Charitable Contributions: Income Tax Aspects (Portfolio 863)

Tax Management Portfolio, Charitable Contributions: Income Tax Aspects, No. 863-3rd, discusses the income tax deduction for charitable contributions by individuals.

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Tax Management Portfolio, Charitable Contributions: Income Tax Aspects, No. 863-3rd, discusses the income tax deduction for charitable contributions by individuals. Many requirements must be complied with in order to secure a charitable contribution deduction, including an eligible donee, donative intent, and substantiation of the contribution amount. The amount of the deduction is determined by the type of property donated and its fair market value.
To claim a charitable contribution deduction, the property must be donated to an eligible donee. A change in the charitable organization's status can have an effect on the contribution deduction. The issue of donative intent rests principally on the facts of each case. The Portfolio discusses the IRS and court guidelines for determining whether a donor has the requisite charitable intent or if he or she expects a commensurate benefit in return. The substantiation requirements must be carefully reviewed in connection with donations of property, especially if an appraisal is required.
The Portfolio also analyzes the charitable contribution deduction restrictions. This analysis centers around the provisions of §170(b), (d), and (e), and the regulations thereunder, which detail the applicable limitations on charitable contribution deductions. The factors that determine the percentage limitations include the classification of donee organizations, the type of property donated, and the available carryover provisions. The computation of the percentage limitations is one of the more complex areas of the Code. Contributions are limited to 50%, 30%, or 20% of the taxpayer's contribution base, which is defined as adjusted gross income computed without regard to any §172 net operating loss carryback. Due to the complexity of the limitations and the interaction of the various factors, the Portfolio provides numerous examples of the application of the limitations.
Additional aspects of charitable contributions are considered in 839 T.M., Estate and Gift Tax Charitable Deductions (EGT Series); 865 T.M., Charitable Remainder Trusts and Pooled Income Funds (EGT Series); and 866 T.M., Charitable Income Trusts (EGT Series); and in 794 T.M., Charitable Contributions by Corporations (U.S. Income Series).
This Portfolio may be cited as Kirschten & Freitag, 863-3rd T.M., Charitable Contributions: Income Tax Aspects.
This Bloomberg BNA Portfolio is not intended to provide legal, accounting, or tax advice for any purpose and does not apply to any particular person or factual situation. Neither the author nor the publisher assumes responsibility for the reader's reliance on information or opinions expressed in it, and the reader is encouraged to verify all items by reviewing the original sources.

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Barbara L. Kirschten, B.A., University of Pennsylvania (summa cum laude); Honours B.A., Cambridge University; Ph.D., M.A., Harvard University; J.D., Northwestern University; member, New York and District of Columbia Bars; former member, Steering Committee District of Columbia Bar Association Taxation Section and former Chair, Exempt Organizations Committee; former Co-Chair, Subcommittee on Museums of Other Cultural Organizations, Exempt Organizations Committee, ABA Section of Taxation; author, The Nonprofit Corporation Forms Handbook; co-author, Federal and State Taxation of Exempt Organizations.

Carla Neeley Freitag, B.A., Duke University (magna cum laude 1974); J.D., University of Florida College of Law (with high honors 1976); LL.M. (in Taxation), University of Miami School of Law (1988); admitted to practice in Florida, Texas, and Georgia; member, American Bar Association, Brevard County Estate Planning Council, Brevard Women Lawyers; author, 517 T.M. Scholarships and Educational Credits, 539 T.M., Net Operating Losses — Concepts and Computations, 607 T.M., Farm and Ranch Expenses and Credits, 744 T.M., Taxation of Cooperatives and Their Patrons, 462 T.M., Unrelated Business Income Tax, 465 T.M., Debt-Financed Income (Section 514); contributor to Tax Practice Series; Tax Management Distinguished Author.
Michael Kaercher, Esq. assisted with this edition of the Portfolio.


