There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
Jeremy Wells: Donating used goods and property to a charity can earn a tax benefit, but it takes more than just hanging on to that slip of paper from the local goodwill. If you prepare tax returns, you've seen this a ton, I know I have. When you're helping people with tax returns and you [00:00:30] ask them to upload their documents around tax time, and you get a slew of these blank goodwill receipts or receipts from whatever the local thrift shop is. And, you know, the taxpayer's expecting some sort of tax benefit from all that. And you're looking at that thinking, I can't do anything with this. In this episode of Tax in Action, we're going to look at a recent tax court case that went sideways for the taxpayer because he failed [00:01:00] to properly document his non-cash donations adequately. It's important that we understand these rules and that we help our clients and that taxpayers understand these rules before they start thinking about the big deductions that they can get when they donate used property or used goods to their local charity. It turns out that in this particular case, the issue wasn't actually the property, the organization, [00:01:30] or even how the taxpayer filled out the tax return. Rather, the issue came down to paperwork. Paperwork that doesn't even have to be filed with the tax return. But it came up because of an IRS audit. That audit found its way into a tax court case, and ultimately the taxpayer lost. So we're going to look at that case, look at what went wrong for the taxpayer.
Jeremy Wells: And from that, we're going to think about how we can make sure that those non-cash charitable contributions are legitimate, are [00:02:00] valid, and that we can actually get the deductions for those. So whether you're helping taxpayers ensure that they get all the tax deductions that they can, or if your taxpayer helping to ensure that you get to claim all of those donations, then this episode is going to lay out all the rules for those non-cash contributions. So after listening to this episode, the objectives here are to make sure that we can properly identify the requirements for claiming [00:02:30] a non-cash charitable contribution. So we're going to dive into IRC section 170. That's on charitable contributions. Now there's a lot in this section that we're not going to talk about in this episode, especially uh, not going to talk about cash contributions. We're going to gloss over a lot of the rules when it comes to much larger charitable contributions, especially those in excess of $5,000. That didn't really happen in this particular tax court case that we're going to look at. There are a lot of rules, [00:03:00] a lot of complex rules. The Treasury regulations related to IRC section 170 are pretty thick and dense. There are a lot of substantiation requirements, but we're going to focus on those relatively smaller, non-cash charitable contributions. So we're talking about those donations of household goods and clothing, appliances, all of those things that taxpayers tend to accumulate over time, especially late in the year, tend to dump off at the local thrift store, and then they [00:03:30] want to take a deduction for that.
Jeremy Wells: What do they need? What kind of documentation do they need? What what do we need to file in order to claim those deductions. So we're going to look at the statutory and regulatory requirements for all of that coming out of section 170. So this includes knowing the substantiation standards for those non-cash donations. And then also understanding what we mean by contemporaneous written acknowledgment that specifically one of the requirements for some of these non-cash contributions. When does that requirement kick in, [00:04:00] and how do we make sure that taxpayers follow that requirement? And then knowing which rules to apply based on the value of the donated property, we're going to look at evaluating whether a client's charitable contribution and the documentation meets the substantiation requirements. And those are specifically going to come out of Treasury Regulation section 1.1 70, cap A 13. So like I said, the Treasury regulations are pretty thick and dense. It takes all [00:04:30] the way to getting to the 13th regulation. Before we get into those substantiation requirements, we're going to talk about some of the red flags, like missing descriptions, missing values, untimely acknowledgments, incomplete form entries, some of those issues that came up in this feature tax court case that we're going to look at. We're also going to look at form 8283.
Jeremy Wells: Form 8283 is the IRS form for reporting those non-cash charitable contributions. [00:05:00] So we'll walk through that and look at how to get these kinds of non-cash contributions properly reported on that form to make sure that we get those contributions. We're also going to look at the substantiation requirements in addition to form 8283. So there are some specific requirements in section 170 as well as Treasury Regulation 1.1 70, cap A 13 that [00:05:30] the taxpayer needs to have on hand, in addition to what was reported in form 8283. And this ultimately is what becomes the issue in the Tax Court case that we're going to look at. So we're going to look at how those substantiation failures can result in a complete disallowance of the charitable deduction. And that's really going to be an issue in this tax court case. What's really interesting about this case, one of the reasons I wanted to talk about it is because there [00:06:00] was no challenge against the actual charitable contribution itself. At no point did the IRS, or even the Tax Court claim that the donation may never have happened. Everyone agreed that the donation happened. The issue was whether it was properly documented, reported on the tax return, but then also substantiated in taxpayers records. And that's why it got overturned the deduction. And that's what we're going to focus on in this episode. And finally, we're going to look at some practical [00:06:30] workflows and client intake procedures to make sure that in your firm that you're getting the information you need, and you're ensuring that the taxpayer has the information that they need to make sure that those deductions are properly reported and substantiated.
