While we have written on this topic previously, two recent court cases remind us how often taxpayers fail to obtain the documentation required to sustain an income tax deduction for a charitable contribution that they have made. For all gifts of $250 or more, the taxpayer must obtain a contemporary written acknowledgement of his gift from the donee, by the earlier of the date he files his income tax return for the year of the gift, or the due date for filing the return, including extensions. The acknowledgement must state the amount of the cash contribution and a description of any property contributed. The acknowledgement must also state whether the donee provided any goods or services to the donor in consideration for the gift and if so, a description of those goods and services, and a good faith estimate of their value. If the gift is to a donee organized solely for religious purposes and the only services the donee provides consist entirely of intangible religious benefits, the acknowledgement must so state.
In Durden, T.C. Memo 2012-40 (May 17, 2012), the taxpayer failed to obtain the proper written acknowledgement of his gift from the donee organization. In 2007, the taxpayer gave his church a total of $25,171 in a series of gifts, all but five of which were more than $250. While the church provided the taxpayer with a letter, dated January 10, 2008, confirming the amount of the taxpayer’s gifts, the letter did not state whether any goods and services had been provided by the church. When the IRS pointed this out to the taxpayer on audit, the taxpayer obtained a second letter from the church dated June 21, 2009, stating that it had provided no goods and services to the taxpayer.
The Tax Court strictly construed the requirements set forth in the Internal Revenue Code. Because the taxpayer had not obtained acknowledgements satisfying all of the requirements of the Internal Revenue Code before he filed his tax return for the year of the gifts, the court upheld the IRS’s disallowance of his income tax deduction.
In Mohamed, T.C. Memo 2012-152 (May 29, 2012), the taxpayer ran afoul of the appraisal requirements. A qualified appraisal must be obtained for all gifts of property for which a deduction of more than $5,000 is claimed. The taxpayers donated valuable real property to a charitable remainder unitrust in 2003 and 2004. Mr. Mohamed was a certified real estate appraiser and based the value of his gift on his own appraisal of the property. On audit, the IRS pointed out that the taxpayers did not have a qualified appraisal because one of the requirements of a qualified appraisal is that the donor cannot be the appraiser. The taxpayers then obtained an appraisal from an unrelated appraiser. The court pointed out that this appraisal was obtained after the taxpayers had filed their tax return – too late, as the appraisal must be obtained before the return is filed. The taxpayers made other errors as well, including failing to complete all of the information required on Form 8283.
The court acknowledged that the result was extremely harsh, noting that the evidence suggested that the property likely was actually worth more than the amount the taxpayer claimed as a deduction. Nevertheless, the court acknowledged that Congress had enacted very specific rules regarding contributions to counteract what it perceived to be a large problem with the incorrect valuation of gifts of property. The court did not feel that it should undermine Congress’s rules to address one very sympathetic case.
These cases and others make it abundantly clear that no margin for error exists in documenting charitable contributions, even when a donor is giving to his own private foundation. The specific requirements will be strictly enforced by both the IRS and the courts, and taxpayers must follow the rules precisely.