June 15, 2015

Non-Cash Charitable Contributions: Updates from a Recent Tax Court Case

By Louis A. Viscuso - Manager, Tax & Business Services

Non-Cash Charitable Contributions: Updates from a Recent Tax Court Case Tax & Business

In a recent Tax Court case, the Court reinforced existing Internal Revenue Service Regulations related to the substantiation rules for noncash charitable contributions. The Court denied the taxpayer’s claimed $37,000 of charitable deductions and subjected him to accuracy-related penalties and interest.  

At various times during the year, the taxpayer contributed various household items to nationally recognized charities that operate thrift stores for charitable purposes.  The Court did not question that he made the contributions.  However, the taxpayer failed to substantiate the value of the contributions and to meet the requirement for necessary contemporaneous written acknowledgement from the charities to support the deduction. 

The present rules state that noncash contributions of $250 or less must be supported by a receipt from the organization or, when left at an unattended drop-off site, a reliable written record must be maintained with respect to each item. 

Taxpayers should understand that contributed clothing or household items must be in good used condition or better.  Also, the value assigned to the contribution must be thrift shop or tag sale value.  It is not appropriate to assign a retail value or overstate the value in any manner.   A working toaster or video cassette recorder is unlikely to have appreciated in monetary value.  Despite any sentimental attachment to those items, a reasonable value must be ascribed.  In general, the more claimed for a deduction, the more to prove and substantiate. 

For noncash contributions of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the organization. 

The acknowledgment must:

  • Include a description of any property other than cash; and
  • State whether any goods or services were provided in exchange for the gift. If no goods or services were provided, a valuation of the gift is not required by the charity. 

To be considered contemporaneous, the receipt must be obtained before the filing (or due date) of the taxpayer’s tax return pertaining to the year of the contribution.

For noncash contributions in excess of $500, taxpayers are required to maintain written information that includes:

  • The date the property was acquired and manner of acquisition;
  • A detailed description;
  • The cost or other basis of the property;
  • The fair market value of the property at the time it was contributed; and
  •  The method used in determining its fair market value.  

The above information is necessary to complete IRS Form 8283, which is required to be included with the income tax filing to report the deduction.

For gifts that fall into the $500 to $5,000 range, similar items of property are aggregated for determining the substantiation requirements.  Similar property is classified under the same generic category type, such as jewelry, furniture, electronic equipment, household appliance or kitchenware.

For contributions of property in excess of $5,000, the taxpayer must meet the substantiation requirements and obtain a qualified appraisal of the gifted items.  The appraisal must be attached to a fully completed Form 8283 that is appropriately endorsed and acknowledged by the appraiser and submitted with taxpayers return.

When gifting property after major life events, such as downsizing a home,  a relative moving out or the inheritance of property, allow for enough time to value and document the quantity of gifted items and to obtain written acknowledgment from the charities, in order to make a legitimate charitable deduction and to avoid any problem with the Internal Revenue Service.  

Asking your Marcum tax professional is the first step.

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