Jeremy Wells: Or if you're a taxpayer listening to this, that you know what records you need to keep on hand. So let's jump into this. Start with the case here. So this is the case of Bissell b e a [00:07:00] w versus commissioner. This is a tax court summary opinion 2025 seven. So like I said this is a relatively recent case came out earlier in 2025. I'm recording here in late 2025. So in this case we're looking at a married couple filing a joint federal income tax return. And on this return, they included a claim for a deductible charitable non cash contribution of $6,760. [00:07:30] Now this contribution was reported on their 2019 return. So you know money isn't quite what it was worth a few years ago. But even that far back you know $6,760, not a massive deduction. However, this case ended up making through an IRS audit into the Tax Court. Got a Tax court summary opinion here. So even [00:08:00] though it's a relatively minor case with a relatively small deduction, the analysis that the court gives us in this opinion can actually be really helpful in thinking about how these non-cash charitable contributions work and what taxpayers need to do to correctly report and substantiate them.
Jeremy Wells: So, like I said on their 2019 Joint Federal individual income tax return, they reported this non-cash charitable contribution totaling $6,760. They included form 8283 [00:08:30] with that return, and that is the form necessary to claim the deduction for those non-cash charitable contributions. But as we're going to talk about later on, there was some critical information left off of that form. In particular, the dates of donation, the fair market values of the property that was donated, the taxpayer's cost basis in that property, and then the method of valuation used to arrive at the deductible [00:09:00] amount. So really, all of the important information as we'll discuss later on in the episode. Now, the IRS started off by examining the return after it was filed. They got around to this in about 2022. So this is the 2019 return. It would have been filed in about 2020. Thinking back, yeah, that was the first year of the Covid 19 pandemic. So even though things were moving pretty slowly, uh, in the IRS, within about two years, that return [00:09:30] got pulled for examination. The IRS requested substantiation for those charitable contributions from the taxpayer. What ended up happening was the taxpayer submitted a reconstructed record and basically took what had been filed on the form 8283, which, keep in mind, was not complete, and use that to reconstruct a record of what had been contributed and submitted that back [00:10:00] to IRS. At that point, IRS said this isn't good enough, denied the deduction, sent a notice of deficiency, and then the case wound up in the Tax Court after the taxpayer, uh, essentially, uh, appealed to the Tax Court.
Jeremy Wells: Now, the Tax Court heard the case. And again, this is a summary opinion. So if you know about how the Tax court works in terms of the opinions it issues, you know that this is essentially [00:10:30] the lowest level in terms of an authoritative response from the tax Court. What do I mean by that? Normally, the Tax Court will issue what's known as an en banc opinion, which is where most, if not all of the judges of the Tax court consult with each other, and they come up with an opinion that represents truly the opinion of the entire Tax court on this case, and those are considered the most authoritative opinions of the Tax Court. [00:11:00] Below that, we have Tax Court memoranda opinions. Usually these aren't establishing new precedent. What they are is they're interpreting existing precedent and applying it to the specifics of a case. They can still be helpful in thinking about how the tax court considers a particular set of issues, or particular set of facts and circumstances in a case, and they can still be authoritative. They can be relied on by taxpayers, but they're not necessarily as precedential [00:11:30] as a tax court opinion. Then we have summary opinions. A summary opinion is basically just saying, yeah, it's pretty cut and dry what happened here. And it's not really establishing new precedent, and it's not even really going against anything that has already been decided in terms of tax court cases.
Jeremy Wells: It's really a relatively, uh, you know, quick and easy opinion. That said, what the court did, uh, in this opinion, is it laid out a [00:12:00] pretty good, uh, summary of what the rules and regulations are in terms of substantiating these non-cash charitable contributions. So I think it's helpful to really dig into this and look at what is necessary for taxpayers. Ultimately, the court agreed with the IRS, disallowed the charitable contribution deduction in full, finding that essentially that reconstruction of the facts, uh, after the fact [00:12:30] does not meet a key word in the law and in the regulations. And that key word is contemporaneous. Now, that word contemporaneous comes up in other places in tax law as well. So for example, if you use your personal vehicle for your business. If you drive to meet a client or meet a vendor, you know that you're supposed to keep a contemporaneous written mileage log. That means you're supposed to be keeping that as you're going throughout [00:13:00] the year. You're not supposed to look back at the prior year or a prior year and try to reconstruct that from memory. Well, it's roughly a similar idea. It's a little bit looser here. Um, but there is a technical definition that's given in section 170. So we'll look at what that is. But essentially the taxpayer didn't have that contemporaneous record of what was donated that ended up being the fatal flaw in the entire case for the taxpayer.
