G. UPDATES ON DISCLOSURE AND SUBSTANTIATION RULES 1

G. UPDATES ON DISCLOSURE AND

SUBSTANTIATION RULES

Michael Seto and Dave Jones

1. Introduction

The Omnibus Budget Reconciliation Act of 1993 contains two provisions that

significantly affect charities and their contributors. These two provisions are

IRC 6115, relating to disclosure of certain information to contributors and IRC

170(f)(8), relating to substantiation of certain information by contributors.

These two provisions were discussed in the 1995 CPE,

Substantiation and

Disclosure Rules of OBRA ’93, at pp. 129-138. That article was written just after

the statute was enacted. The Service has since issued proposed regulations,

1.170A-13(f) and 1.6115-1, to implement IRC 6115 and IRC 170(f)(8).

The purpose of this article is to discuss the disclosure and the substantiation

rules as interpreted by the proposed regulations. The article will highlight the

circumstances where disclosure and substantiation statements are required;

the elements necessary to the statements; safe harbors that have been created

to ensure greater compliance; and how the rules work in certain special situa-

tions.

Disclosure of Quid Pro Quo Contributions

IRC 6115 provides that charities, for contributions made on or after January

1, 1994, must provide

timely written disclosure statements to contributors who

make payments described as "quid pro quo" contributions in excess of $75. IRC

170(f)(8)(A) provides that for contributions made on or after January 1, 1994,

no deduction will be allowed under IRC 170 for a contribution of $250 or more

(whether in cash or property) unless the contributor has a

contemporaneous

written acknowledgment from the charity substantiating the contribution.

These are two different requirements, and although at times they may

overlap (a "quid-pro-quo contribution" of $250 or more), each must be satisfied.

For example, in certain circumstances, charities may be able to meet both

requirements with the same written document. Nevertheless, they must be

careful to provide the written statement in a "timely" manner satisfying the

more stringent requirement of the disclosure rules if the statement is to meet

the requirements of both sections.

1997 EO CPE Text

Updates on Disclosure and Substantiation Rules

A. Quid Pro Quo Contribution Defined

A "quid pro quo contribution" is defined as a payment made partly as a

contribution and partly as payment for goods or services provided to the

contributor. A charity provides goods or services in consideration for a

contributor’s payment if, at the time that contributor make the payment, he or

she receives or expects to receive goods or services in exchange for that payment.

Goods or services include those provided in a year other than the year in which

a contributor made the payment.

Illustration: On December 20, 1995, a contributor provides the

Washington Opera, a section 501(c)(3) organization, $100 in considera-

tion for a concert ticket with a fair market value of $60. The concert is

to take place Jan. 20, 1996.

The Washington Opera must furnish that contributor a timely dis-

closure statement indicating among other things that the value of the

ticket is $60.

The contributor may claim the $40 as a charitable deduction on his or

her 1995 tax return.

Note that the $75 threshold is determined on the $100 payment, not on the amount of

the actual deductible portion (i.e., $40) of said payment.

For purposes of the $75 threshold, separate payments of $75 or less made

at different times of the year for separate fundraising events are not aggregated.

To prevent circumvention of the disclosure requirement in situations such as

the writing of multiple checks by a contributor in the same transaction, the

Service is authorized to develop anti-abuse rules. No such rules have been

prescribed.

Contribution Defined

Whether or not the portion of a payment in excess of the fair market value

of the goods or services received is a contribution depends on the intent of the

donor. The Service applies a two-part test, which was adopted in

United States

v. American Bar Endowment, 477 U.S. 105 (1986): first, a payment to a charity

is deductible only to the extent the payment exceeds the fair market value of

any goods or services the contributor received; and, second, the excess payment

is made with the intent to make a gift.

See also Rev. Rul. 67-246, 1967-2 C.B.

104.

Updates on Disclosure and Substantiation Rules

The first condition is satisfied by evidence that the payment exceeds the fair

market value of the goods or services received. The second condition is satisfied

where the surrounding facts and circumstances of a particular payment indi-

cates such intent. In most situations, the intent is apparent.

