The United States Tax Court’s decision in Kunkel v. Commissioner, T.C. Memo 2015-71 (April 8, 2015), illustrates the importance of maintaining adequate records to substantiate the value of charitable contributions claimed as a deduction on an individual income tax return. In that case, the Tax Court upheld a disallowance of the Internal Revenue Service (the “Service”) of the taxpayers’ claimed deduction for charitable contributions of non-cash property, as well as the Service’s imposition of a 20% accuracy-related penalty, where the taxpayers failed to properly substantiate their charitable contributions.
Taxpayers must keep records to substantiate the amount of cash and non-cash charitable contributions made during the year for which a deduction is claimed on a Federal income tax return. The specific record-keeping requirements depend on the size of the contribution, and whether it was made in cash or other property. These record-keeping requirements are summarized below.
Monetary Contributions of Less Than $250: For cash, check, electronic funds transfers, credit card charges and other monetary contributions of less than $250, taxpayers must obtain and keep a bank record or written communication from the donee organization.
- “Bank records” acceptable for this purpose include bank or credit union statements, cancelled checks, or credit card statements.
- The bank record must show: 1) the date paid or posted, 2) the name of the charity, and 3) the amount of the payment.
- Written records prepared by the taxpayer, such as check registers or personal notations, are not sufficient.
Monetary Contributions of $250 or More and Non-Monetary Contributions: Monetary contributions of $250 or more and non-monetary contributions have more stringent record-keeping requirements. The donor must obtain a contemporaneous written acknowledgement from the donee organization.
- The written acknowledgement must include the following information: 1) the amount of cash and a description (but not value) of any property other than cash contributed, 2) whether the done organization provided any goods or services in exchange for the contribution, and 3) a description and good faith estimate of the value of any goods or services the organization provided.
- The acknowledgement is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of: 1) the date the taxpayer files a return for the year of the contribution, or 2) the due date, including any extensions, for the filing of that return.
Non-Monetary Contributions of $500 or More: Contributions of $500 or more are subject to additional record-keeping requirements.
- These records must include: 1) the approximate date the property was acquired, and the manner of acquisition, 2) a description of the property containing reasonable detail, 3) the cost or other basis of the property, 4) the fair market value of the property at the time of the contribution, and 5) the method used to determine fair market value.
- Clothing and household items donated after August 17, 2006 must be in “good used condition or better” in order to be deductible.
Non-Monetary Contributions of $5,000 or More: In general, for contributions of items other than cash and publicly traded securities exceeding $5,000, a taxpayer must obtain a qualified appraisal made no more than 60 days before the contribution, in addition to maintaining all of the records described above for contributions of $500 or more. For contributions in excess of $500,000, the qualified appraisal must be attached to the return when filed.
Quid Pro Quo Contributions: Special rules also exist for contributions that are part contribution and part payment for goods or services (“quid pro quo contributions.”) For quid pro quo contributions exceeding $75, in addition to the requirements discussed above, the taxpayer must also obtain a statement from the charity that contains a good-faith estimate of the value of goods and services provided and a statement that the contribution is deductible only to the extent the payment exceeds the value of those goods and services.
Kunkel v. Commissioner Decision
In 2011, Kenneth and Susan Kunkel (the “Taxpayers”) claimed a charitable deduction of $42,455 for cash contributions and contributions of other property to four separate charities. The Taxpayers donated to their church books valued at $8,000, household items valued at $1,303, clothing valued at $1,000, toys valued at $822, telescopes valued at $800, jewelry valued at $780 and household furniture valued at $410. The Taxpayers did not produce any receipts or acknowledgements from the church for the donation of any of these items.
The Taxpayers also donated to three other charities: clothing valued at $2,680, household items valued at $350, and toys valued at $250, for a total value of $24,200. The Taxpayers similarly produced no documentary evidence concerning these donations, and had no recollection as to which items were donated to which charity.
The Internal Revenue Service disallowed the Taxpayers’ deduction for all of their claimed non-cash contributions totaling $37,315 as well as $300 of the Taxpayers’ cash contributions. The IRS also imposed an accuracy-related penalty equal to 20% of the underpayment of tax attributable to the disallowed deductions. Citing the rules described above, the Tax Court noted that although there was evidence the Taxpayers had in fact made charitable contributions, the Taxpayers had failed to maintain sufficient records. The court upheld the IRS’s disallowance of the deduction, as well as the 20% accuracy-related penalty for the resulting understatement of tax.
Although the Kunkel case does not represent any significant change in the law, the case illustrates the need to maintain adequate records of charitable contributions for which a deduction is claimed, and the consequences of the failure to do so (i.e., disallowance of deductions, increase in tax due, and imposition of civil penalties). With the April 15 filing deadline fast approaching, now is a good time to ensure that you have obtained adequate records for any contributions for which you intend to claim a deduction on your income tax return.