Limitations on Charitable Deductions

By | December 12, 2013

In general, a charitable contribution of tangible property is equal to the property’s fair market value. Treas. Reg. ยง 1.170A-1(c)(1). However, section 170(e)(1)(B)(i) provides that a donation of tangible personal property shall be reduced to its adjusted basis if the charitable organization (1) used the property in a manner that is unrelated to the organization’s charitable purpose, or (2) sold the property before then end of the taxable year. What can a taxpayer do to ensure that the charitable organization will not trigger any of these events?


IRS Limitations on Charitable Contributions

A contract the follows the principles of a loan covenant could be used, for example.

“I will donate this item to you on the premise that you are not to 1) use the property in a unrelated manner to your charitable purpose or 2) sell the property prior to the end of this taxable year. Should your actions trigger either of these events, the donated item shall be returned immediately. If the item is no longer available, the FMV of the item at the original time of the donation shall be forwarded to the donor. Any delay will result in interest being accrued”.

The taxpayer could place some conditions on the contribution–i.e, “wait a year before you sell this and make sure to use it for your charitable purpose.” But the purpose of using these conditions to gain the benefit of a charitable contribution seems a bit contrary to the definition of a charitable contribution within the meaning of section 170–that is, a donation of money or property without any expectation of return benefit.


Limitations on Charitable Deductions

The best solution would be to ensure that a well written contract is in place to define what is exactly happening with the charitable contribution and the property. This is the best way to ensure that documentation is in place to support the position if an audit were to occur in the future. This would prevent the taxpayer from accruing fines related to the charitable contribution.