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
- 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
- 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
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