Illustration 1: WXYZ, public television station, informs A that she may

receive a compact disc of classical music, with a fair market value of

$15, for a contribution of $50. That compact disc can be purchased for

$15 at music stores in the community. A sends the $50 contribution

and accepts the compact disc. Since the contribution exceeds the fair

market value of the compact disc and A was informed of this before she

made the $50 payment,

A has made a charitable contribution of $35

to WXYZ.

Illustration 2: The facts are the same as in Illustration 1 except that

WXYZ only asks for a $15 contribution. Notwithstanding the fact that

A may think she is making a charitable contribution of $15 to WXYZ,

no part of the payment is deductible. Since the payment approximates

the established purchase price of identical compact discs sold at music

stores, the $15 payment is not a contribution; it is the purchase price

of the disc.

C. Written Disclosure Statement

A charity, in connection with the solicitation or receipt of a quid pro quo

contribution in excess of $75, must provide to the contributor a written dis-

closure statement.

See IRC 6115(a).

(1)

Content

The required written disclosure statement must accomplish the following:

first, inform the contributor that the part of the payment that is deductible for

Federal income tax purposes is limited to the excess of any money, and the value

of any property other than money, contributed above the value of goods or

services provided by the charity; second, provide the contributor with good faith

estimates of the value of the goods or services furnished to the contributor. For

an in-depth discussion of good faith estimates and fair market value, read

Section 4 of this article.

Illustration: On May 1, 1996, X contributes $150 to the Houston

Symphony, a section 501(c)(3) organization, and receives in return one

concert ticket with a fair market value of $50. The information in the

disclosure statement should include the following:

Updates on Disclosure and Substantiation Rules

(A) A statement that the amount of the contribution the donor may deduct

for Federal income tax purposes is limited to the excess of the money

contributed over the value of the goods provided by the Houston Sym-

phony in exchange for the contribution;

(B) A description of the quid pro quo goods (a concert ticket);

Also, the information in the disclosure statement must be made in a manner

that is reasonably likely to come to the attention of the contributor. Since there

is no specific format, whether a disclosure statement satisfies this requirement

depends upon the facts and circumstances of a particular situation.

(2)

Time of Disclosure

Charities must furnish the disclosure statements in a timely manner - with

either the solicitation of the quid pro quo contribution or the receipt of the quid

pro quo contribution. If the disclosure statements are furnished in connection

with a particular solicitation, it is not necessary for charities to provide addi-

tional statements when contributions are actually received. The timing, how-

ever, is critical.

(3)

Situations Where Disclosure Statements are Not Required

In the following three circumstances, disclosure statements are not re-

quired.

First, when goods or services given to contributors by an organization

described in IRC 170(c) have an insubstantial or

de minimis value.

See

Proposed Reg. 1.6115-1(b). These goods or services can be treated as having no

value for purposes of disclosure pursuant to IRC 6115. The standards for

insubstantial or

de minimis value are prescribed in Rev. Rul. 90-12, 1990-1 C.B.

471, as amplified by Rev. Proc. 92-49, 1992-1 C.B. 987, and modified by Rev.

Proc. 92-102, 1992-2 C.B. 580; Rev. Proc. 93-49, 1993-2 C.B. 581; Rev. Proc.

94-72, 1994-2 C.B. 811; Rev. Proc. 95-53, 1995-52 I.R.B. 22. Since the dollar

amount that the Service considers insubstantial or

de minimis is adjusted

annually, check any updates or modification to Rev. Proc. 90-12 and Rev. Proc.

92-49. Also, read Section 5 of this article for additional discussion.

Illustration: In its 1995 fundraising campaign, the March of Dimes

provides a bookmark bearing its logo to any contributor donating $75.

The cost of each bookmark is 25¢. Each bookmark is considered de

Updates on Disclosure and Substantiation Rules

minimis or a low cost article pursuant to IRC 513(h)(2) because the

cost is well below the $6.60 limitation stated in Rev. Proc. 94-72. Also,

the $25 payment rule is satisfied because the $75 contribution is more

than the $33 limitation stated in Rev. Proc. 94-72. Thus, the March

of Dimes may treat the bookmark as having no substantial value and,

thus, need not issue a disclosure statement to the contributors.

