Recent Tax Court Case Highlights Importance of Cost Basis for Donations

Individuals and business entities both often donate to charitable organizations.  Taxpayers may be surprised to learn that the rules are the same for both when comes to substantiation requirements and the ability to take the charitable contribution deduction.  Over the last several decades, the charitable contributions deduction has unfortunately become one of the most abused and Congress has responded over the years by regularly enacting more rules around documenting donations.  There is now a confusing collection of rules to comply with in order to claim a deduction.

Recently in RERI HOLDINGS I LLC, v COMMISSIONER OF INTERNAL REVENUE, a partnership learned that they failed to substantially comply with the contributions substantiation requirements because its Form 8283 did not properly list the donated property’s cost or other adjusted basis.  While Reri Holdings I, LLC argued that they substantially complied by including an appraisal with their Form 8283, the IRS argued that by not including their cost basis they failed to provide the IRS with adequate information to evaluate the donation.  The final verdict of the tax court was a denial of the over $33 million contribution. The result was additional tax, interest, and penalties due. 

Most taxpayers are aware of the substantiation rules as they relate to the value of property donated and the requirement to receive written acknowledgement from the donee.  Many, though, are unaware of the requirements of stating the method of acquisition and the cost basis or adjusted cost basis of property that has been donated on the Form 8283. Failure to complete the form properly can result in full denial of the charitable contribution.

Below are the substantiation requirements for charitable contributions.  This information is also printable in this PDF.

CASH:

Less than $250:

  • A bank record OR a receipt or letter from the qualified organization that shows the following:
  1. The name of the qualified organization,
  2. The date of the contribution, and
  3. The amount of the contribution.

You must obtain this receipt at the time of the donation.

$250 or more:

  • Same as Less than $250, plus
  • A written acknowledgement from the organization that includes:
  1. The amount of the cash you contributed,
  2. Whether the organization gave you any goods or services as a result of your contribution,
  3. A description and good faith estimate of the value of any goods or services described in (b), and
  4. A statement that the only benefit you received was an intangible religious benefit, if that was the case.

You must obtain this acknowledgement by the time the tax return, for the year of the donation, is filed or due (whichever comes first).

NON-CASH:

Less than $250:

  • Clothing or household items must be in good used condition or better.
  • A receipt from the qualified organization that shows the following:
  1. The name of the qualified organization,
  2. The date and location of the contribution,
  3. A reasonably detailed description of the property,
  • You must also keep reliable written records for each item contributed that include the following:
  1. The fair market value of the property at the time of the contribution and how you figured the fair market value.
  2. The cost or other basis of the property, if you must reduce its fair market value by appreciation.
  3. The amount you claim as a deduction for the tax year as a result of the contribution, if you contribute less than your entire interest in the property during the tax year.
  4. The terms of any conditions attached to the contribution of property.

You must obtain this receipt at the time of the donation.

$250- $500

  • Same as Less than $250, plus meet the following tests:
  1. It must be written,
  2. It must include:
  3. A description of any property you contributed,
  4. Whether the qualified organization gave you any goods or services as a result of your contribution, and
  5. A description and good faith estimate of the value of any goods or services described in (2).

You must obtain this acknowledgement by the time the tax return, for the year of the donation, is filed or due (whichever comes first).

$500 – $5,000

  • Same as $250 – $500, plus records that include:
  1. How you got the property (i.e., by purchase, gift, inheritance, etc.),
  2. The approximate date you got the property,
  3. The cost or other basis of property less than 12 months and the cost or other or adjusted basis, or reasonable estimate of basis of property held 12 months or more.

NOTE: If a qualified appraisal is included with the return, clothing and household items do not have to be in good used condition or better for the $500 – $5,000 deduction level.

You must obtain this acknowledgement by the time the tax return, for the year of the donation, is filed or due (whichever comes first).

$5,000 or more (same or similar items, except publicly traded securities)

  • Same as $500 – $5,000, plus
  • A qualified written appraisal on the donated property from a qualified appraiser, and
  • Declaration of Appraiser and Donee Acknowledgement (Form 8283, Section B)

You must have your appraisal done by a qualified appraiser no earlier than 60 days before the contribution and received no later than the time the tax return, for the year of the donation, is filed or due, whichever comes first.

If you have any questions regarding the information in this article, please contact our office at 703.385.8888 or .


Written by: Erin Kidd, EA

Erin Kidd is the Tax Individual Practice Supervisor at Thompson Greenspon and has nearly a decade of tax experience specializing in individual taxation. Throughout her career, she has focused on simplifying complex tax issues and educating clients to maximize their tax benefits and plan for future events. Erin is responsible for the review of individual Federal and multi-state tax returns, managing the firm’s Military Spouse Remote Preparer Program, preparation of individual tax returns with international taxation and reporting requirements, and assisting with the resolution of client issues with Federal and State Taxing Authorities. 

Erin holds a Bachelor’s and Master’s Degree in Business Administration from Morehead State University, is an Enrolled Agent, a federally licensed tax preparer who has unlimited rights to practice before the IRS, and an Accredited Financial Counselor ®. She has been recognized by the Garrison Commands of West Point, NY and Fort Leavenworth, KS for her contributions to the military community for her work with the installations’ Volunteer Income Tax Assistance Centers


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