Edited and Posted by Harold Goedde CPA, CMA, Ph.D.

Written by Michael Koppel, Gray, Gray & Gray LLP in Westwood, Mass.

Charitable organizations frequently depend on donations from the public to pursue their mission, and, although there are many altruistic reasons people give, it is largely acknowledged that the federal tax deduction for charitable contributions is a significant incentive. Earlier this year, the Tax Court highlighted how an apparently slight oversight in documentation can upend the interdependent relationship between donee and donor.

Sec. 170 provides for the broad deductibility of charitable donations, subject to certain substantiation requirements. Earlier this year, these substantiation requirements were at the heart of the dispute [Durden, T.C. Memo. 2012-140].

General Substantiation Requirements

The substantiation requirements for monetary donations of less than $250 remain fairly informal under Sec. 170(f)(17). To substantiate a monetary contribution of less than $250 to a charitable organization, the donor should maintain a bank record of the contribution or written communication from the donee stating the name of the donee organization, as well as the date and dollar amount of the donation.

For donations of $250 or more, Sec. 170(f)(8) provides for more stringent substantiation requirements than those of Sec. 170(f)(17). The donor must obtain a contemporaneous written acknowledgment for cash donations of $250 or more, stating the amount of the contribution, whether the donee provided goods or services in consideration for the donation, in whole or in part, and a good-faith estimate of the value of any goods or services the organization provided. If goods or services received consist solely of intangible religious benefits, the contemporaneous documentation must contain a statement to that effect. See Secs. 170(f)(11) and 170(f)(12) for rules regarding the contribution of property.

The Durden Case

In Durden, the Tax Court’s literal interpretation of Sec. 170(f)(8) cost the taxpayers a charitable contribution deduction because of what might seem to be an inconsequential oversight.

In 2007, the Durdens claimed a charitable contribution deduction of $22,517 for cash contributions to their church. Most individual contributions exceeded $250. Upon questioning by the IRS, the Durdens produced a letter from their church acknowledging the contributions, as well as canceled checks supporting the amounts of the claimed deduction. The IRS declined to accept the acknowledgment on the grounds that it did not contain the required statement under Sec. 170(f)(8)(B) regarding whether goods or services were received in consideration for the contributions. The IRS disallowed the deduction.

The Durdens subsequently obtained a second written acknowledgment from their church with the required language, but the IRS disregarded it because it did not meet the contemporaneous written acknowledgment requirement of Sec. 170(f)(8)(C), which defines contemporaneous as the earlier of the date of filing or the extended due date, including extensions, of the return. The Tax Court also refused to consider the second acknowledgment, siding with the IRS that it did not satisfy Sec. 170(f)(8)(C). The court did, however, agree to consider whether the first acknowledgment met the substantiation requirements in Sec. 170(f)(8)(B) for allowing the deduction.

The Durdens conceded that they did not strictly conform to the statute, but they argued that substantial compliance should be sufficient to allow the deduction. They took the position that Sec. 170(f)(8)(B) contains a “safe harbor” test, rather than an exclusive requirement of acknowledgment. The Tax Court disagreed, pointing to the language of Sec. 170(f)(8)(A), which states that no deduction shall be allowed unless the provisions of Sec. 170(f)(8)(B) are met. Absent substantive language in the acknowledgment regarding goods or services received in consideration, the Tax Court held that the amount of the deduction cannot be known or calculated. Therefore, the court denied the deduction.

What Now?

Durden shows the lengths to which the IRS will go to enforce the substantive documentation requirements for charitable contribution deductions. Individuals claiming charitable contribution deductions should be mindful of the substantiation requirements of Sec. 170(f)(8) to avoid having a deduction denied over negligible omissions. In addition, charitable organizations relying on the goodwill and financial contributions of donors should pay particular attention to the requirements of Sec. 170(f)(8)(B), ensuring that documentation is provided in a timely manner and meets every requirement, no matter how trivial, to substantiate deductions for their donors.