Second, there is no donative or gift element in a particular transaction. A

typical museum gift shop sale is an example of a transaction without a donative

element; it is not a quid pro quo contribution.

Third, where there is only an intangible religious benefit provided to

contributors. Intangible religious benefits are benefits provided to contributors

by an organization organized exclusively for religious purposes and are not

generally sold in commercial transactions. Payments for intangible religious

benefits are not quid pro quo contributions.

See IRC 6115(b). An example of

an intangible religious benefit is admission to a religious ceremony. The

exception also includes

de minimis tangible benefits, such as wine or wafer,

provided in connection with a religious ceremony. The intangible religious

benefit exception, however, does not apply to such items as payments for tuition

for education leading to a recognized degree or for travel services or consumer

goods.

Failure To Provide Disclosure Statements

IRC 6714(a) provides that a penalty is imposed on organizations that do not

meet the disclosure requirement of IRC 6115. This provision also provides that

a penalty of $10 per contribution, not to exceed $5,000 per fundraising event or

mailing, be imposed on organizations that failed to make the required disclosure

in connection with a

quid pro quo contribution of more than $75.

Charities may avoid such penalties if they can show that the failure was due

to reasonable cause.

See IRC 6174(b). Reasonable cause is dependent upon the

facts and circumstances of a particular case.

Substantiation of Charitable Contributions

IRC 170(f)(8)(A) provides that beginning January 1, 1994, no deduction will

be allowed under IRC 170 for a contribution of $250 or more whether in cash or

property unless the contributor has a contemporaneous written acknow-

ledgment from the charity. A one year transitional rule, for calendar year filers,

allowed contributors to take a deduction where they made a good faith attempt

to contact the charities by October 15, 1995, to obtain written substantiation.

Updates on Disclosure and Substantiation Rules

If they could not obtain the written substantiation but have documented a good

faith attempt to obtain it, they can take a deduction for contributions made.

See

IRS News Release 95-25 (March 22, 1995). This transitional rule applied to the

1994 tax year, and no further relief has been granted.

Written Substantiation

A contributor must have a written statement substantiating the amount of

the donation from the donee charity in order to take a deduction. The con-

tributor cannot rely upon cancelled checks alone to substantiate the contribu-

tion. It is the responsibility of the contributor to obtain the written statement.

Under IRC 170(f)(8)(D), charities need not substantiate donations if, in

accordance with Treasury regulations, they report directly to the Service the

information required to be provided in the written statements. There are no

regulations at present establishing such reporting procedure, nor will there be

any in the foreseeable future. Hence, charities may not report to the Service on

behalf of contributors the information in the written statements. In practice,

since good donor relations are in charities’ interest, most, if not all, charities

will provide contributors written statements with the proper information.

(1)

Content

The written statement must include sufficient information to substantiate

the amounts of deductible contribution. Thus, it should have the following

information. First, if the contribution is in cash, the amount must be in the

written statement. If the contribution is in property, the written statement

must have a description of the property, but need not value the property.

See

IRC 170(f)(8)(B)(i) and Proposed Reg. 1.170A-13(f)(2). Second, if the charity

provided any goods or services in consideration, in whole or in part, for the

contribution, the written statement must provide a description and the good

faith estimate of the fair market value of the goods or services.

See IRC

170(f)(8)(B)(ii), (iii) and Proposed Reg. 1.170A-13(f)(2)(ii), (iii). Finally, if the

contributor received nothing in return for the contribution, the written state-

ment must say so. The information does not have to include contributors’ social

security or tax identification numbers.

If goods or services consist entirely of intangible religious benefits, the

written statements should indicate this. The written statements need not

describe or provide estimates of the value of these benefits.

See IRC

170(f)(8)(B)(iii) and Proposed Reg. 1.170A-13(f)(2)(iv).