Detailed Analysis

I. Introduction - General Principles

A. Background of § 170

B. General Scope of § 170

C. Limitations of Discussion

II. Definition of Charitable Contribution

A. Introduction: Basic Elements of a Deductible Charitable Contribution

B. Definition of Transfer

C. Definition of Money or Property

1. Money

a. In General

b. Transactions Deemed to Be the Equivalent of Cash Payments

(1) Payments by Check

(2) Payments by Credit Card

(3) Promissory Notes

(4) Letters of Credit

(5) Pledges

(6) Options

(7) Interest-Free Loans

c. Deductible Payments Made on Behalf of a Charity

(1) Incidental Expenses

(2) Payments on Behalf of Students in the Household

(a) Nature of Qualifying Payment

(b) Amount of Payment

(c) Full-Time Student Status

(d) Compensation or Reimbursement

(e) Exclusivity of § 170(g)

2. Property

a. In General

b. Examples of Gifts of Property

(1) Gifts of Stock

(2) Gifts of Real Estate

(3) Assignment of Debts and Accounts Receivable

(4) Gifts of Tangible Personal Property

(5) Contract Rights

(6) Patents

(7) Royalties

(8) Life Insurance Policies

(9) Grant of Options

c. Gifts That Do Not Generate Deductions for the Donor

(1) Performance of Services

(2) Transfer of Permit

(3) Contributions from IRAs

(4) Contributions to Certain Donor Advised Funds

d. Charitable Contributions as Constructive Dividends

D. Permissible Donees

1. Section 170(c)(1)–(5) Organizations

2. Restricted Contributions

a. Class of Beneficiaries Designated by Donor or by Donee's Charter

b. Individual Beneficiary Designated by Donor

c. Use of Funds Abroad

3. Certain Deductions Disallowed

a. Gifts to Organizations with Racially Discriminatory Policies

b. Gifts to Terrorist Organizations

c. Gifts to Communist-Controlled Organizations

d. Gifts to or for the Use of Certain Other Organizations

e. Gifts to Organizations That Attempt to Influence Legislation or That Participate in Political Campaigns

4. Cumulative List

5. Effect of Donee's Loss of Qualification

a. Rev. Proc. 82-39

b. Rev. Proc. 80-20

6. Churches

E. Contribution or Gift

1. Definition

a. Donative Intent and Receipt of Consideration

b. Nature of a Quid Pro Quo

(1) Money, Property, or Services

(2) Expectation of Future Benefit

(3) Tax Savings from Charitable Contributions Deduction

(4) Benefit Received from Third Party

(5) Valuation of Benefit

c. Voluntary Transfer

d. Incidental Benefit to Donor

e. Examples of Allowed and Disallowed Contributions

2. Receipt of Consideration in Specific Settings

a. Charitable Contribution vs. Trade or Business Expense

(1) In General

(2) Section 162(b)

(3) Certain Nondeductible Expenses

b. Charitable Contribution vs. Tuition

c. Payments to Religious Organizations in Exchange for Certain Religious Privileges or Benefits

(1) Payments for Religious Benefits in General

(a) Church of Scientology Litigation

(b) Sklar I and Sklar II

(2) Impact of § § 170(f)(8) and 6115

d. Payments Related to Fundraising Activities

(1) Receipt of Goods and Services

(2) Reliance on Donee Estimate of Fair Market Value of Goods or Services

(3) Goods and Services Disregarded

(a) Rev. Proc. 90-12

(i) Low-Value Items

(ii) Newsletters and Program Guides

(iii) Free Items with Solicitations

(b) Annual Membership Benefits

(c) Goods and Services Provided to Employees or Partners

(4) Section 170(l) - Payments to Colleges and Universities for the Right to Purchase Seating at Athletic Events

e. Bargain Sale Rules

(1) Bargain Sales

(a) In General

(i) Gift Portion

(ii) Sale Portion

(b) Bargain Sales of § 170(e) Property

(2) Gifts of Encumbered Property

(a) In General

(b) Reduction for Certain Interest - § 170(f)(5)

