As the deadline for 2023 income tax reporting approaches, it is timely to revisit the substantiation rules for claiming charitable deductions during the tax year. For many years, the IRS has focused on various aspects of substantion for charitable gifts in the income tax context. Thus, donors should be working closely with their tax advisors on this aspect of their 2023 returns. This article covers a few of the important rules and requirements for substantiating charitable deductions.
Receipts. For gifts of $250 or more, donors must obtain from the charity a contemporaneous written acknowledgement of their contributions during the tax year. Where similar items are gifted throughout the year, the IRS requires that the donations be aggregated for purposes of this dollar threshold as well as the qualified appraisal threshold discussed below. Treas. Reg. § 1.170A-13(f)(1). The written acknowledgement must be received by the donor on or before the earlier of the due date (including extensions) of the return, or the date the donor files the return, on which the contribution is claimed. Treas. Reg. § 1.170A-13(f)(3). The receipt must contain the name of the organization, the date (and location for property gifts) of the contribution, the amount of cash contributed (or a description of property gifted), and a statement about whether goods or services were provided by the charity in connection with the donation. The receipt must also contain a good faith estimate of any goods or services provided along with a statement that the deduction is limited to the excess of the contribution value over the goods and services provided. Treas. Reg. § 1.170A-13(a)-(b), (f). For gifts to donor advised funds (“DAFs”), the receipt must also state that the sponsoring charity has exclusive legal control of the contributed assets. I.R.C. § 170(f)(18). There are specialized rules for gifts of planes, boats and vehicles described in I.R.S. Pub. No. 4302. The donor must also retain reliable written records of contributions even those under $250.
Appraisals. Qualified appraisals are required for charitable contributions of property other than cash and publicly traded securities if the property is valued more than $5,000. Treas. Reg. § 1.170A-13(c)(2). Cryptocurrency is not considered a publicly traded security and requires an appraisal. See C.C.A. 2023-02-12. There are a few exceptions to this general rule. For example, where the deduction is limited to the proceeds of the sale of a vehicle gift or for inventory property where the deduction is limited to the property’s basis, an appraisal is not required. The requirements for such appraisals are set forth in Treas. Reg. § 1.170A-17. They are detailed and strictly applied, including specialized language that must be included in the appraisal report. The appraisal report must be received before the due date (with extensions) of the return on which the contribution is claimed and must be signed by a qualified appraiser no earlier than 60 days before the contribution and no later than the due date (with extensions) of the relevant return. The appraisal must state the date (or expected date) of the contribution and describe the donated property with sufficient detail that a person unfamiliar with that type of property can determine that the appraised property is the donated property. The valuation must take into account the condition of physical property and include the applicable method(s) of valuation and the basis for the valuation of the specific type of property. The qualifications of the qualified appraiser, as described in the Regulations, must also be included. Treas. Reg. § 1.170A-17(a)(3)(iv).
Form 8283. When a charitable deduction is claimed for property other than cash valued greater than $500, the donor must file a Form 8283 with his or her return. That form states the identity of the donor and the charity as well as facts about the property donated and its acquisition by the taxpayer. It also states the basis of the property and the valuation of the property. The charity, the appraiser and the taxpayer sign the form. If a charity disposes of property (other than cash and publicly traded securities and valued in excess of $5,000) within 3 years after the donation, the charity must file a Form 8282 reporting the disposition.
Recent Substantiation Developments. Donors and their tax advisors should be aware of recent cases and IRS pronouncements about charitable deductions and substantiation. These developments bear out the importance of proper substantiation and strict compliance with those requirements.
Four recent cases found that the contemporaneous written acknowledgement requirement is strictly applied and the receipts in these cases were found to be insufficient. In Keefer v. United States, No. 3:20-CV-0836-B, 2022 WL 2473369 (N.D. Tex. July 6, 2022), the donor’s deduction for a gift of his interest in a partnership to a DAF was denied. Even though the statement that the charity has exclusive control was made in other documentation among the parties, the court held it didn’t appear in the contemporaneous written acknowledgement. In Albrecht v. Commissioner, T.C.M. 2022-53 (May 25, 2022), the deed of gift did not include the required statement that the charity did not provide consideration and could therefore not qualify as a required receipt. In Tucker v. Commissioner, T.C.M. 2023-87 (July 17, 2023), the taxpayers funded a fashion show as a fundraiser for charity. Letters and acknowledgements from the charity did not state that no goods or services were received and where strict compliance is required, the acknowledgement was held to be deficient. In Braen v. Commissioner, T.C.M. 2023-85 (July 11, 2023), the donors sold property to the township as a bargain sale. A zoning dispute affecting the property was settled favorably to the donors in connection with the bargain sale. The acknowledgement from the town stated that no goods or services were provided but the court held that the rezoning was consideration for the sale. The court stated that there was no reasonable cause exception allowing deviation from the statutory and regulatory requirements relating to the contemporaneous written acknowledgement requirements.
Qualified appraisal cases continue to arise and confirm that the appraisal requirements are also to be strictly applied. In Estate of Hoenshied v. Commissioner, T.C.M. 2023-34 (Mar. 15, 2023), an owner of a company gifted shares to a DAF at a time when a sale of the company was being negotiated. The court held that the transfer was completed later than claimed by the taxpayer and that the negotiations had progressed so far by the date of the gift that the prearranged sale doctrine required the donor to report gain on the sale. The court also held that the valuation opinion for the donation was not a qualified appraisal because the donor’s financial advisor who prepared the valuation opinion was not a qualified appraiser, the appraisal did not contain all the required language, the appraisal did not sufficiently describe the property and the method of valuation, and the reported date of the contribution was incorrect. In Schweizer v. Commissioner, T.C.M. 2022-102 (Oct. 6, 2022), the donor donated a sculpture and had a dealer prepare a simple valuation document, but the dealer was not a qualified appraiser and had never prepared a fair market appraisal. His Form 8283 was also missing many pieces of information and signatures.
Conclusion. As donors and their tax advisors report 2023 charitable gifts, they should ensure compliance with the substantiation requirements to avoid questions about, and possible disallowance of, their charitable deductions.
Sheryl Morrison is a partner at Lathrop GPM.
Andrew Biddison, associate at Lathrop GPM, contributed to this article.