on a taxpayer’s return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax under IRC Section 6662(d), see Rev. Proc. 2005-75.[5]


[1] .IRC Secs. 6662(a), 6662(b)(3).
[2] .See IRC Sec. 6662(d).
[3] .IRC Sec. 6662(e)(1)(A), as amended by PPA 2006.
[4] .IRC Sec. 6662(h)(2)(A)(i), as amended by PPA 2006.
[5] .2005-50 IRB 1137.


What are the income percentage limits for deduction of a charitable contribution?

The IRC makes a distinction between gifts “to” a charitable organization and gifts “for the use of” a charitable organization.

50% limit. Generally, an individual is allowed a charitable deduction of up to 50% of his adjusted gross income for any contribution (other than certain property) to: churches; schools; hospitals or medical research organizations; organizations that normally receive a substantial part of their support from federal, state, or local governments or from the general public and that aid any of the above organizations; federal, state, and local governments. Also included in this list is a limited category of private foundations (i.e., private operating foundations and conduit foundations)[1] that generally direct their support to public charities. The above organizations are often referred to as “50%-type organizations.”[2]

30% limit. The deduction for contributions of most long-term capital gain property to the above organizations, contributions for the use of any of the above organizations, as well as contributions (other than long-term capital gain property) to or for the use of any other types of charitable organizations (i.e., most private foundations) is limited to the lesser of (a) 30% of the taxpayer’s adjusted gross income, or (b) 50% of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 50%-type charities.[3]

20% limit. The deduction for contributions of long-term capital gain property to most private foundations is limited to the lesser of (a) 20% of the taxpayer’s adjusted gross income, or (b) 30% of adjusted gross income minus the amount of charitable contributions allowed for contributions to the 30%-type charities.[4]

Deductions denied because of the 50%, 30%, or 20% limits may be carried over and deducted over the next five years, retaining their character as 50%, 30%, or 20% type deductions.[5]

Gifts are “to” a charitable organization if made directly to the organization. Even though the gift may be intended to be used by the charity, and the charity may use it, if it is given directly to the charity, it is a gift to the charity and not “for the use of” the charity, for purposes of the deduction limits. Unreimbursed out-of-pocket expenses incurred on behalf of an organization (e.g., unreimbursed travel expenses of volunteers) are deductible as contributions “to” the organization if they are directly related to performing services for the organization (and, in the case of travel expenses, there is no significant element of personal pleasure, recreation, or vacation in such travel).[6]

“For the use of” applies to indirect contributions to a charitable organization.[7] The term “for the use of” does not refer to a gift of the right to use property. Such a gift would generally be a nondeductible gift of less than the donor’s entire interest.


[1] .See IRC Sec. 170(b)(1)(E).
[2] .IRC Sec. 170(b)(1)(A).
[3] .IRC Secs. 170(b)(1)(B), 170(b)(1)(C).
[4] .IRC Sec. 170(b)(1)(D).
[5] .IRC Secs. 170(d)(1), 170(b)(1)(D)(ii); Treas. Reg. §1.170A-10(b).
[6] .IRC Sec. 170(j); Rockefeller v. Comm., 676 F.2d 35 (2nd Cir. 1982), aff’g 76 TC 178 (1981), acq. in part 1984-2 CB 2; Rev. Rul. 84-61, 1984-1 CB 39. See Rev. Rul. 58-279, 1958-1 CB 145.
[7] .See Treas. Reg. §1.170A-8(a)(2). See Davis v. United States, 495 U.S. 472 (1990).


When is the deduction for charitable contributions taken?

Generally, the deduction for a contribution is taken in the year the gift is made.[1] However, in the case of a contribution of a future interest in tangible personal property (e.g., 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.[2]

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.[3] The grant of stock options by a company to a charitable trust resulted in a deduction in the year in which the options were exercised.[4] 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 would be the value of the property upon the expiration of the option.[5] A fixture that is to be severed from real property is treated as tangible personal property.[6] The deduction for a charitable contribution made by an accrual basis S corporation is properly passed through to shareholders and taken in the year that the contribution is actually paid.[7]


[1] .IRC Sec. 170(a)(1).
[2] .IRC Sec. 170(a)(3). See also Treas. Reg. §1.170A-5.
[3] .Treas. Regs. §§1.170A-5(a)(2), 1.170A-5(a)(3).
[4] .Let. Ruls. 200202034, 8849018.
[5] .TAM 9828001.
[6] .IRC Sec. 170(a)(3).
[7] .TAM 200004001. See also Rev. Rul. 2000-43, 2000-2 CB 333.

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