In our previous post, we took a high level look at charitable contributions and deductions, including looking at what made an organization “qualified” to receive charitable contributions, when deductions might be limited, and special rules for valuing and reporting non-cash charitable contributions. In this post, “Beyond the Basics of Charitable Contributions,” we will dig a little bit deeper and look at some issues that might affect the deductibility of a contribution.
Moving Beyond the Basics of Charitable Contributions
The Green Settee
As we discussed in the first article, your grandmother Phyllis left a beautiful old green settee to your mother which, unfortunately, does not fit the new Bohemian inspired aesthetic of your mother’s home. Although she has her eye on a midcentury modern Scandinavian chair for the corner of the living room and could use an infusion of funds to purchase the chair, she would prefer to donate the settee to a museum or historical society. You agreed to assist her in finding the proper home for the green piece.
As you explained previously, in order for your parents to take a charitable deduction greater than $600 ($300 for separate filers), they will have to itemize their deductions under IRC § 170. Furthermore, the organization to which the settee is donated must be a “qualifying organization,” meaning generally that it is an organization that meets the “organizational” and “operational” tests of IRC § 501(c)(3). Depending on the type of organization, the deduction for the non-cash donation may be limited to 30% or 50% of your parents’ adjusted gross income (AGI),[1] also referred to as their “contribution base.”
The Timing of the Deduction
Looking beyond the basics of charitable contributions, you first note that a contribution must be made before the close of the tax year in order for it to be deductible on that year. For example, if a taxpayer pledges $1,000 to a church in October 2021 to be paid by October 2022, the taxpayer may only deduct on her 2021 tax return the amount actually paid to the church by December 2021. If a contribution is made on a credit card, is deductible as a charitable contribution in the year that the charges made—regardless of whether the bank is actually repaid in that year.[2]
The Nature of Charitable Contributions
By its nature, a charitable contribution under IRC § 170 is a gift. This means that there must be payment of money or a transfer of property without adequate consideration. This means that the person transferring the property to the charity may not receive something of value in return for the contribution.
Under IRC § 170, if the donor receives something of value for a payment or transfer of property, all or a part of the payment or transfer will not be a gift, and the deduction will wholly or partially be disallowed. Similarly, even if the payment or transfer of property is a gift, but it is not made for charitable purposes, a deduction for the payment or transfer will not be allowed.
Receipt of Something of Value in Exchange for a Contribution
If the donor receives something of value in exchange for the contribution, the IRS presumes that there has been no gift. The burden is on the donor to prove either that the value received was not in exchange for the donation or that a portion of the donation is still deductible. In order to prove that a portion of the donation is in fact deductible as a charitable contribution, the donor must prove that the portion claimed as a gift represents the excess of the value of the contribution less the value received from the charitable organization.
In the case of a cash contribution, this means that the donor will have to establish the actual monetary value received from the organization. In the case of a non-cash contribution, the donor will have to prove both the monetary value received from the organization and the value of the donated property. This is not a terribly onerous burden, because, as we discussed in the previous article, the donor must establish the value of the contribution in any event.
Thus, if your mother receives an enameled lapel pin with a logo of the local museum of modern art when she donates the settee, she will have to establish the approximate value of the pin along with the appraised value of the settee. If the settee is appraised for $10,000 and the pin is worth $150, her charitable deduction will be $9,850—the value of the settee, less the value of her fancy new pin.[3]
Because the value of the pin is greater than $75, the museum must provide your mother with a written disclosure setting out the fair market value of the pin and informing her that only the portion of the contribution that exceeds this fair market value is deductible. There are, however, special rules for “de minimis” tokens of the charity’s appreciation.[4]
Similarly, if a donor gives a charity $100 and receives a concert ticket valued at $40, the donor has made a “quid pro quo” contribution. In this example, the charitable contribution portion of the payment is $60. Even though the part of the payment available for deduction does not exceed $75, a disclosure statement must be provided by the charity because the donor’s payment (quid pro quo contribution) exceeds $75.
Out-of-Pocket Expenses
Unreimbursed out-of-pocket expenses paid in rendering services without compensation to a qualified donee may be deductible as a contribution. Although you can’t deduct the value of services given to a qualified organization, small amounts may be deductible if paid in connection with providing services to a qualified organization.
