Non-Profit Update #7
May 14, 1997
New Substantiation Requirements for Non-Profits
Last December the IRS issued final regulations clarifying a charityís requirements for substantiating charitable contributions, particularly where the charity provides the donor with goods (e.g.banquet), services (home tour), or other benefits (supper with artist; hard to get football tickets) in return for the contribution ("quid pro quo.") (Basically the substantiation rule requires donors making gifts of $250 or more to obtain "contemporaneous written substantiation" of the gift from the charity. The quid pro quo rule requires a charity that receives a quid pro quo contribution in excess of $75 to provide the donor with a written statement that advises the donor that only the amount by which the total payment exceeds the fair market value of the benefits provided by the charity is a tax deductible contribution.)
The final regulations provide clarification on a number of issues regarding substantiation and quid pro quo. These include:
When will a payment to a charity for goods or services be treated as including a charitable contribution component?
When are benefits treated as provided "in consideration" for a payment to a charity?
How is the value of the charitable component of a quid pro quo contribution determined?
Are there any benefits that can be disregarded in determining the value of a charitable contribution?
What counts as a "good faith estimate" of value by a charity?
What substantiation rules apply to unreimbursed expenses incurred by volunteers?
How do the rules apply to matched gifts?
How do the rules apply to contributions made by payroll deduction?
How do the rules apply to charity auctions?
How do the rules apply to payments for the right to purchase tickets to athletic events?
How do the rules apply to gifts to charitable lead and remainder trusts, pooled income funds, and annuities?
Let me know if you would like a copy of (1) the regulation; (2) articles from tax magazines discussing the new regulation; or (3) a pamphlet sent to me by a national law firm with suggested substantiation forms for charities to use.
IRS Non-Profit Audit Guidelines
I recently met with Marcus Owens, head of the Exempt Organizations (Non-Profit) Division of the IRS, at a speech he delivered in Washington, D.C. This speech, together with my analysis of the IRSís 1997 CEP, reveal the IRSís audit priorities for this year:
(1) Colleges and Universities, particularly Unrelated Business Income (UBIT) issues relating to travel tours;
(2) Hospitals, particularly private inurement and excessive compensation issues;
(3) Charity Gaming (the S.C. Department of Revenue is also devoting considerable resources in this area);
(4) Lobbying and other political activities by non-profits;
(5) Charitable Remainder Trusts, particularly income deferral abuse;
(6) Tax Exempt Bonds (the IRS is most active in examining small issue bonds in the South East); and
(7) General UBIT issues (particularly affinity credit cards).
Abusive Charitable Trusts
Last month the IRS issued a press release announcing that it was cracking down on certain abusive trust arrangements. Included in the IRS Press Release was the following:
4. The Charitable Trust. The owner transfers assets to a purported charitable trust and claims either that the payments to the trust are deductible or that payments made by the trust are deductible charitable contributions. Payments are made to charitable organizations; however, in fact, the payments are principally for the personal educational, living, or recreational expenses of the owner or the ownerís family. For example, the trust may pay for the college tuition of a child of the owner.
The Department of Revenue is engaged in a similar crackdown and is investigating several such cases from a criminal perspective.
Upcoming Department of Revenue Educational Seminar
The Department of Revenue is organizing a free educational seminar for Non-Profits late this summer or early fall. Suggested topics range from complying with the S.C. Charitable Fundraising Act, to Legislative and IRS updates, to saving money on direct mail postage. We would appreciate your views on what you would like to hear at the seminar and whether you would be interested in attending.
Conservation Easement and Other Publications
The Department of Revenue recently published Local, State and Federal Tax Aspects of Conservation Easements. We have a limited number of copies available. We are making excellent progress on the State Tax Guide for Non-Profits and expect to go to press in July. We are also making progress on a lengthy treatise on tax incentives available for historic preservation. Let us know what else we should be working on.