Blazek & Vetterling
CERTIFIED
PUBLIC
ACCOUNTANTS
DISCLOSURE RULES for CHARITABLE ORGANIZATIONS
A charitable deduction is allowed for income tax purposes for voluntary gifts
intentionally made to or for the use of qualifying tax-exempt organizations. A gift is a
transfer of money or property without consideration (financial benefit or payment) or a
payment for which something of equal (or less) value is not received or expected in
return. A gift is inspired by detached and disinterested generosity.
A reciprocal, quid pro quo, transaction in which goods or services are furnished to the
contributor in exchange for their payment is presumed not to be a gift -- to lack donative
intent. To overcome the presumption, the donor must prove that he or she intended the
payment to charity exceed the value of benefits received. The burden of making such
valuations has shifted to the charity where +$75 is paid. Intangible benefits -- having
one's name placed on a building or donor listing -- are treated as having incidental or
tenuous benefit and are not valued. "Intangible religious benefits not generally sold in a
commercial transaction outside of the donative context" are not valued and such payments
are treated as gifts.
Business contributors are not necessarily impacted by the disclosure rules because their
gifts are made for promotional purposes. Payments to charity that bear a direct
relationship to the donor's business and made with an expectation of financial return may
be deductible as advertising or entertainment expenses rather than as a charitable
contribution.
SUBSTANTIATION RULES
In addition to seeking recognition of exemption and assuring the organization's name
remain listed in Publication 78, charitable organizations have enhanced reporting
requirements to inform donors of the deductible portion of their gifts.
For Gifts of $250 +: No charitable deduction is allowed for a gift of $250 or more unless
the taxpayer obtains a "contemporaneous written acknowledgment" from the charity. The
receipt must be obtained on or before the due date, including extensions, of the return on
which a donation is claimed. In other words, a donor may not claim a deduction for a
charitable gift of $250 or more without it. The receipt provided by the charity must
contain three specific items of information:
1.
2.
3.
2 9 0 0
Amount of cash and a description (but not value) of any property other than cash,
Whether goods or services were provided to the donor in return for the gift, and
Description and good faith estimate of value of any goods or services provided.
W e s l a y a n ,
S u i t e 2 0 0 , H o u s t o n
T X
7 7 0 2 7
( 7 1 3 ) 4 3 9 - 5 7 3 9 ( t a x ) 4 3 9 - 5 7 5 7
( a u d i t )
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Neither a canceled check nor a properly completed quid pro quo invitation to an
event is sufficient to document a $250 donation. Separate payments are not
aggregated; each single gift of $250 or more requires substantiation. For example, a
monthly contribution of $200 resulting in a total of $2,400 for the year is not subject to
receipting. Note the date of the gift is not required by statute to be placed on the
acknowledgment, but it could be useful to certain donors.
Volunteer out-of-pocket expenses are also subject to contemporaneous written receipt
rules. Volunteer must themselves keep adequate substantiation (meaning airline tickets,
meal chits, and other Internal Revenue Code §274 expense account-type receipts) plus
obtain a disclosure statement containing:
1.
2.
3.
Description of services provided by the taxpayer,
Date the services were provided, and
Quid pro quo announcement plus valuation if applicable.
Gifts to charitable remainder and lead trusts, but not pooled income fund gifts, are
exempted from the $250+ substantiation requirement. The IRS reasoned that the donee of
such transfers is often unknown and subject to change. In a similar vein, a partnership or
S corporation is considered as the donor required to obtain a $250+. Each partner
reporting a contribution deduction passed through to them need not obtain separate
substantiation.
BENEFIT VALUATION DISCLOSURE
Charities providing benefits, goods, or any type of service to their contributors to entice
donations are subject to two very different types of disclosure requirements. Effective
January 1, 1994, the tax code requires the charity estimate the value of quid pro quo
benefits provided to donors and inform the giver of such value (to enable the donor to
reduce the payment to arrive at the deductible donation). Another type of benefit is called
de minimus. In this situation, the charity calculates the cost of the benefits (to the
charity), determines if the cost is below a stipulated amount, and if so, tells its givers they
can claim a full donation and ignore the benefits received because the benefits are
essentially insignificant.
