Gomez v. Commissioner, T.C. Memo. 2008-93
A couple claimed a charitable contribution deduction of $6,500 on their tax return for contributions they made to their church consisting of ten checks totaling $6,100 (each check was in excess of $250), and an additional eight checks totaling $400 (each check was for less than $250).
The IRS audited the couple’s tax return and asked them to substantiate their charitable contributions consisting of checks of $250 or more. The couple produced a letter from their church stating that they had made contributions of $6,500 to the church for the year in question. The IRS concluded that this letter failed to substantiate any contribution of $250 or more for two reasons: First, it was not contemporaneous, meaning the letter was not received in the same period of time that the contribution was made, and second, it failed to state whether the church had provided any goods or services in exchange for the contributions, as required by the tax code. The couple appealed to the Tax Court.
The court’s ruling. The Tax Court agreed with the IRS that the couple’s contributions of $250 or more were not deductible. The court noted that section 170(f)(8) of the tax code imposes special 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.
i. The amount of cash and a description (but not value) of any property other than cash contributed.
ii. Whether the [charity] 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) 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 court concluded that the couple failed to meet two of these substantiation requirements with respect to their individual checks of $250 or more:
The court concluded that the letter the church sent to the couple (acknowledging contributions of $6,500) was not contemporaneous because the couple did not receive it by the latter of the date they filed their tax return or the due date of their return. Rather, the church did not issue the letter to the couple until two years later, on the day they had their hearing before the court.
Failure to indicate no goods or services were provided
As noted above, the tax code also requires that, for any contribution of $250 or more, the 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 court noted that the church’s letter did not satisfy this requirement:
The letter from [the church] does not meet the substantiation requirements set forth in the Internal Revenue Code and regulations. According to the Internal Revenue Code and regulations, the required acknowledgment of the charitable contribution not only must include the amount contributed, but also must state whether the charity provided any goods or services in consideration for the contributions and describe and set forth a good faith estimate of the value of those goods or services. (emphasis added)
Application to church leaders. This case graphically 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.
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 2008. 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 or not the church provided him with any goods or services in exchange for any of his contributions. Cash contributions of $250 or more must be substantiated by a written acknowledgment (receipt) from the charity that states whether or not any goods or services were provided to the donor in return for the contributions. If goods or services were provided, the church’s acknowledgment must provide a description and value of those goods or services, or, if only intangible religious benefits were provided, a statement to that effect. Here is an example of the required statement: “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 to the building fund and missions fund.
Example. Same facts as the previous example. Assume that the IRS audits Bob’s tax return in 2009 and denies a deduction for the two $1,000 contributions. Is it too late for the church to issue a revised receipt for 2008 that includes the required language? Unfortunately, the answer is yes. The tax code requires written acknowledgments to be “contemporaneous.” The IRS explains this requirement as follows: “For the written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of the date on which the donor actually files his or her individual federal income tax return for the year of the contribution, or the due date (including extensions) of the return.”
Example. Barb donated an item of jewelry to her church in 2008, and claimed a charitable contribution deduction on her tax return of $1,000. The church issued Barb an annual “contribution summary” for 2008 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, January 2009.