(3) Gift Annuities

(a) Charitable Contributions Deduction

(b) Recognition of Gain

(c) Treatment of Annuity Payments

(d) Example

f. Split-Dollar Life Insurance, Annuity, and Endowment Contracts

(1) In General

(2) Exceptions

(a) Charitable Gift Annuity Contracts

(b) Charitable Remainder Trusts

(3) Excise Tax on Donee

(a) Tax on Premiums Paid

(b) Reporting Requirements

g. Qualified Conservation Contributions

h. State Tax Credits

i. Patents or Other Intellectual Property

F. Gifts of Partial Interests

1. Partial Interests in Property (Not in Trust)

a. General Rule of Nondeductibility

b. Exceptions

(1) All Interests Given to Charity

(2) Donor's Entire Interest

(a) Transfers of Donor's Entire Interest

(b) Transfers to Circumvent Partial Interest Rule

(3) Undivided Portion of Donor's Entire Interest

(a) In General

(b) Limitation on Deduction for Contributions of Tangible Personal Property Made After August 17, 2006

(i) Ownership Requirement

(ii) Valuation Restrictions on Additional Gifts

(iii) Recapture

(A) Deductions Subject to Recapture

(B) Additional Tax

(4) Remainder Interest in Personal Residence or Farm

(a) In General

(b) Personal Residence Defined

(c) Farm Defined

(d) Property Subject to a Mortgage

(e) Reduction for Depreciation and Depletion

(5) Qualified Conservation Contribution

(a) Qualified Real Property Interests

(i) Entire Interest Other Than Qualified Mineral Interest

(ii) Remainder Interest

(iii) Perpetual Conservation Restriction

(b) Qualified Organizations

(c) Permitted Conservation Purposes

(i) In General

(ii) Recreation or Education

(iii) Protection of Environmental System

(iv) Preservation of Open Space

(A) In General

(B) Scenic Enjoyment of General Public

(C) Governmental Conservation Policy

(D) Significant Public Benefit

(v) Historic Preservation

(A) In General

(B) Historically Important Land Areas

(C) Certified Historic Structures

(D) Public Access

(d) Exclusively for Conservation Purposes

(i) Incidental Benefit

(ii) Inconsistent Use

(iii) Enforceable in Perpetuity

(iv) Property Subject to a Mortgage

(v) Retention of Qualified Mineral Interest

(vi) Protection of Conservation Purpose When Donor Retains Certain Rights

(vii) Extinguishment Due to Changed Conditions

(e) Valuation

(i) Entire Interest Other Than Qualified Mineral Interest

(ii) Remainder Interest

(iii) Perpetual Conservation Restriction

(iv) Reduction of Adjusted Basis in Property Retained

(f) Interrelationship with Rehabilitation Credit

(6) Future Interest in Tangible Personal Property

(7) Partial Interest That Would Be Deductible in Trust

(8) Insubstantial Retained Interest

(a) In General

(b) Advisory Privileges in Donor Advised Funds

(i) Contributions Made on or Before February 13, 2007

(ii) Contributions Made After February 13, 2007

(9) Remoteness Exception

2. Contributions in Trust

a. Remainder Interests in Trust

(1) Requirements for Deduction

(a) Charitable Remainder Annuity Trusts

(b) Charitable Remainder Unitrusts

(c) Pooled Income Funds

(2) Planning Considerations

(a) Annuity Trust vs. Unitrust

(b) Gift Annuity Distinguished

(3) Qualified Reformations

b. Income Interests in Trust

(1) Requirements for Deduction

(2) Planning Considerations

(3) Qualified Reformations

c. Trusts Exclusively for Charitable Purposes

d. Donor's Entire Interest

III. Valuation of Contributions and Amount of Deduction

A. Fair Market Value

B. Offsetting Adjustment to Income

C. Appreciated Property

1. Background

2. Recognition of Gain

3. Amount of Charitable Contribution (§ 170(e))

a. Nature of the Appreciated Property

(1) Ordinary Income Property (§ 170(e)(1)(A))

(2) Tangible Personal Property (§ 170(e)(1)(B)(i))

