United States: Tax Season Alert: The IRS May Attempt To Disallow Your Charitable Deductions

As you compile your tax material for the preparation of your 2012 income tax returns, now is the perfect time to examine your files to ensure you have all required records to support your charitable contributions, particularly in light of a recent Tax Court decision.

In Durden v. Comr., T.C. Memo 2012-140, the Tax Court surprisingly sided with the IRS by strictly applying the requirement that a taxpayer must be in possession of a "contemporaneous written acknowledgment" of the contributions, along with a statement that no goods or services were received by the taxpayer from the charity, prior to filing the tax return claiming the donation.

This case involved taxpayers who made multiple contributions to their church in amounts greater than $250. The church provided a statement to the taxpayers acknowledging the contributions, but failed to mention in the statement whether any goods or services were provided in exchange for the contributions. Upon appeal, the Tax Court affirmed the IRS decision, noting that the law requires a timely affirmative statement that no goods or services were received by the taxpayers. This "contemporaneous" acknowledgement must be received prior to the filing of the tax return or the due date of the return (including extensions), whichever came first, the court declared. As a result, the taxpayers were denied an otherwise valid charitable contribution deduction of more than $25,000. The deduction could have been easily preserved if the statement they received from the charity simply included:

  • The amount of the cash contributions and a description; and
  • A good-faith estimate of the value and description of any goods or services provided to the donor in exchange for the contribution, even if the value was zero.

Although substantiation is required for all contributions, the requirements vary depending upon the type and value and are discussed below.

Cash Contributions

Contributions by cash or check of less than $250 must be substantiated by a bank record, such as a cancelled check or a written communication from the donee organization, noting the organization's name and address, and the date and amount of the contribution. A contribution log is insufficient.

Contributions of $250 or more must be substantiated with a bank record and acknowledgement from the donee organization. If the aggregate value of multiple contributions is greater than $250, but each separate contribution is less than $250, the written receipt requirements do not apply. For example, three separate donations of $100 each do not require a written acknowledgment if a written bank record or receipt exists.

The charitable acknowledgement must clearly provide:

  • the amount donated;
  • whether the organization provided any goods or services to the donor in return for the contribution;
  • a good faith estimate of the value of the goods or services, if any, received by the donor; and
  • the acknowledgement must be received by the due date of the return, including extensions, or the date the tax return is filed, whichever is earlier.

If goods or services are received, such as a dinner or theater tickets, in return for contributions, the deduction is limited to the excess of the contribution over the value of what was received.

Contributions through payroll deductions can be substantiated with a pay stub, Form W-2 or other document issued by your employer that reports the amount withheld for payment to a charity. For a single contribution of $250 or more, documentation with a pledge card or other document prepared by the charity including a statement that it does not provide goods or services in return for contributions made by payroll deduction is acceptable. The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold.

Non-Cash Contributions

Taxpayers who contribute property other than cash have to maintain a receipt from the donee organization that clearly discloses the organization's name, date and location, as well as a detailed description of the property. If a receipt cannot be obtained, a reliable written record of the contribution is required. The information required in such a record depends on factors, such as the type and value of property contributed.

If you contribute publicly (as well as non-publicly) traded stock, it may be prudent to maintain written records and an acknowledgement of the contribution. If artwork is contributed, similar rules apply, with a qualified appraisal requirement if the art is valued at more than $20,000. If you contribute an auto, boat or plane, a Form 1098-C must be obtained, and written records should be maintained. All other non-cash donations must be supported by a receipt or acknowledgement, as well as written records. Taxpayers anticipating claiming these types of contribution deductions may want to consult with a qualified tax professional, as the rules are complex.

Contributions of Services

While the value of services contributed is not deductible, some deductions are permitted for out-of-pocket costs incurred while performing services for a charitable organization. Be sure to record the dates and amounts of the expenses incurred, the type and date of services performed and the organization for whom the services were rendered. Also, you should maintain receipts, canceled checks and other reliable written records relating to the services and expenses.

Because written receipts are required for contributions of $250 or more, the written receipt requirement will be satisfied if adequate records are maintained to substantiate the amount of out-of-pocket expenditures, along with a statement from the charity containing a description of the services provided; the date the services were provided; a statement of whether the organization provided any goods or services in return; and a description and good-faith estimate of the value of those goods or services.

The substantiation requirements for charitable donations can be confusing, therefore consultation with a qualified tax professional may be warranted if there is any uncertainty regarding what documentation to obtain and maintain. As the IRS is becoming increasingly aggressive in denying contribution deductions, it is important to collect the necessary documents now, prior to filing your tax return claiming the deduction—as opposed to a year or two down the road—in the event of an audit, when the substantiation may be more challenging to unearth or not be acceptable by the IRS or courts.

If you have any questions regarding this Alert, or for further information, please contact Steven M. Packer, Manager in the Tax Accounting Group, or the practitioner with whom you are regularly in contact.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.

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