Updates on Disclosure and Substantiation Rules

(2) Format

There is no prescribed form for the written statement. Letters, postcards,

or computer-generated forms are acceptable.

Contemporaneous

The written statement must be contemporaneous. IRC 170(f)(8)(C) provides

that written statements must be received by a contributor no later than the date

the contributor actually files his or her return for the tax year in which the

contribution was made. If the return is filed after the due date or extended due

date, the written statements must be obtained by the extended due date.

See

Proposed Reg. 1.170A-13(f)(3).

Separate and Aggregate Contributions

Charities may provide separate written statements for each contribution of

$250 or more received from a contributor, or provide periodic written statements

substantiating contributions of $250 or more. Separate payments received from

a contributor at different times are regarded as independent contributions and

are not aggregated for the purpose of applying the $250 threshold.

To prevent the circumvention of the substantiation rule in situations such

as the writing of multiple checks in an amount below $250 on the same date,

the Service is authorized to establish anti-abuse rules. No such rules have been

prescribed.

Substantiation of Contributions Made By Payroll Deductions

If contributions are made through withholding of wages, the contributions

deducted from each paycheck are regarded as separate payments to be substan-

tiated. Reg. 1.170-13(f)(11)(ii). Substantiation of payroll deductions may be

done by the following: first, a pay stub, Form W-2, or other documents furnished

by the employer that show the amount withheld by the employer for payment

to the charity and, second, a pledge card or other document prepared by or at

the direction of the charity that includes a statement to the effect that the

charity did not provide goods or services in whole or part in consideration for

the contribution.

See Reg. 1.170-13(f)(11).

Updates on Disclosure and Substantiation Rules

E. Substantiation of Contributions Made Through Intermediary Or-

ganizations

Frequently, intermediary organizations such as the United Way, Combined

Federal Campaign receive contributions and distribute them to one or more

charities. Reg. 1.170A-13(f)(12) provides that these intermediary organizations

are treated, for purposes of the substantiation rules, as the recipients of the

contributions. Therefore, they should provide written statements to con-

tributors.

Intermediary organizations are not treated as the recipients of the contribu-

tions if the actual recipient/charities provide goods and services to contributors.

They structure the transaction to avoid taking the goods or services into account

in determining the amount of the charitable deduction to which contributors

are entitled.

See Reg. 1.170A-13(f)(12).

Substantiation of Out-of-Pocket Expenses

A contributor who incurs expenses while rendering services and qualifies

for a charitable deduction is treated as having obtained contemporaneous

written acknowledgment for these expenses if:

1. The contributor has records that substantiate the amount of the expenses; and

2. By the appropriate date, obtains from the charitable organization:

a. a description of the services provided;

b. the date on which the services were provided;

c. a statement of whether or not the recipient charity provided any goods or

services for performance of the services; if the recipient charity provided

such goods and services,

i. a description and good faith estimate of the value of those goods or

services;

ii. if the recipient charity provided intangible religious benefits, a statement

to that effect.

See Proposed Reg. 1.170A-13(f)(10)(ii).

G. Substantiation of Matched Payment

If a contributor’s payment is matched, in whole or in part, by another

contributor and the contributor receives goods or services in consideration for

Updates on Disclosure and Substantiation Rules

the payment and some or all of the matching payment, the goods and services

will be treated as provided in consideration for the contributor’s payment and

not in consideration for the matching payment.

False Substantiation

Charities that knowingly provide false written substantiation to con-

tributors may be subject to penalties under IRC 6701, aiding and abetting an

understatement of tax liabilities. Whether a charity knowingly provided false

substantiation depends upon the facts and circumstances of the particular

situation.

Good Faith Estimate and Fair Market Value

Perhaps the most daunting aspect of the disclosure rule under IRC 6115 and

the substantiation rule under IRC 170(f)(8) is the requirement in both

provisions to provide contributors with good faith estimates of the goods or

services given as an inducement to make contributions.

See IRC 6115(a)(2) and

IRC 170(f)(8)(B)(iii).

Definition of Good Faith Estimate

One basic issue is the definition of a good faith estimate. Proposed Regs.