Jeremy Wells: So [00:13:30] the key lesson here from looking at this case is that you can't just gloss over that missing documentation. You can't try to recreate that later if you're going to claim a deduction for some non-cash charitable contributions or really any charitable contribution, although the rules differ depending on whether it's cash or non-cash. But for non-cash charitable contributions, you've really got to have the paperwork in order, regardless of whether you are filing that form 8283. [00:14:00] There are still requirements for substantiation for the taxpayer and having that paperwork on hand. Section 170 has some strict substantiation requirements. Some of those are in the code section itself. A lot of those are in the Treasury regulations, especially Treasury Regulation 13 under section 170. So we're going to look at that in this episode. Let's look at what the law says and how you or your clients can avoid [00:14:30] a similar outcome to what happened to the taxpayers in this case. So let's look at what's happening under section 170, specifically with regard to non-cash, uh, charitable contributions. So we're going to break down the requirements here into three different components. First of all what qualifies as a contribution. Second what are the general limits. And then third substantiation. Now as far as what qualifies as a contribution, I'm going to gloss over this a bit because [00:15:00] I'm focusing specifically on these non-cash contributions.
Jeremy Wells: There are some rules as far as what qualifies as a contribution. And then what qualifies for a charitable organization. And this is all laid out in section 170 A. So the basic rule here is that a charitable contribution is deductible only if it meets the following two criteria. First, it has to be a gift, which [00:15:30] means a transfer of money or property without any expectation of return benefit. So I can't give a contribution to an organization even if it's a charitable organization, and claim that as a charitable contribution, if I expect something back in return, a lot of times these organizations will run raffles, they will run some sort of contribution drive where there's something in expectation [00:16:00] you might win something from that contribution, or in other cases you might give that in exchange for some kind of actual product back. A great example of this is Public Broadcasting System PBS. Pbs will often do their membership drives, and as part of that, you might tune in during one of their week long membership drives, and you will see that if you sign [00:16:30] up as a member this week, then PBS will send you a copy of the album from the group that just happens to be playing on their concert that they're broadcasting that night, for example. Or they might send you a t shirt from the local chapter of the PBS. So it just depends on whatever that item or product that you expect in return is.
Jeremy Wells: Now, the [00:17:00] value of what you get back might be relatively minimal compared to what you're contributing. So if I pay $100 a year for a membership in an organization, and from that I get back a $5 t shirt, well, that's not an even exchange. So there is a significant portion of that contribution that I'm not really expecting to get anything back from. But technically, I do need to take into account the fact [00:17:30] that at least part of that contribution was expecting something in return. So we need to be very careful with that. What is being given and is there any expectation of anything in return back from the organization? Now, the second criteria is that that contribution, that gift is made to a qualified organization. And the types of qualifying organizations are listed in section 170 cc. It's a relatively long [00:18:00] list. There's about 7 or 8 different kinds of organizations that qualify. Some of them are what you would typically think 500 C three charitable organizations, religious organizations. But then there are also some that we need a little bit more detail on. Now in this particular episode, I'm not going to go into the details about qualifying organizations. I'll probably save that for a future episode to make sure that you understand whether [00:18:30] the organization you're contributing to actually qualifies for a charitable contribution or not. A lot of times it does not. I'll have to explain to a client that your membership dues to this particular kind of an organization, while you see that as benefiting society, you see that as producing some sort of civic benefit.
Jeremy Wells: That's not actually a qualifying organization. And so you don't get to deduct that as a charitable contribution. [00:19:00] So in general, if we're looking to make that contribution and we want to be able to deduct that as a charitable contribution, we have to make sure that we're actually checking and making sure that this organization qualifies. Now that's really the two criteria, the basic criteria to make a deductible charitable contribution. We've got to give a gift with no expectation of benefit in return. And it's got to be to a qualified [00:19:30] organization. Now neither of these was at issue in the Tax Court case that we're looking at here. These were legitimate contributions to qualifying organizations. Both sides stipulated that that wasn't an issue, but it's important to remember in general that like any tax deduction, the charitable contribution deduction is a matter of legislative grace. And that is the phrase that if you read through tax court decisions, you will see that phrase over and over and over [00:20:00] again, especially if the case is about whether a deduction is legitimate or not. Deductions are a matter of legislative grace. Now, whether the way that applies to this case in particular is that the deduction does not come free of charge to the taxpayer, the taxpayer can't just say, well, I made that contribution, I get to deduct it.
Jeremy Wells: What that means is that both the law and [00:20:30] IRS and the Department of Treasury can set rules about how that deduction has to be claimed and substantiated, and if the taxpayer fails to meet those claiming and documentation and substantiation requirements, then the deduction can be disallowed. Just because the law establishes the deduction doesn't mean you automatically qualify for it. You have to prove that you qualify for that [00:21:00] deduction. So how do you do that. Well let's jump into this. Let's look at how the taxpayer went wrong in this tax court case. So the substantiation requirements for cash contributions briefly we're not talking about a cash contribution in this particular case. But just for the sake of comparison, let's briefly run through what the requirements there are for cash contributions. So this is if you donate cash or write a check to a qualifying organization, then [00:21:30] IRC section 170 F17 requires the taxpayer to either have a bank record or a written communication from the donee organization showing the name of the organization, the date of the contribution, and the amount. Where I see this most frequently working with taxpayers is for their contributions to their religious houses of worship. So I've [00:22:00] got a lot of clients. They attend church and they contribute to their church. They they tithe, they give to offerings. And so each year in their tax documents, they will have a statement prepared by their church showing all of their contributions to that church throughout the year.
