Donors must comply with specific substantiation requirements in order to claim a charitable contribution deduction on their tax return. Special rules apply to any contribution of cash or property valued by the donor at $250 or more. Failure to comply with these requirements may result in a loss of a tax deduction. It is important for church treasurers to be familiar with these requirements, since they generally are responsible for the issuance of contribution statements and receipts. A recent Tax Court case illustrates the importance of compliance with these rules.
A donor made a cash contribution of $25,000 to a religious organization. The IRS audited the donor's tax return and denied the charitable contribution deduction on the ground that it was not properly substantiated. The donor appealed to the United States Tax Court.
The Tax Court's ruling
The Tax Court agreed with the IRS that the charitable contribution was not tax-deductible:
Because the amount of the alleged contribution exceeds $250, it must be evidenced by a contemporary written acknowledgment in order to be deductible. As evidence of his alleged contribution [the donor] provided a self-generated letter signed by himself. The letter states that the amount of cash contributed was $25,000, but it does not include any of the other required information. In particular, the letter is silent as to whether the donor received any goods or services in exchange for the cash. Both the Code and the regulations provide that such information is a necessary element of the contemporary written acknowledgment. Because he failed to provide a contemporary written acknowledgment of his contribution, we find that he is not entitled to deduct any amount for contribution.
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 that fail to provide donors with a proper acknowledgment are jeopardizing the deductibility of donors' contributions.
Both the IRS and the Tax Court stressed that whether or not the donor actually made the donation was irrelevant. Even assuming that he did make the $25,000 contribution, he was not entitled to a charitable contribution deduction because he 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.
Longino v. C.I.R., T.C. Memo. 2013-80 (2013)