Temporary and Proposed Regs Provide Rules for Substantiation of Charitable Contributions

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: These temporary regulations are being issued to provide guidance to the public with respect to the substantiation requirement contained in section 170(f)(8) of the Internal Revenue Code. Section 170(f)(8) was added to the Code by section 13172 of the Omnibus Budget Reconciliation Act of 1993. The guidance contained in these regulations affects donors of charitable contributions of $250 or more.

 EFFECTIVE DATE: January 1, 1994.

 FOR FURTHER INFORMATION CONTACT: Joel S. Rutstein, 202-622-4930 (not a toll-free call).

 SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under control number 1545-1431.

 For further information concerning this collection of information, and where to submit comments on this collection of information, the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble in the cross- reference notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.

BACKGROUND

 This document contains amendments to the Income Tax Regulations (26 CFR part 1) relating to the substantiation requirement for the deduction of certain charitable contributions under section 170(f)(8) of the Internal Revenue Code (Code). Section 170(f)(8) was added by section 13172 of the Omnibus Budget Reconciliation Act of 1993.

NEED FOR TEMPORARY REGULATIONS

 The provisions contained in this Treasury decision are needed immediately to provide guidance to the public with respect to the application of the substantiation requirement of section 170(f)(8). Therefore, it is found impracticable and contrary to the public interest to issue this Treasury decision with prior notice under section 553(b) of title 5 of the United States Code.

EXPLANATION OF PROVISIONS

 Section 170 allows a deduction for contributions to or for the use of certain specified organizations, including those organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.

 To be deductible under section 170 of the Code, a payment to or for the use of a qualified organization must be a gift -- that is, a payment of money or transfer of property without adequate consideration. Rev. Rul. 67-246, 1967-2 C.B. 104. Thus, if a taxpayer receives goods or services from the organization in consideration for a payment, the taxpayer may not deduct as a charitable contribution more than the excess of the amount paid over the value of the consideration received therefor. Id. The Service has determined, however, that if a taxpayer receives only certain inconsequential or insubstantial benefits in consideration for a payment to a qualified organization, the taxpayer may deduct the entire payment as a charitable contribution. Rev. Proc. 90-12, 1990-1 C.B. 471. See also Rev. Proc. 92-49, 1992-1 C.B. 987 (amplifying Rev. Proc. 90-12 by providing that certain free, unordered, low-cost items that accompany charitable solicitations are considered to have insubstantial value). (See section 601.601(d)(2)(ii) of the Statement of Procedural Rules, 26 CFR part 601.)

 Section 170(f)(8) disallows a deduction for any contribution of $250 or more that is not substantiated by a written acknowledgment from the donee organization. The acknowledgment must provide information regarding (a) the money or other property contributed, and (b) any goods or services provided by the donee organization in whole or partial consideration for the contributed money or other property.

 Section 170(f)(8) is a compliance provision, intended to facilitate the enforcement of the substantive requirements for a deduction under section 170. The compliance purpose of section 170(f)(8) does not require that an acknowledgment refer to goods or services provided by a donee organization to a donor if the provision of goods or services does not affect the amount that the donor is entitled to deduct as a charitable contribution. Therefore, the temporary regulations provide that goods or services given in return for a contribution need not be taken into account for purposes of section 170(f)(8), if the goods or services have insubstantial value under the guidelines provided in Rev. Procs. 90-12 and 92-49 (and any successor documents). (See section 601.601(d)(2)(ii) of the Statement of Procedural Rules, 26 CFR part 601.)

 The legislative history of the 1993 Act states that Congress intended a similar exception to apply in connection with the disclosure requirement of section 6115. See H. Rep. No. 213, 103d Cong., 1st Sess. 566 (1993). Although the legislative history does not discuss application of such an exception to the substantiation requirement of section 170(f)(8), the Service has determined that such an exception is equally appropriate.

 Some donee organizations receive contributions through arrangements in which employers withhold amounts from the wages of their employees in accordance with pledges made by the employees, and pay the withheld amounts to the donee organizations. Donee organizations that use these arrangements may not know the identity of the contributing employees or the amounts contributed by each employee. Therefore, these donee organizations may face difficulty in preparing the acknowledgments contemplated by section 170(f)(8).

 The statutory language and legislative history of section 170(f)(8) suggest that Congress appreciated the difficulties of applying the substantiation requirement to contributions made by payroll deduction and intended that these difficulties be addressed by regulations. Section 170(f)(8)(E) directs the Secretary to "provide such regulations as may be necessary or appropriate" to carry out the purposes of section 170(f)(8), "including regulations that may provide that some or all of the requirements of [that section] do not apply in appropriate cases." The Conference Report on the 1993 Act expresses the conferees' intent that the Secretary exercise his regulatory authority "to clarify the treatment of contributions made through payroll deductions." H. Rep. No. 213, supra, at 567.

 Accordingly, the temporary regulations also provide special rules for contributions made by payroll deduction. The special rules allow taxpayers to substantiate contributions made by payroll deduction by a combination of two documents: (a) a document furnished by the taxpayer's employer that evidences the amount withheld from the taxpayer's wages, and (b) a document prepared by the donee organization that states that the organization does not provide goods or services as whole or partial consideration for any contributions made by payroll deduction.