(3) Certain Intellectual Property (§ 170(e)(1)(B)(iii))

(4) Certain Taxidermy Property (§ 170(e)(1)(B)(iv))

b. Identity of the Donee

(1) Contributions to Certain Private Foundations (§ 170(e)(1)(B)(ii))

(2) Other Contributions of Appreciated Property (§ 170(b)(1)(C))

c. Contributions of Ordinary Income and Long-Term Capital Gain Property

d. Example of Rules Under § 170(e)

e. Nonapplication of § 170(e)(1) in Certain Cases

f. Nonresident Alien Individuals

g. Augmented Charitable Deduction for Donations of Scientific Equipment

h. Life Insurance Policies

i. Partial Interests

j. Augmented Charitable Deduction for Donations of Computer Equipment

IV. Percentage Limitations

A. Historical Background

B. The Percentage Limitations

1. Fifty Percent Limitation

2. Thirty Percent Limitation

3. Twenty Percent Limitation

C. Classification of Contributions

1. In General

2. Contributions “to” vs. “for the use of”

3. Organizations That Qualify as 50% Charities

a. Public Charities

(1) Churches

(2) Certain Educational Organizations

(3) Certain Hospitals and Medical Research Organizations

(4) University Endowment Funds

(5) Governmental Units

(6) Publicly Supported Organizations

(7) Section 509(a)(2) or (3) Organizations

b. Private Operating Foundations

c. Private Nonoperating Foundations

(1) Distributing Foundations

(2) Organizations Maintaining a Common Fund

4. Thirty and Twenty Percent Limitations

a. Semi-Public Charities

b. Private Foundations

5. Classification Based on Type of Property Contributed

a. Contributions of Ordinary Income Property - § 170(e)(1)(A)

b. Contributions of Long-Term Capital Gain Property to Public Charities

c. Contributions of Long-Term Capital Gain Property to Semi-Public Charities and Private Foundations - § 170(b)(1)(D)

d. Qualified Conservation Contributions

e. Contributions to or for the Use of Certain Private Foundations - § 170(e)(1)(B)(ii)

f. Contributions of Unrelated Use Tangible Personal Property - § 170(e)(1)(B)(i)

D. Application of Limitations

E. Illustrations

V. Carryover of Excess Charitable Contributions

A. General Rule

B. Special Rules

1. Net Operating Loss Carryback to the Contribution Year

2. Net Operating Loss Carryback to Tax Years After the Contribution Year

3. Reduction of Excess Contributions

4. Change in Type of Return Filed

a. From Joint to Separate Returns

b. From Separate to Joint Returns

c. Remarried Taxpayers; Deceased Spouses

C. Supporting Information Required

VI. Substantiation Requirements

A. In General

1. Applicable Authorities

2. Judicial Construction of Substantiation Rules

a. Introduction

b. Language of Code and Regulations

c. Strict Compliance Required

d. Substantial Compliance

e. Cohan Rule

B. Contributions of Money

1. Contributions of Money of Less than $250

a. Contributions Made in Tax Years Beginning on or Before August 17, 2006

(1) General Rule

(2) Canceled Check or Account Statement

(3) Receipt from Donee

(4) Other Reliable Written Records

(5) Automobile Expenses

b. Contributions Made in Tax Years Beginning After August 17, 2006

2. Contributions of Money (or Property) of $250 or More

a. Applying the $250 Threshold

(1) Separate Contributions of Less than $250 to Same Charitable Donee

(2) Multiple Contributions of $250 or More to Same Charitable Donee

(3) Quid Pro Quo Contributions

(4) Contributions by Payroll Deductions

(5) Contributions on Affinity Credit Cards

b. Contemporaneous Written Acknowledgment

(1) In General

(2) Elements of a Contemporaneous Written Acknowledgment

(a) In Writing

(b) From the Donee Organization

(c) Contemporaneous

(d) Goods and Services

(e) Intangible Religious Benefit

(f) In Consideration For

(3) Examples

c. Certain Benefits Not Treated as Goods or Services

(1) Benefits to Donor

(a) Token Exception

(b) Membership Benefits Exception

(2) Benefits to Donor's Employees or Partners

d. Special Rules for Particular Forms of Deduction

(1) Out-of-Pocket Expenses

(2) Contributions Made by Payroll Deduction

(3) Distributing Organizations as Donees

(4) Transfers to Charitable Remainder Annuity Trusts, Charitable Remainder Unitrusts, and Charitable Lead Trusts

