Key point. Charitable contribution deductions are subject to a variety of substantiation requirements depending on the type and amount of a contribution. Failure to comply with these requirements can result in loss of a deduction.
The United States Tax Court ruled that a married couple was not entitled to a charitable contribution deduction for scholarships they made to three students using funds from a memorial account they established in the name of their deceased son. In 2006, a married couple received $75,000 in life insurance proceeds from the death of their son. That same year, the couple used the life insurance proceeds to establish a scholarship fund in honor of their son. The scholarship fund was structured as an irrevocable trust. The trust agreement states that income from the trust is to be used exclusively for educational purposes. The trust is irrevocable, although the couple reserved the right to amend the trust so long as all funds would be distributed to students solely for educational purposes. The trust did not apply to the Internal Revenue Service (IRS) for tax-exempt status as a charitable organization.
During 2008, the trust made payments of $2,000 each to three high school students. Each payment was by check directly to the student. The money for the three payments came from the trust's investment income, and the checks were written on an account owned solely in the name of the trust.
In filing their 2008 Form 1040, U.S. Individual Income Tax Return, the couple did not include the investment income from the trust in their gross income; however, they claimed the $6,000 of payments as a charitable contribution deduction. In 2012, the IRS audited the couples' 2008 tax return and denied the $6,000 charitable contribution deduction. The couple appealed to the Tax Court.
The Tax Court concluded that the couple was not entitled to a charitable contribution deduction for "multiple reasons." These included:
First, the trust's payments "do not qualify as charitable contributions." The court noted that "section 170(c) of the tax code lays out specific rules for who must be the recipient of a contribution or gift in order for the payment to qualify as a charitable contribution deduction. Here, the trust paid the money directly to the students, and the students do not fall into any of the recipient categories under section 170(c)."
Second, the couple "did not produce any evidence of a contemporaneous written acknowledgment of the charitable contribution. The closest thing to a contemporaneous written acknowledgment was the list of charitable contributions that they attached to their [tax return] which showed three $2,000 contributions. That document does not show the dates of the contributions or any of the other information required to comply with the more stringent substantiation requirements for contributions over $250."
What This Means For Churches:
Memorial scholarship funds are often established by the relatives of a deceased family member. This case demonstrates that these arrangements often fail to comply with the requirements for a charitable contribution, and therefore distributions from the fund may not be deductible. Kalapodis v. Commissioner, T.C. Memo. 2014-205.