1.6115-1(a)(1) and 1.170A-13(f)(7) provide that a good faith estimate is the donee

charity’s estimate of the fair market value of the goods or services. Neither of

the proposed regulations requires any particular method of estimating fair

market value. Consequently, charities may use any reasonable methodology as

long as it is used in good faith. See Proposed Reg. 1.6115-1(a)(1) and 1.170A-

13(f)(7).

Estimating Fair Market Value

There are many methods that can be used to estimate the fair market value

of a particular item or property. One is the market-comparable method. For

example, if a real estate agent wants to estimate the value of a house, she

examines the sale price of similar houses with similar features in the same

neighborhood. Although an identical house may not be available, the agent

estimates the value by looking at similar or comparable houses.

Charities may use the market comparable method to estimate the goods or

services provided to contributors as long as they do so in good faith.

Updates on Disclosure and Substantiation Rules

(1) Goods or Services That Are Not Commercially Available

A charity may provide goods or services that are not commercially available.

In this case, estimates can be based on goods or services that are commercially

available even though the commercially available goods or services do not have

the unique qualities of the goods or services being valued.

See Proposed Reg.

1.6115-1(a)(2).

Illustration: a museum allows contributor A to hold an event in one

of its galleries in return for a contribution of $50,000. No other private

events are held in the museum. In the community where it is located,

there are four hotels with ballrooms with the same capacity as the

gallery in the museum. Two of the four hotels,

Y and Z, have ballrooms

offering amenities and atmosphere comparable to the gallery in the

museum, although the two hotels lack the unique art displayed on the

walls of the museum. Because the capacity, amenities and atmosphere

of the ballrooms of the two hotels are market-comparable to the room

in the museum, a good faith estimate of the fair market value of the

benefits received by contributor A may be determined by reference to

the cost of renting the ballroom in either of the two hotels. The cost of

renting the ballrooms in

Y or Z is $5,000. Hence, the rental value of

the gallery in the museum is $5,000.

An axiom of tax law is that the fair market value of property is what a willing

buyer will pay a willing seller. Fair market value is not what it costs the charity

to purchase a particular item. A common error many charities make when

estimating the fair market value of benefits is to value items given to it at $0.

If a charity is given books, which it turns around and gives as premiums, a good

faith estimate of the fair market value of the books can be determined by looking

at market-comparable book prices. The value should not be $0.

(2)

Certain Goods or Services Treated As Having No Measurable

Value

Newsletters or other publications that are not of commercial quality are

treated as though they do not have measurable value as long as their primary

purpose is to inform members about the activities of the charity and are not

available to the public through subscriptions or newsstands.

See Rev. Proc.

90-12, 1990-1 C.B. 471. Generally, publications that contain articles written

for compensation and that accept advertising are considered commercial quality

publications and have measurable fair market value. Professional journals,

whether or not their articles are written for compensation, or whether or not

advertising is accepted, are considered commercial quality publications.

Updates on Disclosure and Substantiation Rules

Illustration 1: A museum sends a newsletter to patrons who made

$250 contributions. The primary purpose of the newsletter is to inform

patrons about forthcoming art exhibits and lectures. It contains no

commercial advertisements or articles; it is only available to patrons

who made such contributions. The newsletter is treated as having no

measurable fair market value for substantiation and disclosure pur-

poses.

Illustration 2: Assume the same facts as Illustration 1, except that the

newsletter also contains high quality photographs of art works and

articles and reviews written by experts, critics, historians and collec-

tors of art works. Announcements of art openings held in commercial

art galleries are also included in the newsletters; the museum charges

a fee to include such announcements. The newsletter is printed on

quality paper and in a magazine format, and published quarterly. The

newsletter is sold to the general public in the museum’s gift shop as

well as book stores and museum gift shops throughout the country for

$60. The cost of producing the newsletter is $20. Under the facts and

circumstances, the newsletter is a commercial quality publication and

is also not a de minimis or low cost article. Consequently, the newslet-

ter cannot be treated as having no measurable market value. The

value is $60.