Jeremy Wells: That piece of paper, that document fulfills the record here. It's written communication from the donee organization [00:22:30] showing its name, the dates of those contributions and the amounts of those contributions. So that fulfills the requirements for a cash contribution. But now for non-cash contributions, we have to go. We have to go a little bit further. We have to give a little bit more information, because valuing cash is straightforward. If I give an organization $100, I get $100 worth of charitable contributions that I may or may not be able to deduct on my tax return, depending on whether I itemize or what the rules are there. [00:23:00] But if I want to know how much I can deduct in terms of my cash contributions, all I have to look at is how much cash did I contribute with non-cash contributions, it's more complicated because we have to worry about the valuation of those, uh, donations. So for non-cash contributions, where we are claiming a value of under $250, then the taxpayer has to have a [00:23:30] receipt showing the name of the charity, a description of the property and the date and location of the contribution that comes from Treasury Regulation 1.1 70, cap A 13 B one. Now this is where for all of those donations to thrift shops of the used clothing, the household goods, small appliances, those sorts of things. This is where those slips of paper that you get from those thrift [00:24:00] shops, those goodwill receipts comes from, there has to be a slip of paper showing the name of the charity, a description of the property and the date and location of the contribution.
Jeremy Wells: Now, that said, a lot of times those slips of paper wind up in our client portal other than whatever is preprinted on them by the organization, which usually has the name of the organization and its location. There's [00:24:30] no other information there. A lot of times, and I've done this before. When I make those contributions, when I drop stuff off at these thrift shops, someone working there will ask me if I need a receipt. And this is where we would go through the process of making sure that there is in writing all of this information. Usually what we're donating doesn't have much value by the time we're donating it. And I kind of already know that I'm not going to [00:25:00] itemize. Uh, so I don't really see a point in getting that receipt. It's kind of a waste of time for everyone involved, so I usually skip that. However, if you or the taxpayers you're working with are actually going to expect to itemize and therefore get some sort of tax benefit from those contributions, then it's important that they get those receipts and that those receipts have a description of the property along [00:25:30] with the date and the location of the contribution. We'll talk about why that matters, especially in this tax court case here in a little bit.
Jeremy Wells: Now, when those non-cash contributions exceed $250, the taxpayer also needs a contemporaneous written acknowledgment from the organization, and that acknowledgment has to be received by the earlier of the filing date of the return or [00:26:00] the due date, including extensions. That comes from IRC section 178. And this is where that term contemporaneous pops up. This definition of contemporaneous is what ultimately caused problems for the taxpayer in this Tax court case, because he created his records in 2022, after the return was already being examined by IRS because [00:26:30] it was his 2019 return, which he probably filed in 2020. Right. So at that point, he's filed the return. We are past that contemporaneous date, that definition of contemporaneous for purposes of a contemporaneous written acknowledgment. And he did not have that at the time. So what does this acknowledgment need to have? Well, it needs to include a description of the property, a statement of whether any goods or services were provided in [00:27:00] exchange, and if so, a value or good faith estimate of those goods or services. Now this comes back to the definition of a deductible charitable contribution from IRC section 170 A you are not supposed to expect something in return for that gift. So essentially, if you're getting something back in exchange for that gift, you need to offset the deductible amount of that gift. Again if I contribute $100 [00:27:30] to an organization, but I expect something back that's valued at, let's say, $50.
Jeremy Wells: I didn't really give $100 to that organization. I bought something for $50, and then I contributed $50 to that organization. So we have to take that into account. And if we're talking about an amount over $250, that's going to be documented in this contemporaneous written acknowledgment. And this is actually where we saw the taxpayer and this tax court [00:28:00] case failed because the charity receipts contained no descriptions of the donated items. Now, notice what's not included in either the receipt or the contemporaneous written acknowledgment. And that is any valuation of the property donated. We're not expecting to see valuations of items on those receipts. So whether that's a goodwill receipt or any of these thrift shop receipts. We don't actually [00:28:30] need to see values on there. It's up to the taxpayer to report and to calculate a fair market value of those contributed items. It's not up to the organization to put that together on the receipt or on the contemporaneous written acknowledgment. However, what has to be on those documents is a description of the donated items, and that description has to be [00:29:00] reasonably detailed enough so that it's possible to identify the items, and also to roughly estimate what evaluation might be, what that might look like. So obviously, we're not going to put that, you know, this was a trunk full of stuff. Right. Because that doesn't tell us anything that could be a trunk full of gold.