In order to be deductible, the amounts must be (a) unreimbursed; (b) directly connected with the services; (c) expenses you had only because of the services you gave; and (d) not personal, living, or family expenses.
Thus, if you volunteer 10 hours a week as a Red Cross nurse’s aide at a hospital, you could not deduct $150 (10 hours at $15/hour) for the value of your services, but you could deduct the cost of the mileage to and from the hospital, as well as the cost of purchasing and cleaning the nurse aide uniform (assuming that the uniforms aren’t suitable for everyday use and are required to volunteer).
There are number special rules, which are all discussed in IRS Publication 526 (including, for whatever reason, a rather large discussion of the deductibility of expenses of whaling captains). Reasonable payments for necessary meals and lodging while away from home donating services may also qualify. Although out-of-pocket automobile expenses for gas, oil, and repairs are deductible, a taxpayer may not deduct a pro-rata portion of general repair and maintenance expenses.
Contributions that are Never Deductible
There are certain contributions that will never be deductible, including contributions to a specific individual, contributions to nonqualified organizations, the value of your time or services (including the value of your blood),[5] personal expenses, appraisal fees, qualified charitable distributions from IRAs, certain contributions to donor-advised funds, and certain contributions of partial interests in property.
Foreign Organizations
After a fair bit of research on your part, you uncovered the provenance of the settee. The piece, it turns out, was made in Trois-Pistoles, in the Bas-Saint-Laurent region of Quebec. There is rumor that a distant relative of yours founded the city in the 17th century, which was named for a silver goblet worth three “pistoles,” an old French coin, that was lost in the river in the 17th century. Having explained the origin of the settee, your mother is inspired to donate it to a charity in Quebec, preferably one close to Trois-Pistoles.
You explain that foreign organizations that meet the requirements for exemption under IRC § 501(c)(3) may establish exemption from federal income tax.[6] In the absence of a tax treaty that provides otherwise, contributions to them are not deductible under IRC § 170(c)(2).
This is so, because that provision requires organizations described therein to be created or organized in the United States or a United States possession.[7] The good news is that the United States and Canada entered into a treaty under which individual donors may, with certain restrictions, deduct contributions to qualifying charities in either country.
Footnotes:
[1] Without regard to any net operating loss carry back that they may have.
[2] See Rev. Rul. 78-38.
[3] See Rev. Rul. 67-246.
[4] Goods or services that have “insubstantial value” as defined by the IRS are considered fully deductible and need not be disclosed by the charitable organization. For calendar year 2021, these “low-cost articles” are those whose FMV is not more than two percent of the donor’s payment or $113.00, whichever is less; or when the payment is at least $56.50 and the only benefits received are token items such as mugs, calendars etc., bearing the organization’s name or logo.
These token items are deemed to be “low-cost articles” if their cost (as opposed to their fair market value) does not exceed $11.30, in the aggregate, for all items received by the donor during that year. See IRS Publication 1771.
[5] Rev. Rul. 53-162
[6] Contributions to the domestic organization operating abroad would be deductible; however, contributions made to a domestic conduit of a foreign organization would not be deductible. For example, contributions will be deductible if made to a domestic charitable organization formed to alleviate hunger in a drought-stricken foreign country by distributing food to hungry people in that country.
However, if a foreign charitable organization, established for the same purpose, forms a domestic charitable organization merely to solicit contributions in its behalf, contributions to the domestic charitable organization will not be deductible. See Rev. Rul. 63-252.
[7] IRC § 170(c)(2) provides that a contribution by a corporation to a qualifying organization is deductible, but only if the contribution is used within the United States or any of its possessions exclusively for IRC § 170(c)(2)(B) purposes. But there is no similar restriction imposed upon the use of an individual’s contribution under IRC § 170.
Therefore, contributions by individuals to domestic organizations operating in foreign countries are deductible. See also Rul. 69-80 (holding that contributions by corporations to exempt domestic corporations for use in a foreign country are deductible notwithstanding that the contributions will be used abroad).
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