Substantiating Cash Contributions of $250 or More

Written requirements for significant contributions.

Background. A registered nurse worked for several employers in different cities. She claimed a $17,000 deduction on her federal tax return for charitable contributions, which she reported on line 15 of Schedule A (“gifts by cash or check”). Next to the $17,000 amount she wrote “church tithes different churches—cash each Sunday.” The IRS audited the taxpayer’s tax return, and denied a deduction for the entire $17,000. The taxpayer appealed to the Tax Court.

The Court’s ruling. The Court noted that the taxpayer did not attempt to explain how she arrived at the $17,000 amount she claimed for charitable contributions. She testified that she attended “any kind of [her denomination’s] churches that I could find [and contributed] 10 percent of what I earned that week.” She also testified that she donated $1,000 to a charity that failed to provide her with a written acknowledgment of the contribution. The Court denied a deduction for this $1,000 contribution since the taxpayer did not receive a written acknowledgment. Federal law specifies that taxpayers can claim a deduction for a contribution of $250 or more only if they have an acknowledgment of their contribution from the charity.

The written acknowledgment a charity issues to a donor (for individual contributions of $250 or more) must meet these three tests:

(1) It must be written.

(2) It must include: (a) The amount of cash that was contributed; (b) whether the charity provided the donor with any goods or services as a result of the contribution (other than intangible religious benefits or certain token items); (c) a description and good faith estimate of the value of any goods or services provided to the donor (other than intangible religious benefits); and (d) a statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit. An intangible religious benefit is a benefit provided by a church that generally is not sold in commercial transactions. Examples include worship services, baptisms, communion, funerals, and similar rituals and ceremonies.

(3) The donor must receive the acknowledgment on or before the earlier of: (a) the date the donor files his or her federal tax return for the year of the contribution; or (b) the due date, including extensions, for filing the return.

Tip. Donors who make more than one contribution of $250 or more must have either a separate acknowledgment for each contribution or one acknowledgment that lists each contribution and the date of each contribution and shows the total contributions. In figuring whether a contribution is $250 or more, do not combine separate contributions. For example, if Don gives his church $25 each week, his weekly payments do not have to be combined. Each payment is a separate contribution.

The Court concluded that “even if we were persuaded that the taxpayer did make the $1,000 contribution and all the other requirements for a deduction had been met, the statute would prohibit allowance of a deduction for this asserted $1,000 contribution” since the charity failed to comply with the written acknowledgment requirement.

When the IRS pressed the taxpayer on the remaining $16,000 she allegedly donated to various churches, and noted that this was more than 20 percent of her gross income and would have required her to donate more than $300 a week, she testified that “I go to various churches. I don’t walk around with $300 in my pocket, but I know when I am leaving work on Saturday night I will stop at whatever church before I go home to sleep, and if it is $100, yes, I will take that along with me.” She added, “This isn’t a guess or an estimate. If I go back home and think about things, or whatever, I will probably be able to come up with why it is $17,000.”

The Court concluded that the taxpayer’s testimony “was focused on plausibility and not reality.” It ruled that she was not entitled to any charitable contribution deduction.

The IRS imposed a penalty in the amount of 20 percent of the taxpayer’s total tax liability as a result of her understatement of income tax. Section 6662 of the tax code empowers the IRS to assess the 20-percent penalty if an understatement of tax is more than the greater of $5,000 or 10 percent of the amount required to be shown on the tax return. The Court affirmed the imposition of this tax, since the taxpayer had understated her tax liability by more than $5,000. Woodard v. Commissioner, T.C. Summary Opinion 2008-45.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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