Monday, June 4, 2012

Two Recent Tax Court Rulings on Charitable Contribution Deductions That Charities Should Be Aware Of

Two recent Tax Court cases were decided last month in which the court upheld the IRS's denial of significant charitable contribution deductions. In both of these cases, there was no dispute that the taxpayers made the contributions, or that they were made to qualified 501(c)(3) organizations, or even that the value of the contributions was at least as much as the taxpayers had reported. In both cases, however, the taxpayers failed to comply in some way with substantiation requirements of the Tax Code and Regulations, and so their contribution deductions were denied.

The first case, Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012), involved a Texas couple who claimed a deduction of $25,171 for cash contributions to their church. The church sent a letter of acknowledgement in January of 2008, but that receipt lacked a statement of whether any goods or services were provided to the Durdens in exchange for their contributions. Obviously trying to make up for the error, the church provided a second acknowledgement in June of 2009, which did include the proper statements. Nevertheless, the IRS denied the deduction because the Durdens failed to get a proper receipt from their church. In the IRS's view, the first acknowledgement was lacking a statement of whether goods or services were provided by the church, and the the second acknowledgement was not a "contemporaneous" receipt, because it was not received by the Durdens by the due date for filing their original return for the year. Because the Durdens did not have proper receipts, the judge agreed with the IRS that the Durdens failed to comply with the substantiation requirements of IRC 170(f)(8).

The second case is Mohamed v. Commissioner, T.C. Memo 2012-152 (May 29,2012). In this case, a California couple made gifts of "extremely valuable" real property (>$18.5 million total) to their charitable trust in 2003 and 2004. The IRS denied the deduction for these contributions because the Mohameds did not have the property independently appraised, as required by Treasury regulations for noncash property contributions of more than $5000. The taxpayer in this case prepared and filed his own tax return, including the required Form 8283 for noncash charitable contributions. The taxpayer admitted that he did not read the Form 8283 instructions (!), although the form itself appeared simple enough, and perhaps was even a little misleading. (The IRS has since revised Form 8283.) The tax court agreed with the IRS that the Mohameds had failed to satisfy the appraisal requirements of the Section 170 regulations, and therefore, their charitable deductions were completely denied. The court agreed that this was a harsh result, but found that "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."

From the perspective of charitable organizations, these cases present reminders that charities need to supply donors with proper receipts. These cases make it clear that, ultimately, it is the taxpayer's responsibility to comply with the requirements for disclosure and substantiation in order to take charitable contribution deductions for gifts they have made. And charities should not be giving their donors legal or tax advice, including putting valuation on property received.  That being said, charitable organizations should be familiar with the reporting and substantiation requirements so that they can help their donors comply. At a minimum, charities should be giving donors proper receipts for contributions.

Helpful resources from the IRS include:  Publication 1771 Charitable Contributions-Substantiation and Disclosure Requirements, and Publication 526 Charitable ContributionsPublication 561 Determining the Value of Donated Property, and the IRS's Stay Exempt website program, Can I Deduct My Charitable Contributions?


Tony Martignetti said...

Excellent post! Concise and easy for everyone to understand. I wish I had written it.

Patrick Sternal said...

Thanks Tony!