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Q&A: Charitable Contributions

Legal Counsel for Philanthropy and the Nonprofit Sector

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Q&A: Charitable Contributions

  1. I understand that under tax law nonprofits must now provide donors with written confirmation of their contributions. Will you please describe the requirements?
  2. Assume I give $100,000 to my college and "informally" receive special privileges - i.e. preferred seating at basketball and football games, complimentary tickets to special events. Is my $100,000 still considered a deductible gift even though I'm receiving substantial benefits in return?
  3. We have a donor who wants to contribute a work of art from his extensive collection, but I have the distinct impression it's overvalued (he claims the painting has been appraised for $95,000). Is it necessary for us to get an independent appraisal or can we, without culpability, accept the appraisal he's done?
  4. A board member has offered to give us a painting and stock in a company, neither of which we have received before. What kind of charitable deduction can he take? Our bylaws allow us to receive cash donations and some other gifts, but make no mention of these gifts. Can we still accept them?
  5. I've read that a charitable organization cannot be organized or operated to benefit a specific individual. If this is so, how can contributions to various interim efforts such as "Help Johnny pay for his heart transplant" be tax deductible?
  6. We have a prospective donor who's nearing retirement and is thinking of contributing a building to house us. There's only one stipulation: he wants to retain a suite of offices, rent-free, for his own real estate business. Is there any legal problem here?

  1. I understand that under tax law nonprofits must now provide donors with written confirmation of their contributions. Will you please describe the requirements?

    Donors are required to maintain a record of all donations, however small, for which they wish to take a charitable deduction. For contributions of $250 or more, whether cash, check, or property, donors must obtain a written acknowledgement from the donee organization prior to filing income tax returns. The acknowledgement must include the name of the organization and the date and amount of the gift. The acknowledgment may take any reasonable form including receipts, written acknowledgements, and thank you letters as long as the foregoing information is included. For donations of less than $250, a bank record, such as a cancelled check, will suffice.

    There are additional disclosure requirements for contributions to charitable organizations for which the donor receives something of value in return, such as meals, discounted admissions, or goods. For contributions exceeding $75, organizations must inform donors in writing that only the excess of the donation over the value of goods or services is deductible as a charitable contribution. Charitable organizations must also provide donors with a good faith estimate of the value of the goods and services.

  2. Assume I give $100,000 to my college and "informally" receive special privileges - i.e. preferred seating at basketball and football games, complimentary tickets to special events. Is my $100,000 still considered a deductible gift even though I'm receiving substantial benefits in return?

    The rule here is: Your contribution is deductible to the extent it exceeds the fair market value of the benefits or privileges you receive. In other words, if a quid pro quo exists, no matter how informal or indirect, your charitable deduction is reduced or eliminated.

    If, for instance, in return for a gift to your college's athletic scholarship program you receive season football tickets on the 40-yard line, your charitable deduction will be reduced by the face value of the highest priced season tickets. (These facts form the basis for the holding in IRS Revenue Ruling 88-63, 1986-1 C.B. 88).

    Difficulties can arise in ascertaining the fair market value of the benefits you receive. From your perspective as donor, the best protection is a written receipt from the college showing the portion of the gift that constitutes a charitable contribution. Alternatively, you may make a good faith determination of the value of the tickets and other benefits and carefully document your calculations and reasoning.

    Remember, though, that in the event of an IRS audit the donor, not the donee organization, is at risk for undervaluing or omitting benefits received. Usually, if the IRS disagrees with your valuation it will simply disallow the charitable deduction. However, if the IRS believes there is a an egregious error or a pattern of misstatements on a donor's tax returns, it may impose penalties.

    Note also that this response only applies to gifts of cash. Gifts of tangible and appreciated property are subject to an entirely different set of valuation methods.

  3. We have a donor who wants to contribute a work of art from his extensive collection, but I have the distinct impression it's overvalued (he claims the painting has been appraised for $95,000). Is it necessary for us to get an independent appraisal or can we, without culpability, accept the appraisal he's done?

    In my view, if you have knowledge that the artwork is actually worth less than claimed or that the appraisal is not accurate, you should not sign the reporting form your donor is required to provide to the IRS.

    Internal Revenue law regarding contributions of non-cash property is as follows: For gifts worth more than $500, donors must complete IRS Form 8283, Noncash Charitable Contributions. For gifts worth more than $5,000 donors must submit Form 8283 and also provide the IRS with a copy of a good faith appraisal conducted by an independent, qualified appraiser.

    The appraisal must be certified as impartial and accurate by the appraiser. The donee charitable organization must acknowledge receiving the gift by signing the form.

    Technically there is no requirement that your organization acknowledge the accuracy of the appraisal. However, for three reasons, I suggest not signing it if you know or suspect the appraisal to be faulty.

    First, the gift of the artwork will be listed on your organization's annual Form 990 return to the IRS. Form 990 is signed by an officer of your organization under the penalties of perjury as true, correct, and complete to the best of the officer's knowledge.

