Durden v. Commissioner, TC Memo. 2012-140 (2012)
Donors must comply with specific substantiation requirements in order to claim charitable contribution deductions on their tax returns. 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 ruling illustrates the importance of compliance with these rules.
A married couple (the “taxpayers”) timely filed their 2007 income tax return. On Schedule A they claimed a deduction of $25,171 for charitable contributions made by cash or check. Most of the contributions were made by check to their church. Except for five checks totaling $317, the checks were for amounts larger than $250.
In 2009 the IRS sent a notice to the taxpayers disallowing their charitable contribution deduction for 2007. In response, the taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church which acknowledged contributions from them during 2007 totaling $22,517 (the “first letter”). The IRS did not accept the first letter and informed the taxpayers that it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.
The taxpayers obtained a second letter from the church (the “second letter”) that contained the same information found in the first letter as well as a statement that no goods or services were provided to them in exchange for their contributions.
The IRS concluded that the taxpayers were not entitled to a deduction for the charitable contributions of $250 or more made to their church during 2007 because neither the first nor the second letter from the church satisfied the requirements of section 170(f)(8) of the tax code, which lists the following substantiation requirements for individual contributions of $250 or more:
(A) No deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the [charity] that meets the requirements of subparagraph (B).
(B) An acknowledgement meets the requirements of this subparagraph if it includes the following information:
- The amount of cash and a description (but not value) of any property other than cash contributed.
- Whether the [charity] provided any goods or services in consideration, in whole or in part, for any property described in clause (i).
- A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction [e.g., worship services, teaching, and sacraments].
(C) An acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of (i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii) the due date (including extensions) for filing such return.
KEY POINT. The income tax regulations clarify that separate contributions of less than $250 are not subject to these additional requirements “regardless of whether the sum of the contributions made by the taxpayer to a charity during a taxable year equals $250 or more.”
The IRS claimed that the church’s first letter to the taxpayers failed because it did not include a statement regarding whether any goods or services were provided in consideration for their contribution and the second letter, which included the statement, was not contemporaneous.
The couple conceded that they had not strictly complied with the tax code’s substantiation requirements. But they insisted that they had substantially complied with the requirements and therefore were entitled to deduct their contributions.
The court’s ruling. The Tax Court agreed with the IRS that the couple’s contributions of $250 or more were not deductible.
Failure to indicate no goods or services were provided
As noted above, the tax code requires that, for any contribution of $250 or more, a charity’s written acknowledgment must state whether it provided any goods or services in consideration for the contribution, and, if so, a description and good faith estimate of the value of any goods or services that it provided or, if such goods or services consist solely of intangible religious benefits, a statement to that effect.
The taxpayers claimed that the omission of a statement regarding goods or services in the church’s first letter was sufficient to indicate that no goods or services were provided in consideration for their contributions. The court disagreed:
The express terms of the statute require an affirmative statement. In addition, the legislative history of section 170 confirms [that] “if the donee organization provided no goods or services to the taxpayer in consideration of the taxpayer’s contribution, the written substantiation is required to include a statement to that effect.” H.R. Conf. Rept. No. 103-213, at 565 n.30 (1993), 1993-3 C.B. 393, 443.
The court also rejected the taxpayers’ argument that the IRS should have considered information beyond the information found in the church’s letters to determine whether they received any goods or services as consideration for their donations. It observed: “Nothing in the statute or legislative history requires the IRS to look beyond the written acknowledgment when on its face the acknowledgment fails to provide the information required to substantiate a charitable contribution deduction.”
The court agreed with the IRS that the church’s second letter—the one that included the required statement that no goods or services were provided to the donors in consideration of their contribution—did not meet the tax code’s “contemporaneous” requirement. That’s because it was issued after the earlier of the dates 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 a return.
The court rejected the taxpayers’ argument that they should be allowed to deduct their donations to their church since they had “substantially complied” with the tax code’s substantiation requirements.
The court concluded that the taxpayers had not complied with the “essential purpose” of the law, which is clearly stated in section 170(f)(8) to include both the contemporaneous requirement and the requirement that the charity’s written acknowledgement indicate whether any goods or services were provided in consideration of the contribution. It concluded:
The essential statutory purpose of the contemporaneous written acknowledgment…is to assist taxpayers in determining the deductible amounts of their charitable contributions and to assist the Internal Revenue Service in processing tax returns on which charitable contribution deductions are claimed …. The taxpayers contend that they have fulfilled the essential statutory purpose even though their written acknowledgment does not include a statement regarding whether goods or services were provided in consideration for the contributions, as required by [law]. We have previously held that the specific statement is necessary for the allowance of a charitable contribution deduction.
Application to church leaders. This case graphically illustrates the consequences of 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.
Tip. Many churches use computer-generated receipts that include the following statement: “No goods or services were provided in consideration of any individual contribution of $250 or more other than intangible religious benefits, unless otherwise noted.”
Churches that fail to provide donors with a proper acknowledgment are jeopardizing the deductibility of donors’ contributions.
IRS Publication 1771 contains the following examples of written acknowledgements that comply with the tax code. Each example was modified to apply to a church.
- “Thank you for your cash contribution of $300 that First Church received on December 12, 2011. No goods or services were provided in exchange for your contribution other than intangible religious benefits.”
- “Thank you for your cash contribution of $350 that First Church received on May 6, 2012. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.”
- “Thank you for your contribution of a used oak baby crib and matching dresser that First Church received on March 15, 2012. No goods or services were provided in exchange for your contribution other than intangible religious benefits.”
It should be noted that both the IRS and the Tax Court conceded that the couple made the donations in question. The problem was that they were unable to meet the stricter substantiation requirements that apply to contributions of $250 or more. When it comes to the substantiation of charitable contributions, it is form over substance.
Example. Bob donated $50 each week to his church in 2011. In addition, he made a $1,000 donation to the building fund, and a $1,000 donation to the missions fund. At the end of the year the church treasurer provided Bob with a receipt that itemized each of his contributions, but failed to state whether the church provided him with any goods or services in exchange for any of his contributions. Here is an example of the required written statement for cash contributions of $250 or more: “No goods or services were provided in exchange for your contributions, other than intangible religious benefits.” The defective receipt issued by the church is not sufficient to substantiate Bob’s contributions of $1,000 each to the building fund and missions fund.
Example. Same facts as the previous example. Assume that the IRS audits Bob’s tax return in 2012 and denies a deduction for the two $1,000 contributions. Is it too late for the church to issue a revised receipt for 2011 that includes the required language? Unfortunately, the answer is yes. The tax code requires written acknowledgments to be “contemporaneous.”
Example. Barb donated an item of jewelry to her church in 2011 and claimed a charitable contribution deduction on her tax return of $1,000. The church issued Barb an annual “contribution summary” for 2011 that listed all of her donations of cash and property for the year. The contribution summary contained the following statement: “No goods or services were provided in exchange for your contributions, other than intangible religious benefits.” It described the donated jewelry as “an item of jewelry.” This receipt may not be sufficient since it did not provide an adequate description of the donated property as required by section 170(f)(8) of the tax code (quoted above). In particular, the acknowledgement contained no information regarding the quality, age, or condition of the donated property that would enable the IRs to determine its value at the time of the donation. Also, note that donors who contribute items of noncash property valued at more than $500 (but not more than $5,000) must complete section A of Form 8283 and attach it to the tax return claiming the deduction. For contributions of noncash property valued at more than $5,000, additional substantiation requirements apply.
Tip. Be alert to any donation of 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. It is a good practice for churches to have some of these forms on hand to give to donors who make contributions of noncash property.
This article first appeared in Church Finance Today, August 2012.