March 16, 2016
While we’re not even three full months into 2016, the United States Tax Court already has decided two cases, which disallowed tax deductions for donors based on a tax exempt entity’s failure to properly substantiate those donations.
Although the charities themselves were not directly affected by these rulings, these cases demonstrate the need to provide donors with the proper documentation in order to comply with the IRS' rules regarding substantiation. Pro. As detailed at length in Burnie Maybank’s book South Carolina Nonprofit Corporate Practice Manual:
The federal tax laws have substantiation and disclosure requirements for tax-deductible charitable contributions. Charities, including churches, receiving tax-deductible charitable donations need to be aware of … general rules to meet substantiation and disclosure requirements for federal income tax return reporting purposes:
1. A charitable organization is responsible for providing to the donor a written acknowledgement for any single contribution of $250 or more before the donor can claim a charitable contribution on his federal income tax return.
Order the manual here.
In Garcia v. Commissioner, T.C. Memo 2016-21, the Tax Court reviewed a number of charitable contributions made by a husband and wife, which were disallowed by the IRS. While the Court mentioned the donor’s duty to keep “’reliable written records’ such as canceled checks or receipts,” the Court denied a number of deductions because the taxpayers failed to obtain either a contemporaneous written acknowledgment from the donee for gifts over $250 or a qualified appraisal for gifts of property over $500.
Most notably, the Court concluded the IRS properly disallowed a $3,560 deduction for clothing, even though the charity eventually (four years later) provided a letter substantiating the gift.
More recently, in Brown v. Commissioner, T.C. Memo 2016-39, the Tax Court denied a deduction of cash contributions made by a pastor to his own church. While the pastor and his wife contended that their charitable contributions were all made in cash, the court noted that the church "did not produce any receipts purporting to acknowledge cash contributions until after the [IRS'] pretrial memorandum was filed.”
Despite attempts by the taxpayers to introduce testimony and receipts at trial in an attempt to substantiate the cash contributions, the Court concluded they were not contemporaneous records.
These cases demonstrate that if charities wish to receive repeat donations, they need to properly and timely provide substantiation of gifts received by donors, pursuant to Section 170(f) of the Internal Revenue Code. For more information, please review this PowerPoint Presentation, which addresses the substantiation and quid pro quo issues in greater depth.
Jim Rourke is an associate with Nexsen Pruet's Tax Group in Columbia. After earning his undergraduate degree from Harvard and a World Series ring as a staffer with the Boston Red Sox, he earned his law degree from the University of South Carolina and his LL.M. from New York University.