Celebrity presence is another item that is treated as having no fair market

value. Often celebrities will lend their presence to enhance the fundraising of

a charity they support. The mere presence of celebrities need not be valued

because, generally, it cannot be valued independently.

See Proposed Reg.

1.6115-1(a)(3).

Illustration: A charity provides a contributor of $1,000 with a dinner

for two followed by an evening tour of a museum. An artist, whose

most recent works are on display at this museum, conducts the tour.

Typically, tours at this museum are free. Because museum tours are

free, the celebrity presence is treated as having no value and the

charity need not value the tour. The museum, however, must provide

a good faith estimate of the fair market value of the dinner for two.

In contrast, another charity provides a one-hour tennis lesson with a tennis

professional in return for the first payment of $500 it receives. The tennis

professional normally provides one-hour lessons for $100. Because the services

of the tennis professional have a market and can be valued, the charity must

provide to the contributor a good faith estimate ($100) of the fair market value

of the one-hour lessons.

Updates on Disclosure and Substantiation Rules

5. Safe Harbors from the Requirements of the Disclosure

and Substantiation Rules

Many charities, in their fundraising activities, provide benefits to con-

tributors in appreciation of their contributions or to potential contributors as

enticements to make contributions. These charities are required to disclose to

contributors the value of benefits for purposes of the disclosure and substantia-

tion rules. Nevertheless, there are several situations where charities need not

disclose so long as they conform to any of the following safe harbors.

The first safe harbor involves the use of token items such as bookmarks,

calendars, key chains, mugs, tee shirts and other such items that bear the

charities’ names or logos.

See Rev. Proc. 90-12, 1990-1 C.B. 471; see also

Proposed Regs. 1.170A-13(8)(i)(A) and 1.6115-1(b). The use of these items must

be in the context of a legitimate fundraising campaign. The token items are

exchanged for a contribution of $25 or more (adjusted for inflation) and such

items are low cost articles within the meaning of IRC 513(h)(2). For 1996, this

safe harbor applies where the value of a contribution must be $33.50 or more

and the value of low cost articles is $6.70 or less.

See Rev. Proc. 95-53, 1995-52

I.R.B. 22 (the dollar amount that the Service considers insubstantial or

minimis is adjusted annually; check any updates or modification). If these

conditions are met, the fair market value of token items can be treated as having

no substantial value and can be disregarded for charitable deduction purposes.

Illustration: A charity, an inner city nonprofit health clinic, in its 1996

fundraising campaign, sends its supporters a small calendar bearing

its logo in return for a contribution of $250. The cost of production and

distribution of the calendar is $1.50 per supporter. Since the cost of

the calendar is below $6.70, the calendar is considered a low cost

article. Also, the $25 payment rule is satisfied because the $250

contribution is more than the $33.50 limitation stated in Rev. Proc.

95-53. Thus, the health clinic can inform the contributor that the

calendar has no substantial value and that the full amount of the

contribution is deductible in the substantiation statements.

The second safe harbor involves charities mailing or otherwise distributing

free, low-cost, unordered items to patrons. The items will be treated as not

having market value.

See Rev. Proc. 92-49, 1992-1 C.B. 987. For this safe

harbor to apply, items received must not have been distributed at patrons’

requests or with the express consent of patrons and must be low cost articles

within the meaning of IRC 513(h)(2). In 1996, the amount of low cost articles

is $6.70 or less.

See Rev. Proc. 95-53, 1995-52 I.R.B. 22.

Updates on Disclosure and Substantiation Rules

Illustration: As part of a fund raising campaign, on June 1, 1995, a

charity mails each potential contributor a packet of 20 return address

labels containing his or her name along with a solicitation letter

requesting a donation of $250. The packet has not been distributed at

potential contributors’ requests or with their consent. The solicitation

states that the potential contributor may keep the packet whether or

not he or she makes a contribution. The cost of producing each packet

is 75¢. Since the cost of each packet is well below the $6.70 limitation

stated in Rev. Proc. 95-53, the packet is considered a low cost article.

