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Exempt Organizations

Exempt Organizations
February 2011

As we head into this tax filing season, individual donors will be busy gathering documentation to substantiate charitable contributions. Failure to have adequate support will result in denial of the charitable contribution deduction in the event of an audit. While it is the primary responsibility of the donor to substantiate contributions, it ultimately falls upon the charitable organization (the “donee”) to provide the required documentation. In addition, certain other documentation responsibilities are imposed directly upon charitable organizations.

In order for a charitable organization to fulfill its documentation requirements, as well as satisfy donor expectations, we recommend the following:

  • Organizations should generate acknowledgments automatically, without having to be asked by the donor. If possible, provide acknowledgments no matter what the value of the contribution received (i.e., even if the contribution is less than $250) as this is another opportunity to express your appreciation to donors for their support.
  • For cash contributions, the acknowledgment should indicate the amount of the contribution.
  • For contributions of property, the acknowledgment should describe the property contributed, but should not reflect a value for the contributed property.
  • If the organization did not provide any goods or services in consideration of the contribution, the acknowledgment should so state.
  • If the organization provides goods or services in consideration of the contribution, it should include a good faith estimate of the value of such benefits. (Certain insubstantial benefits may be ignored).
  • Language to the effect that donations are “deductible to the extent allowed by law” should not be included as a substitute for other specific disclosure requirements.

We have summarized below some of the key documentation requirements for charitable contributions.

Donor requirement to substantiate contributions

Donors have the burden of maintaining documentation of charitable deductions claimed in their returns. Although the following describes requirements imposed on donors, it is the charitable organization that will generate the documentation needed by the donor.

  • Gifts of less than $250. For cash gifts less than $250, the donor must maintain a record of the contribution in the form of a bank record (cancelled check) or written communication from the donee showing the name of the donee organization, the date of the contribution and the amount of the contribution. A written acknowledgment must also be obtained for noncash gifts less than $250.
  • Gifts of $250 or more. In order for a donor to claim a charitable deduction for a gift of $250 or more, the donor must obtain a written acknowledgment of the gift from the donee. A cancelled check alone is not sufficient. The acknowledgment must be “contemporaneous,” i.e., obtained on or before the date the donor’s return is filed or the due date for filing the return, whichever is earlier.

There is no particular form of acknowledgment that is required by the IRS. Acknowledgments must be in writing, but may be furnished via letter or electronically, such as through email. They should be made in a manner that is likely to come to the attention of the donor (e.g., not in a smaller font). The acknowledgment must include the following:

  • The amount of cash paid and/or description (but not value) of other property contributed to the organization;
  • Whether or not the donee organization provided any goods or services in consideration of the cash or property. If no goods or services were provided, the acknowledgment should so state; and
  • A description and good faith estimate of the value of any goods or services provided by the donee in consideration for the cash or property or, if such goods or services consisted solely of intangible religious benefits, a statement to that effect.

Separate contributions to the same organization that are less than $250 are not subject to this substantiation requirement. A donor who makes multiple contributions to the same organization that exceed $250 in total may substantiate the contributions in a single acknowledgment.

If the goods and services provided to the donor are insubstantial, the acknowledgement may indicate that no goods or services were provided. Insubstantial items for this purpose may include certain “token benefits” of low dollar value (based on IRS guidelines) or certain annual membership benefits, such as discounts.

Donee disclosures with respect to “quid pro quo” contributions

A donor’s charitable contribution is limited to the amount of payment in excess of the fair market value of any benefits (the “quid pro quo”) received. Charitable organizations are required to provide donors with an acknowledgment upon the solicitation or receipt of contributions in excess of $75 where there is a quid pro quo provided by the organization.

The cost to the organization of providing such benefits is not determinative; it is the fair market value of the benefits that is key. One can view the transaction as part gift, part exchange. The donor is treated as purchasing the benefits provided by the charitable organization in an arm’s length transaction at fair market value.

An example of a situation involving a quid pro quo contribution is a payment made to attend a charity gala at which the donor receives dinner in partial consideration of the donor’s payment. The charitable contribution is limited to the excess of the payment over the value--not the cost--of the dinner provided. While cost is relatively easy to determine, arriving at fair market value poses greater difficulty and often involves a somewhat unscientific process (see “Good faith estimate of value,” below).

For quid prop quo contributions in excess of $75, the organization must furnish the donor a written statement containing the following:

  • Statement that the deductibility of the donor’s contribution is limited to the excess of the amount of any money or value of any property contributed by the donor over the value of the goods or services provided to the donor by the organization; and
  • A good faith estimate of the value of the goods or services provided by the organization.

For purposes of the $75 disclosure threshold, it is the total amount of the payment, rather than the amount ultimately deductible, that controls. Failure to include the required disclosure may result in a penalty upon the organization of $10 for each contribution with respect to which a disclosure should have been made up to $5,000 for a particular event or mailing.

Some organizations continue to include statements to the effect that “charitable contributions are deductible to the extent provided by law.” While this may be a true statement, in order to protect the donor and donee from disallowance of deduction or penalties, required disclosure language should also be included.

Good faith estimate of value

Organizations may use any reasonable methodology in arriving at their estimate of fair market value of benefits furnished to donors. The regulations provide that “a good faith estimate of the value of goods or services that are not generally available in a commercial transaction may be determined by reference to the fair market value of similar or comparable goods or services. Goods or services may be similar or comparable even though they do not have the unique qualities of the goods or services being valued.”

The IRS provides the following examples of good faith estimates of value:

  • Example 1. A charity provides a one-hour tennis lesson with a tennis professional for the first $500 payment it receives. The tennis professional provides one-hour lessons on a commercial basis for $100. A good faith estimate of the lesson's FMV is $100.
  • Example 2. For a payment of $50,000, a museum allows a donor to hold a private event in a room of the museum. A good faith estimate of the FMV of the right to hold the event in the museum can be made by using the cost of renting a hotel ballroom with a capacity, amenities, and atmosphere comparable to the museum room, even though the hotel ballroom lacks the unique art displayed in the museum room. If the hotel ballroom rents for $2,500, a good faith estimate of the FMV of the right to hold the event in the museum is $2,500.
  • Example 3. For a payment of $1,000, a charity provides an evening tour of a museum conducted by a well-known artist. The artist does not provide tours on a commercial basis. Tours of the museum normally are free to the public. A good faith estimate of the FMV of the evening museum tour is $0 even though the artist conducts it.

There are a number of special rules that may apply to certain types of contributions that are beyond the scope of the current newsletter. Please contact us with any questions regarding:

  • Goods and services provided to employees or partners when the contribution is made by the employer or partnership
  • Requirement for donor to obtain appraisals for certain gifts in excess of $5,000
  • Requirement for charitable organization to report disposition of donated property with a claimed value of more than $5,000 (excluding cash and publicly traded securities) within three years of receipt
  • Donations of household items (the “good used condition or better” requirement), donations of vehicles and similar property, donations of qualified intellectual property
  • Substantiation of out-of-pocket expenses
  • Contributions by payroll deduction
  • Form 990, Schedule M, disclosure regarding certain noncash contributions

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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