Quid Pro Quo Benefits: If a charitable organization receives a quid pro quo
contribution, the organization shall," in connection with the solicitation or receipt" of the
contribution do the following:


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"Inform the donor that the amount of the contribution that is deductible for Federal
income tax purposes is limited to the excess of the amount of any money and the value of
any property other than money contributed by the donor over the value of the goods or
services provided by the organization, and
Provide donor with a good faith estimate of the value of such goods or services."
Note the charity has some leeway on the timing of the disclosure because the code does
not require information be printed on solicitations. A later reporting on a receipt may be
allowed (and is required for givers of $250 or more). The Ways & Means Committee
report says it intends the disclosure be made in a manner that is reasonably likely to come
to the attention of the donor -- "disclosure in small print set forth within a larger
document might not meet the requirement."
Definition of a Quid Pro Quo Contribution. A "quid pro quo contribution" means a
payment made partly as a contribution and partly in consideration for goods or services
provided to the payer by the donee organization.
Penalty. An organization failing to meet the disclosure requirement with respect to a
quid pro quo contribution, is penalized $10 for each contribution in respect of which the
organization fails to make the required disclosure. The total penalty for a particular
fundraising event or mailing no more than $5,000. If the charity can prove to the IRS that
the failure is due to reasonable causes, such as "our CPA misinformed us," the penalty
may be abated. It is not reasonable to expect the IRS to be lenient with such forgiveness.
ASSIGNING VALUE TO BENEFITS
To calculate the charitable deduction, if any, the fair market value (FMV) of goods and
services or other property returned to the givers must be valued and subtracted from the
amount paid to the charity WHETHER OR NOT THE CHARITY IS REQUIRED TO
DISCLOSE AN AMOUNT TO DONORS. To illustrate assume:
Charitable event ticket sells for
Fair market value of event is
Amount of charitable donation is
$ 50
40
--$ 10
$100
40
--$ 60
Valuing benefits provided in a charitable fundraising event is often a difficult matter.
Technically the IRS says,
“The fair market value (FMV) is that amount a willing buyer under no extraordinary
compulsion to buy would pay a willing seller also not required to sell in the normal
market place for the property being valued.”
The unique nature of most charitable fundraising events means the benefits have no
commercial counterpart. The cost of rendering a service or benefit to members and/or
attendees is not the prescribed measure of value. The cost, however, may be
determinative absent a comparable market. The concept can be illustrated with examples.
The object or service to be valued is shown below on the left with suggested valuation
method on the right.
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BENEFIT
VALUE ASSIGNED
Objects or services sold normally in
stores and by service providers.
Discounts on purchases.
Benefit dinner dance in the nonprofit's
facility.
Benefit golf tournament.
Chance to play with pro.
Raffle or door prize ticket.
Participation in educational tour.
Attendance at performance or movie or
admission to facility.
Posters, buttons, bumper sticks, books,
and publications.
Goods/services purchased at auction.
Name printed in program or on a
building.
Non-commercial quality publication
Price at which good or services normally
sell.
Amount of discount given.
Cost of event, including donated goods
and services.
Normal cost of playing golf on course.
Price of the chance.
Price paid for ticket.
Price of similar commercial tour.
Normal ticket or admission price.
Comparable market price unless de
minimus rules apply.
Normal commercial price.
None.
None.
PRACTICAL ASPECTS OF VALUATION
A charity's good faith estimate of benefit value can be relied upon by donor, unless the
taxpayer knows, or has reason to know, the estimate is erroneous. Thus, the charity has a
burden to obtain sufficient information to make an accurate valuation, although any
reasonable methodology can be used. The factors used should be documented and,
preferably, include independent opinions. Merchants who donate goods and services
inherent in benefits should, for example, be asked to furnish an invoice reflecting the
normal cost of the items they contribute. Commercial price lists of similar items can be
sought.