    Second, the IRS is stepping up its efforts to monitor charitable contribution deductions by correlating individual donor returns with those of donee organizations. Overvalued gifts to your organization, as reflected on a donor's tax return, could thus slightly increase the chances of your organization being subject to IRS audit.

    Thirdly, for ethical reasons, I would not want to knowingly comply with an effort to essentially cheat the government of tax dollars. To be sure, I do not hesitate to suggest that whenever possible under the tax code you aggressively maximize benefits to your organization. However, in my mind, acknowledging a substantial overvaluation of the artwork goes one step beyond that.

    Therefore, I would take the action you suggest and offer to have an appraisal conducted by an appraiser of your choosing. You may wish to express to the donor that for your own corporate protection it is necessary for a second opinion, and that the organization will gladly pay for the appraisal.

    If the donor is reluctant to accept your offer or decides to withhold the gift, you can probably assume the artwork is worth much less than claimed.

  4. A board member has offered to give us a painting and stock in a company, neither of which we have received before. What kind of charitable deduction can he take? Our bylaws allow us to receive cash donations and some other gifts, but make no mention of these gifts. Can we still accept them?

    Yes. It is well settled under case law that unless your bylaws specifically state otherwise you may accept nearly all types of donated property.

    In regard to appreciated stock, double tax benefits are available to the donor. First, no capital gain is realized when appreciated property is donated to a 501(c)(3) public charity. Second, the donor may claim a charitable deduction for the full market value of the appreciated stock.

    As to the artwork, two possibilities exist. First, if the use of the painting is related to your organization's tax exempt purposes, the donor may take a charitable deduction for the fair market value of the painting. In order to determine its value, the IRS requires that any gift worth over $5,000 be independently appraised. The appraisal must be conducted by a qualified appraiser (such as a reputable art dealer) and submitted to the IRS on Form 8283, Noncash Charitable Contributions.

    Secondly, if the use of the painting is unrelated to your organization's tax exempt purposes, the donor may take only a charitable deduction for his cost basis in the painting. Determining relatedness to tax exempt purposes can be difficult but there is room for some creative thinking. For instance, the use of art objects by a nursing home was determined to be related to its tax exempt purposes. The nursing home demonstrated to the IRS that the art added to the quality of life of the residents.

  5. I've read that a charitable organization cannot be organized or operated to benefit a specific individual. If this is so, how can contributions to various interim efforts such as "Help Johnny pay for his heart transplant" be tax deductible?

    Such contributions are not tax deductible as charitable contributions unless they are made to a 501(c)(3) organization that has agreed to sponsor Johnny's cause. That's why you will often see appeals of an emergency nature asking that donations be sent in care of another organization. Donors, of course, are free to contribute without taking a tax deduction. But federal tax deductions can be claimed only for gifts to recognized 501(c)(3) organizations.

  6. We have a prospective donor who's nearing retirement and is thinking of contributing a building to house us. There's only one stipulation: he wants to retain a suite of offices, rent-free, for his own real estate business. Is there any legal problem here?

    In theory, the arrangement is legal and proper. However, there may be complications in actually implementing it which then raise legal questions.

    From the organization's perspective, a donor may give a less-than-complete interest in donated property. It happens frequently with respect to charitable remainder trusts and gifts of personal residences. In such cases donors commonly retain a life interest in the property.

    Ordinarily, the issue of private inurement is present in an arrangement between a tax-exempt organization and an individual who benefits from the transaction. (Private inurement occurs when a charitable asset inures to the benefit of an individual). In this situation, however, private inurement is not immediately a concern because the suite of offices was never a charitable asset.

    An analogous situation would occur where a donor gives your organization 75 acres of a 100 acre plot, retaining the remainder for personal use. Private inurement would occur only if your organization first owned the property and then leased it out for less than market rate to the donor.

    This is not to say there won't be complications. First is the question of tax deductibility. Although the transaction may be legal, by making a partial-interest gift, the donor may sacrifice some or all of his tax benefits. Although this technically is not your problem, since you are committing yourself to being roommates with the donor for an extended period of time, you probably do not want unpleasant tax surprises for either party.

    Secondly, gifts with a value in excess of $5,000 must receive a qualified and impartial appraisal. Although failure to meet this requirement is also a problem for the donor, your organization must sign an appraisal summary. You should not sign such document if you know the property to be overvalued or the office suite undervalued. By virtue of the split interest, valuation itself may become difficult and highly subjective.

    Another set of concerns involves the continuing occupancy, repair, and maintenance costs. There may be some private inurement issues if it is expected that your organization is to pay such costs, thereby subsidizing his use of the property for years to come.

    Therefore, you will want to draft a simple but complete agreement clarifying the continuing responsibilities of both parties in the future. Other considerations that should be carefully thought out in advance and addressed in the agreement are: the duration of the arrangement, the conditions for resale of the property, permitted uses of both portions of the property, and the ownership of contents of the property.

    For audit purposes (both internal and in the remote chance of an IRS audit), an agreement that anticipates and resolves such legal and practical issues will indicate good faith effort at legal compliance on the part of your organization.