Deducting Contributions Where Goods or Services Are Received in Return (Quid Pro Quo Contributions)
General Rule
Taxpayers who make contributions to qualified charities and as part of their contributions receive tickets to balls, banquets, shows, or other “food and fun” events may deduct the contribution under a two-part test proscribed in IRS Regulations 1.170A-1(h)(1) and (2):
1. the contribution exceeds the fair market value of the goods or services received
in return for the payment, provided that,
2. the taxpayer intended to make a charitable contribution or in other words, the
taxpayer wanted to pay more than just the fair market value of the goods or
services provided by the charity.
Generally, all that is required is for the charity to make a good faith estimate of the value of the noncommercially available goods or services. That can be done by reference to the fair market value of similar or comparable goods or services or any other reasonable method. See IRS Regulation 1.6115-1(a).
Taxpayers must keep in mind that any contribution of $250 or more must be substantiated by a contemporaneous written acknowledgment. The acknowledgment must contain the following information:
1. The amount of cash contributed and a description (but not necessarily the value) of any property other than cash contributed;
2. Whether the donee organization provided any goods or services in consideration, in whole or in part, for any cash or other property contributed;
3. If the donee organization provided any goods or services other than intangible religious benefits, a description and good faith estimate of the value of the goods or services; and
4. If the donee organization provides any intangible religious benefits, a statement to that effect.
A written acknowledgment by the donee organization is regarded as contemporaneous if the donor obtains the acknowledgment on or before the earlier of:
1. the date on which the donor files a return for the taxable year in which the contribution was made; or
2. the due date (including extensions) for filing such return.
No particular format is prescribed for a contemporaneous written acknowledgment. According to legislative history, the acknowledgment may be made by letter, postcard, or computer-generated forms. It may be provided in paper form or electronically, including an e-mail addressed to the donor.
Examples of Contemporaneous Written Acknowledgments
The following examples illustrate statements that qualify as contemporaneous written acknowledgements:
► Thank you for your cash contribution of $400 that [charity’s name] received on December 31, xxxx. No goods or services were provided in exchange for your contribution
► Thank you for your cash contribution of $500 that [charity’s name] received on December 31, xxxx. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $75.
► Thank you for your contribution of the painting of Alphonse van Gogh that [charity’s name] received on June 30, xxxx. No goods or services were provided for your contribution.
See IRS Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements.
There are a number of Tax Court Memorandum decisions in which taxpayers were denied contribution deductions because they failed to produce a contemporaneous written acknowledgment. A cancelled check is not a contemporaneous written acknowledgment.
Reporting Requirements
Charitable organizations that receive monies which are by their nature quid pro quo contributions which exceed $75 per taxpayer must provide a written statement to the donor/taxpayer stating that the contribution deduction is limited to the excess of the contribution over the value of the goods or services received. The charity must also provide a good faith estimate of the goods or services given to the taxpayer. This disclosure is separate from the rules requiring an acknowledgement be given. However, one statement will take care of both requirements. See IRS Regulation 1.6115-(a).
The disclosure can be made either when the contribution is solicited or when the quid pro quo item or benefit is received or conveyed. The disclosure must be made in a manner likely to be noticed by the taxpayer. It must in the same size font or larger as all other written material.
Exception for Insubstantial Benefits
There are instances where the quid pro quo item is insignificant and therefore, impractical to value and report. The IRS has issued guidelines to treat token items as being insignificant or having insubstantial fair market value. When items are found to have insignificant or insubstantial value, the full amount of the contribution is deductible.
For 2008, quid pro quo items or benefits will be considered to have insubstantial fair market value if the contribution occurs during a fund-raising campaign and:
1. the fair market value of the item or benefit is not more than 2% of the total contribution or $91, whichever is less, or
2. the payment is $45.50 or more, and the items or benefits received are token items, such as mugs, calendars, pens, bookmarks, etc.) whose cost does not exceed $9.10. See IRS Revenue Procedure 2007-66.
If a charity sends low-cost items in the mail free or hands them personally to a potential donor free as part of a solicitation for a contribution, such items are not reportable. See IRS Revenue Procedure 92-49. There must be a request for a donation, however.
In the case of memberships, the following benefits can be ignored when the membership contribution received from a taxpayer is $75 or less if:
1. the benefits can be exercised frequently and are free or discounted admission or parking or discounts on purchases of goods or services, and
2. the benefits are for events only and members only and the direct cost is $9.10 or less.
Some Examples
Example 1:
John Doe buys two tickets to the Renaissance Fair Concert (featuring medieval instruments and sumptuous meal to follow eaten without utensils) benefiting the Ancient and Honorable Artifacts Museum. The tickets are $200 each and the value of the meal and concert is $50 each. The deductible contribution is $300 (2 times $200 less $100).
Example 2:
John buys the tickets but his wife gave birth to quintriples the night of the concert and they were unable to attend. The deductible contribution is still $300.
Example 3:
As John was rushing to the hospital with his wife, he noticed a friend and his wife mowing their 2 acre lawn and stopped to give the tickets to them. They decided to stay and finish the lawn and did not attend. The deductible contribution is still $300.
Example 4:
John learned earlier that day that his wife would need to go to the hospital to start the C-section. He returned the tickets to the Renaissance Fair group. The deductible contribution is now $400, because he returned the tickets to the charity, evidencing his intent not to use them.
Raffle Tickets
Raffles are a common fundraising technique. However, the IRS has ruled that the cost of a raffle ticket is not deductible as a charitable donation because the taxpayer is deemed to have received full consideration in purchasing a chance to win a prize, the chance itself being the consideration. It seems a contrived ruling, but it is what it is. See IRS Revenue Ruling 83-130 and the Goldman case.
Penalties
A penalty is imposed on charities that do not meet the written disclosure requirement. The penalty is $10 per contribution, not to exceed $5,000 per fundraising event or mailing. An organization may avoid the penalty if it can show that failure to meet the requirements was due to reasonable cause. See IRS Publication 1771.
IRS Customer Service
Telephone assistance for general tax information is available by calling IRS customer service toll-free at (800) 829-1040. Exempt organizations may call the IRS Exempt Organizations Customer Account Services toll-free at (877) 829-5500. The Exempt Organizations website is www.irs.gov/eo . A regular email newsletter with information for tax-exempt organizations and tax practitioners who represent them is available at www.irs.gov/eo and click on “EO Newsletter.”
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