(5) Payments to a College or University for the Right to Purchase Tickets to Athletic Events

(6) Contributions by Partnerships or S Corporations

(7) Purchase of an Annuity

(8) Matched Payments

C. Contributions of Property

1. Introduction

2. Contributions of Property with Claimed Deduction of Less than $250 ($1–$249)

3. Contributions of Property with Claimed Deduction of $250 or More and Not More than $500 ($250–$500)

4. Contributions of Property with Claimed Deduction of More than $500

a. Introduction

(1) Applicable Authorities and Effective Dates

(2) Applying the Dollar Thresholds

b. Contributions with Claimed Deduction of More than $500 and Not More than $5,000 ($501–$5,000)

(1) Contributions After June 3, 2004

(2) Contributions on or Before June 3, 2004

c. Additional Requirements for Contributions of Property with Claimed Deduction of More than $5,000 but Not More than $500,000 ($5,001–$500,000)

(1) Appraisal Requirement

(a) In General

(b) Application of $5,000 Threshold

(c) Qualified Appraisal

(i) In General

(A) Pre-August 18, 2006

(B) Post-August 17, 2006

(ii) Qualified Appraiser

(A) Requirements

(B) Required Declaration

(C) Certain Individuals Excluded

(D) Multiple Appraisers

(iii) Required Information

(iv) Prohibited Appraisal Fees

(2) Appraisal Summary

(a) Pre-August 18, 2006

(b) Post-August 17, 2006

d. Additional Requirements for Contributions of Property with Claimed Deduction of More than $500,000 ($500,001 and Up)

e. Exceptions

(1) Pre-June 3, 2004, Exception for Publicly Traded Securities

(a) Publicly Traded Securities Described in Regs. § 1.170A-13(c)(7)(xi)(A)

(i) Definition

(ii) Substantiation Rule

(b) Publicly Traded Securities Described in Regs. § 1.170A-13(c)(7)(xi)(B)

(i) Definition

(ii) Substantiation Rule

(c) Nonpublicly Traded Stock Valued at More than $5,000 and Not More than $10,000

(i) Definition

(ii) Substantiation Rule

(2) Post-June 3, 2004, Exception for Readily Valued Property

(a) Cash

(b) Patents, Copyrights, and Other Intellectual Property

(c) Inventory or Stock in Trade

(d) Publicly Traded Securities

(e) Qualified Vehicles

(3) Post-June 3, 2004, Reasonable Cause Exception

5. Contributions of Art

a. Contribution of Less than $20,000

b. Contribution of $20,000 or More

c. Optional Statement of Value for Art Appraised at $50,000 or More

6. Contributions of Used Motor Vehicles, Boats, and Airplanes

a. In General

(1) Contributions Made Before January 1, 2005

(2) Contributions Made After December 31, 2004

b. Qualified Vehicles

c. Alternative Scenarios

(1) Gross Proceeds Limitation Does Not Apply

(a) Significant Intervening Use of Vehicle by Donee

(b) Sale or Gratuitous Transfer to Needy Individuals

(2) Gross Proceeds Limitation Applies

(a) Vehicle Sold by Donee Without Intervening Use

(b) Vehicle Sold for $500 or Less

d. Contemporaneous Written Acknowledgment

e. Donee's Responsibilities Under § § 170(f)(12) and 6720

f. Form 1098-C

g. Substantiation of Fair Market Value

7. Qualified Conservation Contributions

8. Donor Advised Funds

a. Contributions on or Before February 13, 2007

b. Contributions After February 13, 2007

VII. Donee Disclosure and Reporting Requirements

Introductory Material

A. Quid Pro Quo Contributions Exceeding $75

1. In General

2. Good-Faith Estimate

3. Certain Goods and Services Disregarded

4. Special Rules

a. Payments to a College or University for the Right to Purchase Tickets to Athletic Events

