Recent Court Decisions Highlight Need for Compliance with Substantiation Rules to Claim Income Tax Charitable Deduction

July 12, 2012

Individuals who itemize their deductions on their federal income tax return can claim a deduction for contributions to qualifying charities, but only if the contributions are properly substantiated. To correct a number of perceived abuses, the Pension Protection Act of 2006 imposed additional requirements regarding the documentation necessary in some cases to claim an income tax charitable deduction for a gift to charity. Armed with these enhanced rules, the IRS, which has also likely grown weary of valuation disputes with taxpayers in the charitable contribution area, has changed its tactics and has been using these rules to deny the taxpayer’s entire charitable deduction where the donor lacks the required substantiation, rather than contesting the valuation of the charitable gift to lower the deduction amount. In the last several years, the courts have been generally siding with the IRS in these cases and denying the taxpayers’ income tax charitable deductions in full. Based upon these trends, it is imperative that donors and their advisers take steps to ensure that a charitable gift is properly substantiated so that the donors obtain the full tax benefits associated with their gifts.

As the amount of the charitable contribution becomes larger, the substantiation rules become more and more demanding. For gifts under $250, a taxpayer needs to maintain a record of the contribution, such as a cancelled check, credit card record, or a written communication from the charity, showing the charity’s name, the date of the contribution, and the amount of the contribution. Under changes made by the Pension Protection Act of 2006, if the gift is cash (such as cash placed in the collection plate at church each week), the taxpayer’s written records will no longer suffice and the taxpayer must have a written communication from the charity as described previously.

For gifts of $250 or more, a taxpayer must maintain a contemporaneous written acknowledgment from the charity. The acknowledgment must include the amount of cash, a description of any property contributed, and a statement that no goods or services were provided in return for the contribution or a good faith estimate of the value of any goods or services that were provided. For the receipt to be contemporaneous, the taxpayer must obtain the receipt on or before the earlier of the date the taxpayer files the return for the year of the contribution, or the due date, including extensions, for filing that return. If the contribution is to a donor advised fund, the acknowledgment must also include a statement that the sponsoring organization of the donor advised fund has exclusive legal control over the assets contributed.

For contributions of property valued at more than $500 but not more than $5,000, the taxpayer must complete and file Section A of Form 8283 as part of the taxpayer’s federal income tax return for the year in which the contribution is made in addition to obtaining the written acknowledgment from the charity.

For contributions of property (other than cash or publicly traded securities) with a value of more than $5,000 (or $10,000 for nonpublicly traded stock), the taxpayer must obtain a qualified appraisal of the property from a qualified appraiser and complete the appraisal summary on Form 8283 (which requires a signature from the donee charity as well as the qualified appraiser). If the contributed property is valued at more than $500,000, the taxpayer must attach the qualified appraisal to the return for the year the taxpayer made the gift. Additional rules apply for gifts of façade easements and artwork with a value of $20,000 or more.

A qualified appraisal and qualified appraiser are now defined in Internal Revenue Code Section 170 and the Treasury regulations. These very specific requirements must all be met for the taxpayer to be entitled to an income tax charitable deduction for which a qualified appraisal is required.

In many recent cases, the IRS has successfully denied the charitable deduction because the taxpayer failed to obtain an appraisal that meets all the requirements to be a qualified appraisal or did not have a contemporaneous written acknowledgment meeting the requirements of the Internal Revenue Code. In each of the following decisions, the court agreed that the taxpayer had not met the substantiation requirements and disallowed the charitable deduction:

