Running the Hurdles
Morehead, G. Philip, Journal of Accountancy
OBRA's charitable contribution substantiation rules put new obstacles in the path of contributors and charities.
Beginning this year, dramatic changes in the tax rules for acknowledging and substantiating the giving and receiving of charitable contributions take effect. In accordance with the Omnibus Budget Reconciliation Act of 1993, contributors seeking a federal income tax deduction under Internal Revenue Code section 170 must produce, if asked, a written receipt from the charity if a contribution's value is $250 or more. This limit applies to each contribution, not to total contributions for the tax year. (The Internal Revenue Service expects to issue antiabuse rules that will, in certain cases, allow small contributions to be aggregated. Before 1994, donors needed only to produce a canceled check to substantiate cash contributions.
Section 170(f)(8) places the burden of obtaining a receipt on the contributor, not the charity. But charities must tell contributors if some of their contributions may not be fully deductible based on the value of goods or services received in connection with a fund-raising event.
Exhibit 1, page 56, shows the required documentation for contributions made after 1993. Exhibit 2, pages 58-59, outlines the substantiation rules for gifts made after 1993. These rules are explained in greater detail below.
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No particular form of receipt is required, although it must
* Accurately describe the cash or property donated.
* State whether the contributor received any goods or services of value in return for the contribution. If so, the charity must make a good-faith estimate of their value.
* Show the date of the contribution.
* Show that the contributor received only "intangible religious benefits" if the charity is a religious organization, the contribution exceeds $250 and the goods and services received are entirely intangible religious benefits. (Such benefits in for example, the spiritual support religious institutions provide and extend to sacramental wine used in religious observances.
The IRS issued publication 171, Charitable Contributions--Substantiation and Disclosure Requirements, in early 1994 to provide guidance on contribution receipts.
Unless a charity provides something of value in return for a contribution, it is not required to estimate the value of noncash contributions. (Sample text for a receipt letter to donors who receive no goods or services in return for their contributions appears on page 57.
An alternative is for the charity to disclose contributions on its tax return. Treasury regulations will be issued to guide charities in making such disclosures. However, charities, particularly those that never have filed returns, may be reluctant to make such disclosures and contributors could lose their tax deductions if their contributions are mistakenly omitted.
After repeated IRS efforts to persuade charities to follow its rules for fund-raising events, many charities failed to comply. As a result, Congress enacted IRC section 6115, which places a burden on the charity to report to contributors the "net amount" of contributions to fund-raising events.
When a contributor donates $75 or more, a charity must disclose to the donor, in writing, the charity's good-faith estimate of the value of the goods or services the contributor received in connection with the event. Further, the charity must state that the contributor's deduction is limited to the excess of the contribution over the value received.
Such requirement is different from the contributor's receipt for contributions of $250 and over. Sample text for a letter to donors who contribute $75 or more and receive goods or services in return appears on page 57.
Charities have limited relief from these requirements because revenue procedures 90-12 (1990-1 C. …