Thus, the charity may inform the contributor that the labels have no

substantial value and that the full amount of the contribution is

deductible in the substantiation statements.

The third safe harbor is where the fair market value of a benefit received in

return for a contribution is not more than 2% of the contribution or $50,

whichever is less.

See Rev. Proc. 90-12, 1990-1 C.B. 471. The $50 is indexed

for inflation, and in 1996, that amount is $67.

See Rev. Proc. 95-53, 1995-52

I.R.B. 22.

Illustration: A section 501(c)(3) university, in 1996, gives its con-

tributors a framed print of the university campus with a fair market

value of $40 in return for contributions of $1000. The university may

inform its contributors that the print has no substantial value and that

the full amount of the contribution is deductible.

The fourth safe harbor involves membership package benefits. Charities,

such as museums, libraries, zoos, and arboretums, typically use membership

packages to build a following and base of support. The benefits of a typical

membership package may include free parking, gift shop discounts, an admis-

sion discount, etc. Charitable organizations which offer basic membership

packages at $75 or less and include some or all of the following benefits can treat

such membership benefits as having insubstantial value and, hence, need not

value them.

See Proposed Regs. 1.170A-13(f)(8)(i)(B) and 1.6115-1(b). The

membership benefits are:

a) Any right or privilege, other than rights to seating at collegiate

athletic events, the contributor can exercise frequently during the

membership period. Examples of such rights and privileges include

free or discounted admission to organizations’ facilities or events,

free or discounted parking, preferred access to goods or services, and

discounts on purchases of goods or services; and

Updates on Disclosure and Substantiation Rules

b) Admission to events during the membership period open only to

members if the cost per person for the event, excluding any allocable

overhead, is within the limits for low cost articles. For 1996, the

limit for low cost articles is $6.70. See Rev. Proc. 95-53, 1995-52

I.R.B. 22.

Illustration: A performing arts center offers a basic membership

package for $75. The benefits offered include the right to purchase

tickets one week before they go on sale to the general public, free

parking in its garage during evening and weekend performances, and

a 10% discount at its gift shop. For $150, the performing arts center

offers a preferred membership package which includes all the benefits

of the $75 package plus a poster sold at its gift shop for $20. The basic

membership and the preferred membership are each valid for twelve

months. There are approximately 50 productions at the performing

arts center during the twelve month period. The center’s gift shop is

open for several hours during the week and during performances. The

performing arts center may disregard the value of the basic member-

ship package benefits for purposes of the disclosure statement.

Preferred members must receive a disclosure statement indicating

that a reasonable estimate of the fair market value of their member-

ship benefit is $20, the fair market value of the poster. This estimate

also should be included in the preferred members’ substantiation

statements.

This safe harbor can only apply to frequently available benefits. The

following illustration is meant to draw the distinction between frequently

available benefits and those that cannot be exercised frequently.

Illustration: A community theater group performs four different plays

each summer. Each play is performed twice. In return for a member-

ship fee of $60, the theater offers a membership package that consists

of free admission to any of its performances. Non-members may

purchase tickets for $15 each on a performance-by-performance basis.

If a contributor makes a gift of $350 and receives such membership

package in return, the theater must provide a reasonable fair market

estimate of the benefit, i.e., the value of the performances. Because

the benefit provided admission is to a limited number of performances,

it could not be frequently exercised and, therefore, does not meet the

requirements of the safe harbor.

Updates on Disclosure and Substantiation Rules

6. Special Situations

Where a charity provides to a contributing corporation’s employees benefits

that are same as those described in any of the above safe harbors, such benefits

can be treated as insubstantial and need not be valued.

See Proposed Reg.

1.170A-13(f)(9). Where the benefits given employees are other than those

described in any of the safe harbors, the substantiation and disclosure state-

ments have to be provided.

Conclusion

The final and proposed regulations and the revenue procedures are designed

to improve compliance with and facilitate enforcement of IRC 170(f)(8) and IRC

6115. They will also relieve exempt organizations from complying with the

disclosure and substantiation rules in certain circumstances. It is anticipated

that the proposed regulations will be finalized without substantial changes.