Substantiation is a Requirement to Deduct a Charitable Contribution

Richard Sills is a Partner in our Washington, D.C. office

Donors must receive acknowledgment letters from charitable organizations in order to deduct contributions of $250 or more. See IRS Publication 1771.

Organized charities typically provide prompt written acknowledgments of donors' contributions. It is good donor relations to do so. But what happens when a taxpayer sits down at his kitchen table in December to write a big check to his own private foundation, of which he is President? The foundation deposits the check in its account. Does the taxpayer then write a thank-you letter to himself, on behalf of his foundation? Under the law, he must, in order to deduct his contribution.

Code section 170(f)(8) provides that no deduction is allowed for any contribution of $250 or more, unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization. The cancelled check and the proof of deposit into the charity's bank account will not be sufficient. IRS and the courts have construed this requirement strictly.

"Contemporaneous" means the acknowledgment must be provided to the donor by the earlier of (a) the date on which the donor files a tax return for the year in which the contribution was made, or (b) the due date (including extensions) for filing such return. For individual donors, the due date of their tax returns (absent an extension) is typically April 15, but some file earlier. Charities with numerous donors can't know when each donor will file his or her return, so they should send out their acknowledgment letters by the end of January or early February -- and typically, they do.

In the case of a private foundation with very few donors, the letter-writing itself is not a big task. The key is that the taxpayer needs to be aware of the need to send the letters.

Under the law, the acknowledgment must include the following information:

1. The amount of cash, and a description (but not necessarily the value) of any non-cash property contributed. (The letter should also indicate the date on which the contribution was made, especially if the letter is written after the end of the tax year in which the contribution was made.)
2. Whether the donee organization provided any goods or services in consideration, in whole or in part, for that contribution. If no goods or services were provided in exchange for the contribution, the letter must say so.
3. A description and good faith estimate of the value of any goods or services referred to in (2) above, or, if the goods or services consist solely of intangible religious benefits, a statement to that effect.

In the typical case of a cash gift, with no quid pro quo, the letter will acknowledge the amount of the contribution, the date on which it was made, and include a statement that no goods or services were provided in exchange for the contribution.

In any case involving a large non-cash gift, or other circumstances beyond the typical "plain vanilla" gift, the acknowledgment will be more detailed. For example, if any of the following facts is present, your client will require more specific advice with regard to the acknowledgment letter:

1. if the donor received some consideration back from the charity, the consideration must be described and a value assigned to it;
2. if the gift consists of tangible personal property, the amount of tax deduction may depend on whether the donee charity will use the gift in a manner that is directly related to its charitable purposes; or
3. if the gift is made to a donor advised fund, the acknowledgment must point out that the recipient sponsoring organization has exclusive legal control over the assets contributed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.