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Special Written Disclosure Rules for Quid-Pro-Quo Payments

February 18, 2014

IRS requires certain charitable events to adhere to special disclosure rules.

It’s winter and charitable organizations frequently run special events that are part party and part fundraising activity. The IRS calls the payments that change hands for these events quid-pro-quo payments. This means that the donor who attends receives something in return for their payment. This fact changes the payment from the straight charitable contribution (which is a unilateral transfer from the donor to the charity with nothing going back to the donor except good feelings) into something a bit more complicated.

A charitable organization is required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75. This is a requirement that, if not performed, may subject the charity to fines and financial penalties for lack of compliance.

The written disclosure must inform the donor of the amount of charitable contribution they are entitled to when their payment is greater than $75. Therefore, if your organization sponsors a Valentine’s Day dinner dance and the cost is $300 per couple, each couple purchasing a ticket must be provided with written disclosure indicating how much of the $300 is deductible as a contribution to the charity.

How do you determine how much is deductible? The donor cannot deduct the fair market value of the good or services received in return for their payment. In the Valentine’s Day dinner dance example, if the fair market value of the dinner and dancing was determined to be $125, then the donor could only deduct $175 of their $300 ticket price. This fact must be disclosed to the donor in writing. That disclosure may be done at the time the ticket is purchased or in a thank-you letter after the event.

In addition to disclosing the amount of the ticket price to which the donor is entitled to deduct as a contribution, the charity must also make sure that none of their other communications relating to the event give the donor a different impression. For example, even if the charity intends to provide the required written disclosure to donors after the event, using terminology in the pre-event advertising such as “Donation $300” is forbidden.

Here is an important point to know, the regulation requires that the donors not deduct the market value of the goods or services received in connection with their ticket purchase. The cost of these good or services to the charitable organization does not matter. Take our Valentine’s Day dinner, if the venue donated the space for the dinner and the food to the charity and the band donated their services, so that the event cost to the charity is next to nothing, it would not change that fact that of the written disclosure requirement or the amount to be disclosed. The charity must still inform the donor of the fair market value of the goods or services received in exchange for their payment.

If, in addition to dinner and dancing, each person attending the event also received a gift from the charity, that requires an entirely different analysis. In general, the fair market value of the gift must be added to the fair market value of the dinner and dancing, but because there is an exception in the Internal Revenue Code for low-cost items, the gift may fall into this exception. What adds to the confusion in this case is the fact that the cost of the gift is important in this circumstance while above I indicated that the cost of the dinner, dancing and band did not play a role in the written disclosure amount.

The rules and regulations applicable to quid-pro-quo contributions are complicated and our white paper titled: Quid Pro Quo Charitable Contributions addresses this topic in more detail. For help with your written disclosure for quid-pro-quo payments please any member of our Not- for-Profit Services Group at trustedadvisors@kahnlitwin.com.

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