Jeremy Wells: It could be a trunk full of air. We don't know. And so that doesn't help us come up with an actual value of what [00:29:30] was donated. But at the same point, we don't have to be so detailed that we're specifically describing every single item. In general, we just need a description that reasonably gives us an idea of what was contributed, so that we can use that to compare to the value that is claimed as a charitable contribution. Now the taxpayer has to include, with the return for the taxable [00:30:00] year in which the contribution is made, a description of the property and other information that the Secretary may require. That's coming from IRC section 170 F 11 B. The way this usually gets done is with form 8283 the non-cash charitable contributions form. So later on in Treasury Regulation 1.1 70 cap A 13 B3. There's a requirement for [00:30:30] the following information for these contributions. So this gives us specifically what we need to see in what the taxpayer submits or what is filled out on form 8283. We need to know the date that the taxpayer acquired the property, how the taxpayer acquired the property, did purchase it, inherit it. We need to know the taxpayer's cost or basis in the property, the fair market value of the property [00:31:00] at the time of the donation. And again, the taxpayer is going to come up with this. And then we need to know the method that the taxpayer use to determine that fair market value.
Jeremy Wells: A lot of times, that fair market valuation method is for what's typically donated, such as clothing and household goods, to a thrift shop. A lot of times that is based on what we call thrift shop value, basically. What would this sell for if it's sitting on a shelf in a [00:31:30] goodwill, or if it's hanging on a rack at your local thrift shop? Honestly, usually that's not a whole lot, right? Especially compared to what the cost or cost basis in that item is, but it's up to the taxpayer to come up with those amounts, and it's up to the taxpayer to provide enough detail on the return, whether that's in form 82, 83 or in their own written records. It's up to the taxpayer to provide what that valuation method was and what that actual value is. [00:32:00] And what ended up happening in this tax court case is the taxpayer pretty much just left all of this off on form 8283. Now there was a form 8283 attached to the return. And it did have some of this information, but all of the required information was actually left off. And this ended up being the most problematic thing for the taxpayer. Now briefly again, just like with cash contributions, what I'm about to talk about doesn't directly apply to this [00:32:30] case, but I do want to bring it up because it's relevant here. Non-cash contributions over $5,000 have an extra set of requirements, and that is a qualified appraisal of the donated property.
Jeremy Wells: So in IRC section 170 F11c, there is a requirement for a qualified appraisal of non-cash contributions over $5,000. And [00:33:00] in those cases, the taxpayer, the donee organization and the appraiser all have to sign the form 8283, which we'll talk about here in a little bit. And then there are also some special rules for vehicle donations. Those get reported on a form 1098 and then donations of business inventory under section 173. I'm not going to get into those now. Uh, that's not specifically the point of this episode, but I'll probably cover these at some point later [00:33:30] on in the future. So let's look at how we, as practitioners, can apply these rules in our own practices, how we can make sure that we're accurately preparing, uh, form 8283 for our clients and how we can make sure that the taxpayers we're working with have the proper documentation on hand in case there is a question, uh, about these returns. So I want to think about a list here of some questions that we need to ask whenever these non-cash charitable contributions [00:34:00] happen. Or another way to think about this is when you see those blank goodwill receipts pop up in your client portal, how are you going to address those? How are you going to follow up with the taxpayer to understand what actually happened? Because we can't use a blank goodwill receipt.
Jeremy Wells: And even if that goodwill receipt or slip of paper says something like household goods, used clothing $1,000. Is [00:34:30] that sufficient? Based on the reading of IRC section 170 and the associated Treasury regulations, and then looking particularly at this tax court case? Probably not. We probably need a little bit more information than that. Now. It doesn't necessarily have to be documented information, something that the client uploads in the portal, but it might need to be more documentation the client needs to have on hand. So what are we going to ask when we see these blank goodwill receipts? [00:35:00] Well, first of all, what exactly was donated? If we just see a blank goodwill receipt or even if we just see a fairly, uh, but, you know, just undetailed description, clothing, household goods, what does that actually mean? Especially if we're looking at a relatively significant fair market value. And if the taxpayer is in a position to actually take a deduction for that amount, if the taxpayer is not going [00:35:30] to itemize anyway, really, who cares, right? We're not going to claim a deduction for that. But if the taxpayer is going to itemize and we're going to include these non-cash contributions in the amount deducted, we need to make sure that we have proper documentation for this. When and where did the taxpayer donate? Now, this might be on that goodwill receipt, or it might be on some other written statement that we have. But we need to make sure that if it's not evident that we have that information documented [00:36:00] somewhere, if we have a claim in a in an organizer or in a client questionnaire, for example, that those non-cash charitable contributions happened, then we need to follow up and ask if there is a receipt or a written acknowledgment.