Luckily, the nonprofit's administrative staff and facility costs are not counted as part of
the cost of benefits provided for this purpose, for Form 990 reporting purposes, nor for
financial reporting purposes. By reference, the nonprofit using actual cost to value
entertainment or favors provided for disclosure purposes (due to lack of comparable
commercial event), should exclude overhead costs.
A charitable event assigned no value is presumed to have a value equal to the ticket price
meaning no part of the price is deductible by the purchaser. The helpful charity assigns a
value to all events, including those with a ticket price $75 or less even though it is not
technically required. Similarly, purchasers at an auction are presumed to lack donative
intention so that the amount bid sets the market value. An auction sponsor can provide a
listing or catalog of bid items showing market values so that purchasers paying more than
value are able to evidence a partial donation. Merchants and patrons donating items to be
auctioned provide a valuation of their gift to aid in assigning value. Note again that the
charity is responsible to make an effort to judge the accuracy of estimated values.
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Payment of an admission price in excess of established (printed) price results in a
donation equal to the excess. A so-called "charitable performance" to which the
entertainers donate their services has value to those attending. Despite the donation by
the performers, by the hosts, by the caterer, or others, the admission price is not
deductible unless it exceeds the normal price. Similarly the price non members must pay
to receive a benefit or participate in organization's affairs may be determinative of FMV.
Preferred seating is presumed to be a valuable right equal to the price paid for it unless
the de minimus rules described below apply. If instead the charity assigns a specific value
to the privilege and solicits any excess as a gift, a portion of price is deductible. Amounts
given to an institute of higher education allowable as a deduction but for the fact that the
taxpayer receives the right to purchase athletic event tickets are partly (80 percent)
deductible under §170(m).
Event disclosure placed on a card returned to the charity, rather than on an invitation the
ticket purchaser might keep, compounds the reporting burden. Another problem arises
when the benefit "sponsor" doesn't use the tickets. Whether or not used, the value of
accepted tickets reduces the gift. Overt written refusal of the ticket or privilege is needed
to evidence a pure gift was intended.
DE MINIMIS BENEFITS
Token Goods. Items furnished by the charity to its donors of de minimus value may not
need to be valued nor reduce the amount of the charitable deduction. Premiums or
benefits of insubstantial value given in connection with a qualified fund-raising campaign
can be ignored in the following circumstances:




Fair market value of all benefits received for the payment is not more than 2 percent of
the payment, or $97, whichever is less, or
The payment is $48.50 (for 2011 indexed for inflation) or more and benefits received are
token items (bookmarks, calendars, key chains, mugs, posters, tee shirts, etc.) bearing the
organization's name or logo with a cost (as opposed to FMV) of no more than $9.70.
All benefits received during a year are aggregated to calculate the total amount furnished.
For example, the combined cost of a $5.50 mug and a $4.40 tee shirt exceed the de
minimus amount and reduce the donation by the entire $9.90.
The charity mails or otherwise distributes free, unordered items.
A qualified fund-raising campaign has three elements:




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It is designed to raise tax-deductible donations.
The charity uses reasonable methods to value benefits offered in return for donations.
Solicitations state (whether written, broadcast, telephoned, or in person) -- as well as in
tickets, receipts or other documents issued -- how much is deductible under Section 170
and how much is not.
Organizations following this procedure are instructed to include this statement in their
fund-raising literature:
"Under IRS guidelines, the estimated value of (benefits received) is not
substantial; therefore the full amount of your payment is a deductible
contribution."
Disregarded Member Benefits: Due to the difficulty of valuing certain member
privileges, in August 1995, the IRS significantly eased the disclosure requirements by
extending the "token item" rules above to apply to member benefits. Benefits provided to
members can be "disregarded" if they are given as a part of an annual membership of $75
or less per year and fall into one of two categories:
1.
Admission to events open only to members, such as a reception with light
refreshments prior to an opera performance, is considered of "insubstantial value"
where the event costs the organization $9.70 per person.
