Valuing and substantiating charitable contributions.

• Author: Ellentuck, Albert B.

Charitable deductions may be limited or denied if strict substantiation and appraisal rules are not followed.

Establishing fair market value (FMV) of a charitable contribution of real estate, stock, or financial instruments is generally not an issue for a taxpayer due to the availability of appraisals and market quotes. However, many taxpayers have problems placing a value on clothing and other household items gifted to charity. The burden of establishing FMV is on the taxpayer.

Many taxpayers value clothing and household items as a percentage of the original cost of the item (depending on its condition). However, IRS Publication 526, Charitable Contributions, states that the use of such formulas is not acceptable. For used clothing, the prices buyers actually pay in used clothing stores such as consignment or thrift shops can be used.

Contributions of used clothing and household items that are not in "good" condition or better are completely disallowed. The statute does not define the term "good." The term "household items" means furniture, furnishings, electronics, appliances, linens, and similar items (but not food, paintings, other art objects, antiques, jewelry, gems, or collections) (Prop. Regs. Sec. 1.170A-18(c)). An exception to the general disallowance rule allows deductions for single used household items that are not in good condition or better if they are valued at more than $500 by a qualified appraisal that is filed with the return (Prop. Regs. Sec. 1.170A-18(b)). Also, the IRS is authorized to issue future rules that could completely disallow deductions for certain used clothing and household items that are deemed to have minimal value (such as underwear and socks) regardless of condition. For affected contributions by a partnership or S corporation, the restrictions apply at the entity level, and deductions are disallowed at the partner or shareholder level (Sec. 170(f)(16)). For further assistance, taxpayers should review IRS Publication 561, Determining the Value of Donated Property.

Stocks traded on a stock exchange are valued at the average between the highest and lowest selling prices (not the closing price) on the contribution date (IRS Publication 561). If the securities are not traded on that day but within a reasonable time before and after, FMV is determined using a weighted average of the highest and lowest selling prices before and after the contribution date.

Substantiating Contributions

The recordkeeping and filing requirements for charitable contribution deductions vary based on whether the contribution is made in cash or property and the amount of cash or the value of the property contributed.

Property Contributions of More Than $5,000

When the value of donated property, other than publicly traded securities (or group of...