Jeremy Wells: And if not, do you have any documentation of what you donated? There is a, uh, an allowance for taxpayers that if they donate to, uh, in [00:36:30] a situation where getting a receipt is not practical. So, for example, one of those remote drop off locations where there's no one working there, it's just basically a Big Ben that you can dump clothes or used goods into. There's no one there to give a receipt. The taxpayer can rely on their own records in that case. But there are substantiation requirements in that. Treasury regulation section 1.1 70, cap A13 that the taxpayer needs to be aware of. And [00:37:00] again, that needs to be contemporaneous. That needs to be on hand, not reconstructed after the fact, certainly not after the tax return is filed. Does that written record adequately describe the property? Did the taxpayer receive anything in return for the contribution. Do the total non-cash contributions exceed $500? If that's the case, the taxpayer has triggered Filing form 8283. And does any single item exceed [00:37:30] $5,000? If that's the case, then an appraisal might be required. I've had situations with taxpayers where they wanted to claim a deduction in excess of $5,000, and once we explain to them the appraisal requirement, either they didn't want to go through with the appraisal, or they adjusted their valuation of that contribution to an amount below $5,000.
Jeremy Wells: So sometimes explaining the rules to taxpayers [00:38:00] will help them understand that they might be being a little greedy with their claim deduction. And then finally, when we do have a taxpayer assigned valuation to these contributions, we need to ask them how did they determine the valuation? What did they use to get to that? Now let's briefly look at the rules for evaluating donated goods. So Treasury regulation 1.17 D cap A1C2 defines fair market value for purposes of charitable contributions as [00:38:30] the price of willing, knowledgeable buyer would pay a willing, knowledgeable seller under no compulsion. Now that's the definition. With respect to charitable contributions. Fair market value is a term that comes up throughout tax law, and there might be different definitions of it in different places in tax law, but for purposes of charitable contributions and valuing them, that is the definition of fair market value. The price of willing, knowledgeable buyer would pay a willing, knowledgeable seller under no compulsion. [00:39:00] And again, that's why for used clothing, used household goods, this is why that thrift shop value is a pretty common and reasonable valuation tool. If this t shirt you didn't know anything about this t shirt other than you saw it hanging on a rack in a thrift shop and you liked it.
Jeremy Wells: What price would you reasonably pay for that? A lot of times, if you think about it that way, it might pull you back in time a little bit in terms of how you're trying to value that [00:39:30] for purposes of a tax deduction. Now, IRS publication 561, while not an authoritative source, you don't hear me citing IRS publications a lot on this show because they're not authoritative. However, they can be helpful for thinking about how some of these work in some of these issues work in practice. So that publication lists some factors affecting fair market value. Facts and circumstances of the situation, for example. And so it might be helpful to go through that list. [00:40:00] So that includes recent transactions connected to the property, the desirability of the property, how it's going to be used, the condition that it's in, how scarce that item is in the marketplace, and then what demand is exists in the market for that property or property like it. So again, if you think through these situations, really the main issue that I see when it comes to trying to get [00:40:30] a taxpayer to value, especially some of these household goods, is sentimental value. And discounting that just because that piece of property might hold some sentimental value for you or your family doesn't necessarily mean that it has a higher fair market value. Sentimental value doesn't really translate well usually into actual market value, so it's important to keep that in mind.
Jeremy Wells: Now for [00:41:00] use clothing and household goods a common category of non-cash contributions uh, is is the thrift store value. And that often gets used for this kind of, uh, property. But The requirement for clothing and household goods is that it must be in at least good used condition to qualify. It can be better than that. It can be like new, but it needs to be at least in good used condition. Anything less than that, there [00:41:30] is no allowable deduction for that. So you can't basically just leave a bunch of broken, worn out stuff and expect to get a contribution for that. It needs to be stuff that maybe a little bit of scratch and dent, but other than that, it's perfectly fine and somebody is going to want to buy that and able to start using it or wearing it. Um, whatever it is that you're donating, uh, to that organization that comes from section 170 F 16. Now, again, [00:42:00] talking about valuation in this tax court case, we saw the taxpayer gave no fair market value amount for any of the items claimed on form 8283. Again Problematic. Let's look at reporting. Let's do a quick walk through of form 8283 and think about when is this required. Now if total non cash contributions are over $500 then we have to use form 8283. If the non cash contributions are less than $500, [00:42:30] you can still claim the deduction for up to $500 of non cash contributions and not file form 8283.