Rights and privileges that members can frequently exercise during the
membership period. The IRS reasoned it was "often difficult to value membership
benefits, especially rights or privileges that are not limited as to use, such as free or
discounted admission or parking, and gift shop discounts" and decided to allow
"limited relief."
2.
Members paying amounts above $75 are entitled to disregard (not reduce their
contribution by) the value of those privileges included in a basic membership priced at
$75 or less. The meaning of "frequently exercised" is defined only by example of what is
not. Under the proposals, free tickets to all of a theater group's eight summer
performances are not disregarded because of the limited (and I'd say specific number of
performances). Benefits provided to the member's employees can be also be disregarded
under the above rule without regard to the number of them using the benefits.
Commercial Quality Publications: Publications, such as newsletters or program
guides, are assigned value if they are commercial quality publications (CQPs). A
CQP is one (1) the primary purpose of which is not to inform members about the
organization's activities, (2) is available to the general public, (3) contains paid
advertising, and (4) contains articles written for compensation.
SAMPLES: Suggested examples of disclosure statements follow. Failure to disclose the
value of benefits provided is subject to a $10 penalty for each donor for each event. The
language can vary but three very specific items of information must be provided to satisfy
the IRS as follows:
1.
2.
3.
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Donor name with amount and date of cash paid.
Description of other property given (without a valuation).
State whether or not benefits were provided, and if so, a good faith estimate of the
value.
NO BENEFITS PROVIDED - CHARITABLE GIFT $250 OR MORE
DONOR NAME
Thank you for your contribution of _______________in cash and property
______________________(description) on ________________(date). Your gift will be
devoted to our exempt purposes and we have not provided benefits or services that are
required to be valued to you in consideration for this gift. We are a §501(c)(3)
organization and you, therefore, may be entitled to a donation deduction for your gift.
ORGANIZATION NAME
BENEFITS PROVIDED - PAYMENT OF $75.01 OR MORE
DONOR NAME
Thank you for your contribution of _______________in cash and property
______________________(description) on ________________(date). We estimate the
fair market value of the benefits we provided to you in consideration for this gift was
$_______ per person. We are a §501(c)(3) organization and you, therefore, may be
entitled to a donation deduction for the difference between the cash and property given to
the organization and the value of the benefits you received.
ORGANIZATION NAME
INTANGIBLE RELIGIOUS BENEFITS -- GIFT OF $250+
DONOR NAME
Thank you for your contribution of $______ in cash and _______________
_____________(description of property donated) on _____________(date). The church
has only furnished you intangible religious benefits that need not be valued for tax
purposes. We are a §501(c)(3) organization and, therefore, you may be entitled to a
donation deduction for your gift.
NAME OF RELIGIOUS ORGANIZATION
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CHARITABLE BENEFITS -- TICKET PRICE $75.01 OR MORE
DONOR NAME
Thank you for your purchase of benefit tickets for $___________in cash on
________(date). We estimate the fair market value of the meal and entertainment
furnished in connection with the event was $____________ per person (ticket). We are a
§501(c)(3) organization and, therefore, you may be entitled to a donation deduction for
the difference between the cash you paid and the value of the benefits, or
$_________________________.
ORGANIZATION NAME
AUCTION PURCHASE RECEIPT
PURCHASER NAME
Thank you for your purchase of auction item # ____________ (description) for $_____in
cash on ________(date). We estimate the fair market value of this item is $___________.
We are a §501(c)(3) organization and, therefore, you may be entitled to a donation
deduction for the difference between the cash paid less the value of the item, or $ ______.
ORGANIZATION NAME
IRS instructions on disclosure rules are available in Publication 1771. Charities subject to
the disclosure requirements must establish record keeping systems and assign values in
good faith. We recommend all benefits provided be valued, without regard to the amount
paid to the charity. What is deductible is a pure gift paid without expectation or actual
receipt of returned benefits. For more information see Chapter 24 of Jody Blazek's book,
Tax Planning and Compliance for Tax-Exempt Organization, 4th Edition, supplemented
annually, published by John Wiley & Sons, New York, and available through our office.
updated March 4, 2011
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