b. Goods or Services Provided to Employees or Partners of Donors

5. Penalty

B. Dispositions of Donated Property

1. In General

2. Penalty for Fraudulent Identification of Exempt Use Property

C. Qualified Intellectual Property Contributions

VIII. Tax Returns and Compliance

A. Tax Returns

B. Penalties on Donors

1. Introduction

a. Background

b. Burden of Proof

2. Accuracy-Related Penalties

a. Section 6662 General Penalty on Underpayments

(1) In General

(2) Negligence or Disregard of Rules or Regulations

(3) Substantial Understatement of Income Tax

(4) Substantial and Gross Valuation Misstatements

(a) Definitions

(i) Returns Filed on or Before August 17, 2006

(ii) Returns Filed After August 17, 2006

(b) Application of Reasonable Cause Exception

(i) Returns Filed on or Before August 17, 2006

(ii) Returns Filed After August 17, 2006

b. Section 6662A Penalty on Underpayments with Respect to Reportable Transactions

3. Fraud Penalty

4. Interest

C. Sanctions on Appraisers

1. Disciplinary Proceeding

2. Aiding and Abetting Penalty

3. Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals

D. Taxes Associated with Donor Advised Funds

1. Introduction

2. Terminology

a. Donor Advised Fund

(1) Three-Prong Test

(a) Separate Identification of Contributions

(b) Ownership and Control by Sponsoring Organization

(c) Advisory Privileges

(2) Exceptions

(a) Distributions to a Single Organization or Governmental Entity

(b) Grants for Travel, Study, or Similar Purposes

(c) Additional Exceptions Authorized

b. Sponsoring Organization

c. Fund Manager

d. Persons Described in § 4958(f)(7)

3. Taxes on Excess Business Holdings (§ 4943)

a. In General

b. Special Rules for Donor Advised Funds

4. Taxes on Excess Benefit Transactions (§ 4958)

a. In General

b. Transactions Involving Donor Advised Funds

c. Transactions Involving Sponsoring Organizations

5. Taxes on Taxable Distributions (§ 4966)

a. Introduction

b. Taxable Distributions

(1) Definition

(2) Exceptions

c. Taxes Imposed

(1) Tax on Sponsoring Organization

(2) Tax on Fund Management

(3) Abatement of Taxes

6. Taxes on Prohibited Benefits from Donor Advised Funds (§ 4967)

a. Prohibited Benefits Subject to Taxation

b. Taxes Imposed

(1) Taxes on Persons Described in § 4958(f)(7)

(2) Taxes on Fund Management

(3) Abatement of Taxes

c. Coordination with § 4958


Working Papers

Table of Worksheets

Worksheet 1 Filing and Appraisal Requirements for § 170 Deduction

Worksheet 2 Form 8282, Donee Information Return

Worksheet 3 Form 8283, Noncash Charitable Contributions

Worksheet 4 Pub. 526, Charitable Contributions

Worksheet 5 Pub. 561, Determining the Value of Donated Property

Worksheet 6 Publication 1771, Charitable Contributions - Substantiation and Disclosure Requirements

Worksheet 7 Cash Contribution: Donor Letter

Worksheet 8 Stock Contribution: Donor Letter; and Donee Letter Acknowledging Receipt

Worksheet 9 Real Estate Contribution: Donor Agreement

Worksheet 10 Tangible Personal Property/Gift Conditioned on Related Use: Donor Letter

Worksheet 11 General Charitable Pledge Agreement

Worksheet 12 Securities Charitable Pledge Agreement

Worksheet 13 Endowment Fund Letter Agreement (Principal and Income Applied to Charitable Purpose)

Worksheet 14 Endowment Fund Formal Agreement (Income Only Applied to Charitable Purpose)




Public Laws:

Treasury Rulings: