Posted March 1st, 1998

Brush Up on IRS Substantiation Rules

As April 15 approaches, we find charitable organizations providing many of their donors with receipts for the gifts they have made. This sounds like a simple task, but sometimes it can be a confusing process. In 1993, Congress enacted new gift substantiation rules for donations of $250 or more, but many questions about them still remain, even after publication of final IRS regulations implementing the rules in December of 1996.

Cases in point

To explore this issue in more depth, let’s look at several of the major questions about the new rules being asked by many charities today.

Q: Each April, our organization holds a dinner for major donors (givers of $1,000 or more) of the prior year. How should our organization–and how should our major donors–deal with this dinner for federal income tax purposes?

A: Arguably, your organization should inform everyone invited to the dinner of the fair market value of the dinner package (food and entertainment). Those who receive the invitation bear responsibility for any required tax reporting with respect to the dinner.

Part of the uncertainty here stems from the fact that the dinner and the gifts occur in different tax years. Another part is due to the fact that the IRS’s final regulations suggest that even those major donors who were not promised an invitation to the dinner in return for their gifts must somehow take the fair market value into account as an offset against their gifts if they expected, at the time they made their gifts, to be invited to the dinner. Those who were promised the dinner in exchange for their gifts clearly have to take the fair market value of their places at the event into account. But because the gifts and the dinner occur in two different tax years, it is unclear exactly how they should take this value into account. More uncertainty stems from the fact that since 1967 the IRS has taken the position that if an individual who makes a gift is given a seat at a dinner in return, the fair market value of the dinner is an offset against the individual’s gift. This applies even if the individual does not attend the dinner. The only way an individual can avoid this is to relinquish his or her place at the dinner in advance.

Q: Does it make any difference that non-major donors–for example, major prospects–are invited to the dinner?

A: It does make a difference, but the implications are not clear. There may be a difference on the grounds that the presence of major prospects makes the dinner not a quid pro quo for prior gifts but rather a “warm-up,” or cultivation, for future gifts.

Q: Suppose the dinner is held in honor of a particular donor. Does the honoree have to treat the fair market value of his or her place at the dinner as an offset, in some way, against his or her gift?

A: Arguably not, assuming the place at the dinner was not offered in exchange for the donor’s gift. If the dinner is merely recognition for the donor’s gift and not a quid pro quo for the gift, the IRS has taken the position over the years that such recognition of a gift (even if fairly lavish) is not an offset against the gift for tax purposes.

Q: We have a volunteer who travels extensively to visit donors on behalf of our organization. What expenses in connection with these travels are deductible by her for federal income tax purposes?

A: The tax law allows as charitable contributions unreimbursed out-of-pocket expenses incurred in providing services to a charitable organization. Such expenses would include, for example, airfare and hotel costs, but not babysitting costs. The volunteer should submit an itemized statement of the expenses, the dates they were incurred, and the purposes for which they were incurred to the donee organization. The donee organization should issue a gift receipt to the volunteer stating, in the event expenses exceed $250 for any one day, whether the donee provided any goods or services to the individual in the consideration of the outlays.

Q: Our organization has an art and antiques auction each year. If an individual buys an item at the auction for more than its fair market value, can he or she claim a charitable contribution for federal income tax purposes for the “excess” part of the purchase price?

A: IRS regulations essentially say yes, so long as the purchaser receives a catalog before the auction that lists the item and its fair market value (the donee organization is required to place a good faith estimate of the fair market value in the catalog).

Q: Suppose a community foundation received a donor-advised gift of $10,000 from an individual who later asked the foundation to make a $5,000 donation to another charity in the individual’s name to pay for tickets to a donor recognition dinner. What are the tax consequences here? Does the contributor receive a $10,000 gift receipt from the community foundation and then a $5,000 gift receipt from the other charity? How should this sort of situation be handled from a tax reporting standpoint?

A: The donor clearly has made the $10,000 gift to the community foundation for tax purposes. The second charity, if it wishes, may recognize the donor in some way for the $5,000 payment it receives from the community foundation but should not give the donor a gift receipt for this payment. The real question here, however, does not have to do with gift receipts. It is whether the community foundation’s use of donated, 501(c)(3) moneys for a private purpose is proper. The answer, in the writer’s view, is that it is proper only if the community foundation reports the payment to the second charity as goods or services provided to the donor to the extent of the fair market value of the dinner package thereby purchased. [See page 1 of The Wall Street Journal, February 12, 1998 for more information regarding this issue. Ed.]

Conclusion

The gift substantiation rules are complex and, from the standpoint of many charitable organizations, far from complete in terms of addressing the many different substantiation questions that arise. Please do not rely upon the answers given here as legal advice. The discussion of the issues presented here is intended only as potentially helpful information. Be sure to check with your organization’s own attorney for definitive answers to the questions posed here, as well as any other questions you may have regarding gift substantiation rules.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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