Key point. Charitable contribution deductions for contributions of noncash property are subject to various substantiation requirements. Failure to comply with these requirements can result in a loss of any deduction, even if there is no doubt that a contribution was made.
The United States Tax Court upheld the IRS's denial of a $65 million charitable contribution deduction because the written acknowledgment issued by the donee charity was not "contemporaneous" as required by the tax code.
On its 2007 tax return, a partnership claimed a charitable contribution deduction of $65 million. In order to substantiate a charitable contribution deduction of $250 or more, a taxpayer must secure and maintain in its files a "contemporaneous written acknowledgment" (CWA) from the donee organization. IRC 170(f)(8)(A). The CWA must state (among other things) whether the donee provided the donor with any goods or services in exchange for the gift. IRC 170(f)(8)(B)(ii).
The IRS audited the partnership's tax return and disallowed the charitable contribution deduction in its entirety. The donee organization thereafter submitted an amended return that included the information specified in subparagraph (B), including whether the donee provided the donor with any goods or services in exchange for the gift. The partnership appealed to the United States Tax Court. The partnership asked the court to dismiss the case on the ground that the substantiation requirements had been met. The court declined to do so.
The court began its opinion by stressing that "the requirement that a CWA be obtained for charitable contributions of $250 or more is a strict one. In the absence of a CWA meeting the statute's demands, no deduction shall be allowed." If a taxpayer fails to meet the strict substantiation requirements of section 170(f)(8), "the entire deduction is disallowed."
Further, the doctrine of "substantial compliance" does not apply to the failure to obtain a CWA meeting the statutory requirements. In other words, a taxpayer's substantial compliance with the tax code's substantiation requirements is no defense to noncompliance. The court explained:
Section 170(f)(8)(B) [of the tax code] provides that a CWA must include the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii)… .
An acknowledgment qualifies as "contemporaneous" only if the donee provides it to the taxpayer on or before the earlier of "the date on which the taxpayer files a return for the taxable year in which the contribution was made" or "the due date (including extensions) for filing such return."
The court concluded that the partnership failed to comply with the tax code's requirement of a CWA, despite its attempt to rectify the mistake by filing an updated form after the deadline had expired.
What this means for churches
This case illustrates the consequences that can result from a church's failure to comply with the substantiation requirements for charitable contributions. Those requirements are stricter for contributions of $250 or more, and, as this case demonstrates, require the written acknowledgment (receipt) provided by a charity to donors to be contemporaneous and include a statement indicating whether the charity provided goods or services to the donor in consideration of the contribution. If goods or services were provided, the church's written acknowledgment must provide a description and good faith estimate of the value of those goods or services, or, if only intangible religious benefits were provided, a statement to that effect.
Churches failing to provide donors with a proper acknowledgment jeopardize the deductibility of donors' contributions. In this case, that meant the loss of a $65 million contribution deduction.
Both the IRS and the Tax Court stressed that whether or not the donor actually made the donation was irrelevant. Even assuming that the donor made the $65 million contribution, it was not entitled to a charitable contribution deduction because it was unable to meet the strict substantiation requirements that apply to contributions of $250 or more. When it comes to the substantiation of charitable contributions, it is form over substance. And, "substantial compliance" with the law is no excuse or defense. 15 West 17th Street LLC v. Commissioner, 147 T.C. 19 (2016).
Tip. To avoid jeopardizing the tax deductibility of charitable contributions, churches should advise donors at the end of 2017 not to file their 2017 income tax returns until they have received a written acknowledgment of their contributions. This communication should be in writing. To illustrate, the following statement could be placed in the church bulletin or newsletter for the last few weeks of 2017 or included in a letter to members: "IMPORTANT NOTICE: To ensure the deductibility of your church contributions made this year, please do not file your 2017 income tax return until you have received a written acknowledgment of your contributions from the church. You may lose a deduction for some contributions if you file your tax return before receiving a written acknowledgment of your contributions from the church."
Tip. Be alert to any donation of noncash property that may be valued by the donor at more than $500. Be sure the donor is aware of the need to complete Section A of Form 8283 for donations of property valued at more than $500 but not more than $5,000, and Section B of Form 8283 for donations of property (other than publicly traded stock) valued at more than $5,000. The instructions to Form 8283 contain a helpful summary of the substantiation requirements that apply to these kinds of gifts. Different rules apply to donations of vehicles. Failure to comply with these rules may lead to a loss of a deduction. Churches should have these forms on hand to give to donors who make contributions of noncash property.