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IRS withdraws controversial charitable contribution substantiation regs

IRS has withdrawn proposed regs issued this past September that would have implemented an optional donee reporting procedure, authorized by Code Sec. 170(f)(8)(D), for substantiating charitable contributions of $250 or more. The regs had caused controversy because, even though the procedures contained in them were optional, donee organizations that elected to use those procedures would have to obtain, store and send to IRS donor social security numbers, causing a potential identity theft problem.

Background—charitable contribution substantiation rules before the promulgation of the proposed regs. Under Code Sec. 170(f)(8)(A), no charitable contribution deduction for any contribution of $250 or more is allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment (CWA) of the contribution by the donee organization. In general, the CWA must state: (1) the amount of cash and a description (but not the value) of any property other than cash contributed; (2) whether the donee provided any goods or services in consideration for the contribution, and if it did, a description and good-faith estimate of their value; and (3) if the goods or services consist entirely of intangible religious benefits (e.g., admission to a religious ceremony, but not religious school tuition or fees), a statement to that effect. (Code Sec. 170(f)(8)(B); Reg. § 1.170A-13(f)(2))

Under Code Sec. 170(f)(8)(C), a written acknowledgment is contemporaneous if it’s obtained by the taxpayer on or before the earlier of: (a) the date he files the original return for the tax year of the contribution; or (b) the due date (including extensions) for filing the original return for the year.

Under Code Sec. 170(f)(8)(D), a CWA isn’t required if the donee organization files a return, on such form and in accordance with such regs as IRS prescribes, that includes the information described in Code Sec. 170(f)(8)(B). Currently, there is no procedure for such “donee reporting” under Code Sec. 170(f)(8)(D).

Some taxpayers under examination for claimed charitable contribution deductions have argued that a failure to comply with the CWA requirement of Code Sec. 170(f)(8)(A) may be cured if the donee organization files an amended Form 990, “Return of Organization Exempt From Income Tax,” that includes the information described in Code Sec. 170(f)(8)(B) for the contribution at issue. IRS has taken the position that, because it hasn’t yet identified any form for charities to use to substantiate gifts of $250 or more, donors can’t meet the CWA requirement by relying on a Form 990, Return of Organization Exempt From Income Tax, filed by a charity. (Chief Counsel Advice 201120022)

Background—proposed regs. Under proposed regs issued in September, 2015 (Weekly Alert ¶  20  09/24/2015), donee organizations could elect to provide donee reporting under Code Sec. 170(f)(8)(B) by completing a to-be-designated form. On the form, the donee would have to report the information described in Code Sec. 170(f)(8)(B), as well as the donor’s name, address, and taxpayer identification number (TIN). (Prop Reg § 1.170A-13(f)(18)(ii)) IRS said the donor’s TIN was necessary in order to properly associate the donation information with the correct donor.

Under the proposed regs, the donee reporting information—unlike a CWA—would be sent to IRS. While donees would not be required to adopt donee reporting, donees who opted to use donee reporting would be required to provide a copy of the information return to the donor at the address the donor provides for this purpose, and the information return would contain only the information related to that donor. (Prop Reg § 1.170A-13(f)(18)(i))

When it issued the proposed regs, IRS said the donee reporting rules would be strictly optional. There was concern that disclosing the donor’s TIN on the donee reporting form would lead to identity theft. In the preamble to the proposed regs, IRS expressed concern about the potential risk for identity theft with a donee reporting system based on a specific-use information return because donee organizations would be collecting donors’ taxpayer identification numbers and maintaining those numbers for some period of time.

In early December, 2015, in an e-mailed statement, IRS sought to placate donee organizations’ fears by stressing that the proposed regs wouldn’t impose mandatory changes to existing donee substantiation rules. IRS said that charities could continue doing things as they have always done, and it anticipated that the vast majority would do so. See Weekly Alert ¶  6  12/10/2015.

IRS withdraws regs. Noting the concerns expressed by the public in comments that it received about the regs, IRS has withdrawn the proposed regs. As a result, Code Sec. 170(f)(8)(D)’s exception to the CWA requirement remains unavailable unless and until final regs are issued prescribing the method for donee reporting.

References:For the contemporaneous written acknowledgment of charitable contributions, see FTC 2d/FIN ¶  K-3933  et seq.; United States Tax Reporter ¶  1704.50; TaxDesk ¶  334,019; TG ¶  19329.

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