Jeremy Wells: All of the other substantiation requirements are still in effect, though. The substantiation requirements are independent of whether form 8283 is filed or not. But if form 8283 needs to be filed because those contributions are in excess of $500, then you're going to start off with section A of form 8283. Now, if the value [00:43:00] of a single item or group of similar items exceeds $5,000, unless that is securities or some other specific property that are listed in the form instructions. Then we're going to use section B. So you're going to want to check the form instructions for those particular types of property. I'm not going to go through all of them here. It's kind of wonky. Uh, what qualifies for section A that is in excess of $5,000 and vice versa. But [00:43:30] in those cases, you'll want to be sure to check the form instructions, make sure you're putting those contributions and reporting them in the correct section of form 8283. Now, section A asks for the name and address of the donee organization along with the following information. So a description and condition that needs to be somewhat specific of what was donated. Again, not just high level category names can't just be clothing needs to be a little bit more specific [00:44:00] than that. Now, it doesn't need to necessarily be an itemized list of every single piece of clothing included, but something more than just stuff, for example, also need to put the date of the contribution the date acquired.
Jeremy Wells: Now the form itself only asks for month and year, not the actual day, and various is an option in the tax software that I've used. And honestly, that's what gets used a lot because, you [00:44:30] know, especially if we've got a contribution of clothing. Well, that clothing was probably purchased over, you know, a range of years. So I can't really assign a specific acquisition date to any of that. However, um, if the contribution is in excess of $500, it's required to put that date acquired and then also how it was acquired. The options there are usually purchase gift or inheritance purchase nine times out of ten is, uh, what [00:45:00] we go with, unless we know that that property was acquired through, uh, either a gift or inheritance. And again, that's required if it's over $500, the donor's cost or adjusted basis is also required. If it's over $500 and then the fair market value at the time of the contribution is always required, and then the method used to determine fair market value is always required. And of course, the taxpayer in this tax case B-cell left all these blank. [00:45:30] Um and that that was problematic for him. Now quickly section B this doesn't apply in this tax court case. But it's important to understand or at least think about what's happening here. This is generally for donations in excess of $5,000. Part one provides information on the donated property, including the kind of property there is a checklist of different kinds of property art, real estate, equipment, securities, collectibles, intellectual property, vehicles, digital assets.
Jeremy Wells: But remember, some of [00:46:00] those are actually reported in section A. So if you look at the 2025 version of form 8283, you will see that where you report a contributed vehicle, including its Vin, its vehicle identification number that actually goes in section A, even though there's a checkbox in section B for vehicles. The same is true of securities. Uh, the donated securities are usually reported in section A, not section B, but one [00:46:30] of the checklist items in section B is for securities. I'm not sure what's going on there. It's a little bit confusing. So if you're dealing with these kinds of non-cash charitable contributions, it's very important that you read through the instruction. You understand exactly what needs to go, uh, where uh, part one also includes the description and condition. Again, be as specific, as reasonable here, the appraised fair market value, the data acquired, how acquired and the donor's costs are adjusted basis. Now notice I said appraised fair [00:47:00] market value. In section B we are dealing with property that has to have an appraisal because we're claiming a deduction in excess of $5,000. Part two is for partial interest in restricted use property other than qualified conservation easements. That's obviously beyond the scope of this episode. I might, uh, look at those in a future episode, especially qualified conservation contributions.
Jeremy Wells: That's something that I have not had [00:47:30] to deal with with my particular clients. But it's a topic that's interesting, uh, to me. And if you keep up with what's going on in the tax court, especially over the last year or two, there have been a lot of cases about some wild valuations of conservation easements and how the Tax court or other courts, uh, basically had some serious reservations about the valuations given to those conservation easements. So there's a lot of contention over not [00:48:00] necessarily whether conservation easements are, you know, are legitimate or not, but the valuations of those contributions, that can be an issue. How were those conservation easements valued? Again, that's a subject for a different episode. Part three is the taxpayer statement declaring that a list of items from section B, part one, has been appraised for a value of up to $500. Um, I'm not [00:48:30] I'm not 100% clear on that particular, uh, part, but that's where the taxpayer is going to sign declaring that, uh, and then include a list of items from section B saying that the appraisal came in under $500 for those items. Again, um, you know, that's that's interesting. Not sure what's going on there, but part four is where we get into the appraisers declaration. Now, there's actually a couple of paragraphs there that the, [00:49:00] uh, the appraiser is agreeing to, that. There's no conflict of interest between the donor and appraiser, that the appraiser is not giving valuations based on a relationship, a prior relationship with a donor, that the appraiser is actually qualified, and that the appraisal fees are not based on a percentage of the appraised value.
Jeremy Wells: Again, that there's no conflict of interest here and that the appraisal complies with relevant rules. It's a lot of language going on in there, and I'm [00:49:30] kind of glossing over that. But that's what the appraiser is going to sign off on on form 82, 83. That's going to get filed with the return. And then part five is the donor's acknowledgment that it's a qualifying charitable organization, that if it sells, exchanges or otherwise disposes of the contributed property within three years, that it's going to file form 82, 82, which is the donee information return. And then it's going [00:50:00] to check either a yes or no box, whether it intends to use the property for an unrelated use. So this is going to be more on helping the IRS track what the organization is doing with this property and give it some information about maybe why it's being contributed. Uh, if there's anything potentially going on there. But other than that, part five is for the donee. So what are the main issues here is if you're working with taxpayers that have these kinds of contributions, is ensuring that they get a qualified appraisal [00:50:30] if it's necessary. It wasn't in the Tax court case that we're looking at in this episode, but it could be, depending on what your client's contributed, that the reported values of donated items match the appraisal if there is one.
