In the last three weeks, the Tax Court has issued two decisions that demonstrate the importance of complying with the rules for substantiating a charitable contribution. These cases are cautionary tales writ large!
Under Section 170(f)(8)(A) of the Internal Revenue Code, no charitable contribution deduction for any contribution of $250 or more is allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organization that meets certain specified requirements. A written acknowledgement is contemporaneous if it is obtained by the taxpayer on or before the earlier of: (1) the date the taxpayer files the original return for the tax year of the contribution; or (2) the due date (including extensions) for filing the original return for the year.
In David P. Durden, et ux., TC Memo 2012-140, the Durdens gave over $22,000 to their church in 2007. The IRS disallowed the charitable contributions in a notice of deficiency sent April 13, 2009. (The case does not explain how the notice of deficiency came into existence, but it may have simply come over the transom as part of a correspondence audit: you, the taxpayer, can’t deduct the contributions until you submit to us, the IRS, proper documentation.) The petitioners sent the IRS a letter from the church dated January 10, 2008, which acknowledged contributions from them during 2007 of the amount deducted. The IRS did not accept this acknowledgement because, while it was “contemporaneous,” it lacked a statement regarding whether any goods or services were provided in consideration for the contributions, such statement being one of the “certain specified requirements” mentioned above.
No problem, thought the Durdens. They obtained a letter from the church dated June 21, 2009 that contained the right language. Sorry, says the IRS. That acknowledgement is not acceptable because it was not “contemporaneous” as defined. The Tax Court agreed with the IRS and the Durdens did not get a charitable contribution deduction.
There are a lot more rules concerning substantiation and documentation of charitable contributions. In Joseph Mohamed, Sr., et ux. TC Memo 2012-152, the Mohameds lost charitable contribution deductions of over $18,500,000, because they did not follow the extensive regulatory requirements for substantiating charitable contribution deductions over $5,000. In this case, Mr. Mohamed prepared his own return and found the instructions for Form 8283 confusing and, apparently, too burdensome to spend much time reading.
Sorry, says the Tax Court. “We recognize that this result is harsh – a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions – all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.”
So, in the past, we may have seemed a bit picky when we asked for and poured over the documentation for your charitable contributions. Hopefully, you now understand a little better why we do what we do.