Temporary and proposed regulations on the substantiation of charitable contributions - Tax Executives Institute's Federal Tax Committee

Tax Executive, The, Sept-Oct, 1994

On May 26, 1994, the Internal Revenue Service issued temporary and proposed regulations under section 170(f)(8) of the Internal Revenue Code, relating to the substantiation of charitable contributions of $250 or more. The regulations were printed in the May 27, 1994, issue of the Federal Register (59 Fed. Reg. 27458, 27515) and the July 18, 1994, issue of the Internal Revenue Bulletin (1994-29 I.R.B. 7, 39).

During its separate liaison meetings with each of you last February, Tax Executives Institute raised several issues concerning the Code's new contemporaneous documentation requirements for charitable contributions over $250, including the application of the rules to combined-giving campaigns. The temporary regulations address many of our concerns and resolve the issues concerning combined-giving campaigns in a sensible manner. Although TEI believes the temporary regulations can be finetuned, on the whole we believe that the IRS and Treasury have fashioned a workable solution to what could have become a recordkeeping night-mare for charities, employers that participate in combined-giving campaigns, and the government. We commend you for responding so promptly to taxpayer concerns.

Exception for Corprations

TEI remains concerned, however, that an expansive application of the substantiation requirements in other areas could jeopardize corporate contributions. Section 170(f)(8)'s requirement that donees provide donors with written confirmation of contributions in excess of $250 was enacted as part of the Omnibus Budget Reconciliation Act of 1993 (OBRA). The legislative history of OBRA explains that Congress was concerned with quid pro quo "donations" that, while deducted as charitable contributions, in reality constituted a payment for goods and services. See H.R. Rep. No. 103-213, 103d Cong., 1st Sess. 63-64 (Aug. 4, 1993) (hereinafter referred to as the "Conference Report"). Moreover, although the broad language of the statute sweeps in contributions made by corporations, the substantiation requirement was clearly aimed at individuals.(1)

Large corporations often have extensive charitable-giving programs. Contributions by a company can aggregate millions of dollars a year, spread over scores of locations and thousands of different charities throughout the country. The congressional concern that donors may receive goods or services in return for their "contributions" does not resonate in the corporate setting because the purchase of goods or services by a corporation will generally be deductible under section 162.(2) Therefore, compliance with the new substantiation requirements will impose needless recordkeeping burdens on corporations and may prompt some companies to reduce their level of giving without furthering any legitimate legislative goal.

New section 170(f)(8)(E) of the Code provides broad authority to "prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases." Thus, Congress has provided the Treasury and IRS with express authority to exempt certain contributions from the new substantiation requirements. TEI believes that contributions by corporations represent an "appropriate case" for exemption from the substantiation requirements.(3) Such an exemption change would not, of course, relieve corporations from their current obligations to substantiate their charitable contributions. See Treas. Reg. [sections] 1.170A-13.

Donations of Inventory Property

Section 170(a) of the Code provides the general rule that taxpayers may deduct contributions to charitable organizations made during the taxable year.(4) Section 170(f)(8)(A) provides that no deduction shall be allowed under subsection (a) for any contribution of $250 or more unless it meets the contemporaneous documentation requirements. TEI is concerned about the application of these new rules--absent an exemption for corporations--to donations of inventory property under section 170(e) of the Code.

Historically, taxpayers were entitled to a deduction under section 170 equal to the fair market value of donated property, including contributions of inventory. As part of the Tax Reform Act of 1969, Congress enacted section 170(e)(1), which limited the deduction for a contribution of inventory property to the taxpayer's basis in the property. This provision was adopted in order to curb perceived abuses. See S. Rep. No. 91-552, 91st Cong., 1st Sess. 80 (1969).

Congress revisited the area in 1976 because the 1969 amendment had the unfortunated and unintended effect of substantially reducing the number of non-cash contributions. The limitation proved especially problematic for charitable organizations providing food, clothing, medical equipment, and supplies to the needy and disaster victims. See S. Rep. No. 94-938 (Part 2), 94th Cong., 2d Sess. 78-79 (1976). See also Staff of the Joint Committee on Internal Revenue Taxation, General Explanation of the Tax Reform Act of 1976, 94th Cong., 2d Sess. 672 (1976). To address this reduced level of contributions, Congress added section 170(e)(3) of the Code, which permits a taxpayer a deduction equal to its basis, plus one-half of the unrealized appreciation (up to a maximum of 200 percent of basis) for contributions made to a public charity or private operating foundation. This enhanced deduction, however, is available only if the donee uses the property in furtherance of its exempt purposes and solely for the care of the ill, the needy, or infants.