Jeremy Wells: Apparently this happens their tax court cases, where there was a difference between what was claimed and what was appraised. And that just seems wild to me. Why you wouldn't just copy and paste those amounts into form 8283, but I guess that happens. And then [00:51:00] getting the donee to sign the acknowledgment. So practically speaking, you know in the in the age of e file, think about what would need to happen here is you would have to print the 8283 with the information in it, and then you would have to get the taxpayer, uh, or you would have to get the taxpayer to print the 82, 83, you know, if you're working remotely with them and then get them to take that to, uh, the Dhoni organization, hand it to the appraiser, get [00:51:30] there. Probably wet ink signatures on it. Um, I suppose you could get e-signatures. I'm not sure on that particular form, but either way you would need to get the signatures from the Dhoni organization as well as the appraiser. And then you would probably have to upload that, uh, document into your tax software in order to be able to file that as a PDF. Uh, attachment. So what I would probably do is have the normal version that is prepared by the software and then attach that [00:52:00] copy that's actually got all the signatures on it.
Jeremy Wells: Now, there is some documentation that has to be kept by the taxpayer and not sent with the return. Again, this was problematic. In Bethel's Tax court case. The taxpayer has to maintain records that are not submitted with the tax return. Treasury Regulation Section 1.1 70, cap A, 13 A and B list these requirements. The taxpayer has to keep the following A detailed list of the property. [00:52:30] The taxpayer needs to know what they're contributing. They can't just put together a couple boxes of a bunch of old stuff and then drop it off at the local goodwill they need to actually have a list, probably a spreadsheet of what all was given. And that spreadsheet needs to include a detailed list of the property, the receipts showing the date and the location, and the description of what was contributed, along with any fair market value worksheets. So property probably in that [00:53:00] spreadsheet containing all of the property. You will probably see the valuation that the taxpayer has given to that, or at least you should, along with dates where it was donated, what organization it was contributed to, all those sorts of things. Most people, you know, if you think about it, most taxpayers for that generic sort of used clothing and used household goods, they're not going to track all of this. I'm always a bit curious as to what exactly a taxpayer's, [00:53:30] you know, clients of mine. Expectations are when they give me this kind of information.
Jeremy Wells: I think they're always expecting a little bit more in terms of a deduction than than I know they can get, or I'm willing to report on the return. But in general, if the taxpayer really wants to take a deduction for some of this stuff, they really need to have this. It probably matter more with bigger contributions vehicles, especially if they're donating Appreciated property like stocks and [00:54:00] securities. You're definitely going to have the paperwork in order for that and advise the taxpayer accordingly. And then if there are any appraisals required for the property, definitely want to have that on hand. So form 8283 is only part of the package here. There really needs to be additional documentation as well. So I want to look at some common myths here and debunk them pretty quickly. So first one is that a signed receipt is enough. No [00:54:30] it's not. It has to have a description of the property and include other details. It doesn't have to include the values of the property, but it does have to include reasonably complete descriptions of what was donated. Another myth is that you can recreate or fix missing details later. Again, this is what ultimately ended up being fatal in Bissell's case, is that the courts and the IRS will not accept a Reconstructed information [00:55:00] about what was contributed. It needs to be contemporaneous, meaning it needs to be the. The record needs to be established by the earlier of when the tax return was filed or the due date of the tax return, including an extension.
Jeremy Wells: Another myth is that fair market value is optional for small donations. Again, no. Form 8283 requires fair market value for every non-cash donation over $500. So even if it's a relatively small amount, the taxpayer [00:55:30] has to assign a value to that and needs to have an actual method for determining that fair market value. Again, thrift shop value is a pretty common one for clothing and household goods and small appliances, that sort of thing. And finally, the donation definitely happened. So the IRS should allow it. Well, that's actually exactly what happened in this tax court case. Again, both sides stipulated that the donation happened. Both sides even stipulated that the donation would be deductible [00:56:00] if the taxpayer had the required records. That case shows that courts will disallow deductions even when the facts of the donation are not disputed. So beyond just claiming the deduction and preparing form 8283, it's important that we make sure that taxpayers have the correct documentation on hand. Now the charitable deduction to wrap up is powerful. It can be it can be a significant deduction for a lot of taxpayers. [00:56:30] But there are some serious technical requirements and we need to be aware of those. It's a lot more than just properly filing form 8283. This tax court case illustrates that substantiation is everything. Um, it really is in a lot of areas of tax law, and especially here in terms of charitable contributions.