 The special rules for contributions made by payroll deduction, like the underlying statutory provisions, do not require that the document prepared by the donee organization take any particular form. similarly, although donors must obtain the document in time to meet the "contemporaneous" requirement of the statute (generally, by the time they file the relevant tax return), the rules do not require the donee organization to prepare the document at any particular time. Therefore, if a donee organization includes the statement contemplated by the rules on a pledge card prepared to solicit contributions in 1995, a donor who receives the card before timely filing the donor's 1994 tax return could use the card to substantiate contributions made in 1994. Contributions made by payroll deduction during 1994 can thus be substantiated under these rules even if the donee organization has used pledge cards for 1994 contributions that do not include the statement contemplated by the rules. As a result, the Service understands that donee organizations will be able to comply with the "contemporaneous" requirement for 1994 contributions. The Service invites comments, however, on whether transitional relief from the "contemporaneous" requirement is needed for 1994 contributions.

 The temporary regulations also provide that, for purposes of applying the $250 threshold provided in section 170(f)(8)(A) to contributions made by payroll deduction, the amount withheld from each paycheck is treated as a separate contribution. Thus, the substantiation requirement of section 170(f)(8) will not apply to contributions made by payroll deduction unless the employer deducts $250 or more from a single paycheck for the purpose of payment to a donee organization. This rule is consistent with the legislative history of section 170(f)(8). See H. Rep. No. 213, supra, at 565 n.29 ("In cases of contributions paid by withholding from wages, the deduction from each paycheck will be treated as a separate payment.").

 Some charitable organizations solicit contributions in the form of payroll deductions or lump-sum payments for the purpose of distributing the amounts received to other charitable organizations. The temporary regulations provide that, in such cases, the distributing organization is treated as a donee organization for purposes of the substantiation requirement of section 170(f)(8). This rule applies regardless of whether the distributing organization distributes the contributed funds pursuant to the donor's instructions. The rule does not apply, however, if a distributee organization provides goods or services to the donor as part of a transaction structured with a view to avoid taking the goods or services into account in determining the amount of the deduction to which the donor is entitled under section 170.

SPECIAL ANALYSES

 It has been determined that these temporary regulations are not a significant regulatory action as defined in Executive Order 12866. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, an initial Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Joel S. Rutstein, Office of the Assistant Chief Counsel (Income Tax & Accounting), Internal Revenue Service. However, other personnel from the Service and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR part 1

 Income taxes, Reporting and recordkeeping requirements.

26 CFR part 602

 Reporting and recordkeeping requirements.

Treasury Decision 8544

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1 and 602, are amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. the authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * section 1.170a-13t also issued under 26 U.S.C. 170(f)(8)(E).

Par. 2. section 1.170a-13T is added to read as follows:

SECTION 1.170A-13T SUBSTANTIATION REQUIREMENT FOR CERTAIN CONTRIBUTIONS.

(a) CERTAIN GOODS OR SERVICES THAT HAVE INSUBSTANTIAL VALUE NOT TAKEN INTO ACCOUNT. Goods or services that have insubstantial value under the guidelines provided in Revenue Procedures 90-12, 1990-1 C.B. 471, and 92-49, 1992-1 C.B. 987, (and any successor documents) need not be taken into account for purposes of section 170(f)(8). (See section 601.601(d)(2)(ii) of the statement of Procedural Rules, 26 CFR part 601.)

(b) CONTRIBUTIONS MADE BY PAYROLL DEDUCTION -- (1) FORM OF SUBSTANTIATION. A contribution made by means of withholding from a taxpayer's wages and payment by the taxpayer's employer to a donee organization may be substantiated, for purposes of section 170(f) (8), by --

(i) A pay stub, Form W-2, or other document furnished by the employer that evidences the amount withheld by the employer for the purpose of payment to a donee organization, and

(ii) A pledge card or other document prepared by the donee organization that includes a statement that the organization does not provide goods or services in whole or partial consideration for any contributions made to the organization by payroll deduction.

(2) APPLICATION OF $250 THRESHOLD. For the purpose of applying the $250 threshold provided in section 170(f)(8)(A) to contributions made by the means described in paragraph (b)(1) of this section, the amount withheld from each payment of wages to a taxpayer is treated as a separate contribution.

(c) DISTRIBUTING ORGANIZATIONS AS DONEES. An organization described in section 170(c), or an organization described in 5 CFR 950.105 (a Principal Combined Fund Organization for purposes of the Combined Federal Campaign) and acting in that capacity, that receives a payment made as a contribution is treated as a donee organization solely for purposes of section 170(f)(8), even if the organization (pursuant to the donor's instructions or otherwise) distributes the amount received to one or more organizations described in section 170(c). This paragraph (c) does not apply, however, to a case in which the distributee organization provides goods or services as part of a transaction structured with a view to avoid taking the goods or services into account in determining the amount of the deduction to which the donor is entitled under section 170.

(d) EFFECTIVE DATE. The rules of this section apply to contributions made on or after January 1, 1994.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority for part 602 continues to read:

Authority: 26 U.S.C. 7805.

Par. 4.Section 602.101(c) is amended by adding the entry "1.170A-13T . . . 1545-1431" in numerical order to the table.