Substantiation of Charitable Contributions

December 12, 2012

The documentation requirements taxpayers must maintain in order to take a charitable contribution deduction on their tax return have been in place for almost 20 years. They are worth repeating however, as two recent tax court cases have upheld the necessity of following these rules and denied contribution deductions to taxpayers who did not have the necessary documentation.

As a review a donor cannot claim a tax deduction for any single contribution of $250 or more unless the donor obtains a contemporaneous written acknowledgement of the contribution from the recipient organization. Although it is a donors responsibility to obtain a written acknowledgement, charities should be very mindful of these rules because certainly donor relations are at stake if something goes wrong.  IRS publication 1771 outlines these requirements.

In a 2012 case, David and Veronda Durden were denied a tax deduction for contributions made to their church because the original acknowledgement letter received from the Church did not clearly stipulate that no goods or services were provided to the donors in exchange for their donation ( TC Memo 2012-140). To correct this problem, the Church issued a second acknowledgement letter with the required statement but it was rejected by the Court because it was not considered to be contemporaneous.

To be considered contemporaneous, the documentation must be obtained on or before the earlier of:

  • The date the taxpayer files the original return for the taxable year, or
  • The due date ( including extensions ) for filing the original return for the year.

There are rules outlining necessary steps if a non-cash donation of over $5000 is claimed for what is required to take a deduction for non-cash property (real estate, furniture, computer equipment, clothing etc.). The donor is required to file a Form 8283 with their standard return and it must include the signature of a “qualified appraiser” as to the value assigned to the donated property.

The tax court case of Joseph and Shirley Mohamed (TC memo 2012-152) also ruled against the taxpayers (who had taken a deduction of millions of dollars for donated real estate) because they did not properly comply with the rules regarding Form 8283  and did not obtain a qualified appraisal.  This case resulted in a really draconian result for the taxpayer who had clearly donated substantially valuable property to their presumably valid charitable remainder trust, yet were denied the deduction due to improper reporting of the gift as far as completing the requirements of IRS Form 8283.

In both of these cases, the Tax Court has sent a strong message that the substantiation rules DO MATTER and failure to follow them closely will result in the loss of a contribution deduction.