  • Friedman v. Commissioner, T.C. Memo 2010-45 – The appraisal failed to indicate the valuation method used or the basis for the appraised values and was not a qualified appraisal.
  • Scheidelman v. Commissioner, T.C. Memo 2010-151 – The taxpayers could not prove that the gift was not a quid pro quo and lacked a qualified appraisal.
  • Lord v. Commissioner, T.C. Memo 2010-196 – The appraisal failed to indicate the date of contribution, the date the appraisal was performed, or the fair market value of the property contributed on the date of contribution, and therefore was not a qualified appraisal.
  • Hendrix v. U.S., 106 AFTR 2d 2010-5373 (S.D. Ohio 2010) – The appraisal was not a qualified appraisal because it did not indicate the date of contribution, did not disclose the terms of an agreement between the taxpayer and the donee, did not include the qualifications of the appraiser, and did not state that the appraisal was prepared for income tax purposes. The taxpayers also failed to obtain a contemporaneous written receipt.
  • Gundanna v. Commissioner, 136 T.C. No. 8 (2011) – The taxpayers retained control over their gift, and therefore the contemporaneous written receipt was inaccurate in stating that no goods or services were provided for the donation.
  • Schrimsher v. Commissioner, T.C. Memo 2011-71 – The taxpayer failed to obtain a contemporaneous written receipt, and the Form 8283 omitted certain information and was not signed by any of the parties involved in the donation.
  • DiDonato v. Commissioner, T.C. Memo 2011-153 – The taxpayer did not obtain a contemporaneous written receipt and did not attach a fully signed copy of Form 8283 to their return. The court also expressed concerns over the validity of the appraisal.
  • Gaerttner v. Commissioner, T.C. Memo 2012-43 – The receipts from the charity failed to set forth the description of the property donated, the quantity of items, or the age, quality, or condition of those items, and therefore did not satisfy the substantiation requirements.
  • Durden v. Commissioner, T.C. Memo 2012-140 – The taxpayer’s initial and timely written receipt did not include a statement regarding whether goods or services were provided to the taxpayer in return for the contribution, and the taxpayer’s second receipt was not obtained contemporaneously.
  • Mohamed v. Commissioner, T.C. Memo 2012-152 – The appraisal was not a qualified appraisal because it was signed by the taxpayer, who was a real estate broker, but who did not qualify as a qualified appraiser because he was also the donor.
  • Rothman v. Commissioner, T.C. Memo 2012-163 – The appraisal did not indicate the specific basis for the valuation and did not contain a clear property description, the contribution date, the terms of the donor/donee agreement, or a statement that the appraisal was made for income tax purposes and was therefore not a qualified appraisal.

These decisions indicate that the courts and the IRS take the substantiation rules very seriously and will deny the taxpayer’s entire charitable deduction if the taxpayer does not comply with all the substantiation requirements. Because of the complexity of these rules, taxpayers should review these rules carefully for every charitable contribution and obtain the necessary documentation meeting the requirements of the tax laws to substantiate the taxpayer’s gift. The rules are clear and specific, and no taxpayer should be faced with the prospect of a full denial of an income tax charitable deduction in return for a legitimate charitable gift.

McGuireWoods LLP Nonprofit and Tax-Exempt Organizations Group

The lawyers in our nonprofit and tax-exempt organizations group provide advice and guidance on a variety of legal issues to enable charities and other nonprofits to operate more efficiently and effectively in the increasingly complicated, regulated, and competitive environment.

Fiduciary Advisory Services and Private Wealth Services

McGuireWoods’ Fiduciary Advisory Services and Private Wealth Services Teams stand ready to advise individuals, financial institutions, and other clients about planning, tax, and fiduciary matters. McGuireWoods’ Private Wealth Services Group has been ranked by Chambers, the international rating service for attorneys, as one of the top wealth management legal practices in the country for several years. Please click here for a full listing of our lawyers and their locations.

McGuireWoods Education Practice

Our education attorneys represent public and private colleges and universities. This representation includes statutory and regulatory compliance and investigation work relating to the Higher Education Act of 1965 and federal student aid programs. It also includes issues relating to NCAA investigations, faculty tenure, financing expansion, low-income housing, 501(c)(3) and other tax issues, student lending compliance and investigations, intellectual property, students and academics, housing, governance, endowment management, and construction.

Subscribe
Back to top