At the end of the year I do a roundup of the year’s most unfair tax decisions. The case of David Durden will be number 2. To be clear, I do not think the Tax Court is wrong, just that the result is unfair. The substantiation requirements for charitable contributions are strict. How strict ? Stricter than you probably thought. You must get a contemporaneous written acknowledgment from the donee for donations over $250. The acknowledgment needs to detail the value of any goods or services you received in exchange for the donation or explicitly state that you received none (Intangible religous benefits do not count. – But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal.)
I can illustrate the need for this strictness by a story, perhaps apocryphal, that was passed around our office many years ago. It is impolite to look at what other people are dropping in the collection plate, but if you have ever been charged with counting or even just observed in passing, you would realize that most people think George Washington is the holiest president. In Catholic churches in the 1960’s, it was a little different. Pictures of George on a green background showed up rarely, but his image on a metal disk appeared a good bit. Franklin Roosevelt was probably the holiest president back then. My grandmother certainly thought so, but that’s another story. In that context, we tell the story of Joe’s Luncheonette, St. Brigid’s and Father Mulcahey, all names I just made up.
Joe’s Luncheonette, which also did a booming business in candy bars and newspapers, was across the street from St. Brigid’s. One Monday morning, Joe observed Father Mulcahy carrying an obviously heavy bag. Father Mulcahy was on the way to the bank, as Joe well knew. Joe invited the priest inside for a cup of coffee and offered a suggestion that would be mutually beneficial. Instead of schlepping all those coins to the bank each Monday, why didn’t Father Mulcahy instruct the ushers to bring the “take” from each of the six Sunday Masses over to Joe’s. After the 12 O’Clock Mass, the good Father could come over and Joe would give him a check. It would be a great help to Joe since he often ran out of change on Sunday. It was a great misfortune to Joe that he drew an IRS auditor, who decided to look beyond the cancelled checks supporting Joe’s large charitable contributions to Saint Brigid’s and go interview Father Mulcahy about his extremely generous parishioner.
So the tightening of the substantiation requirements is justified, but as the case of David Durden shows, they may have gotten overly tight.
On April 13, 2009, respondent sent a notice of deficiency disallowing petitioners’ claimed charitable contribution deductions for 2007. In response, petitioners produced records of their contributions, including copies of canceled checks and a letter from NCC dated January 10, 2008, which acknowledged contributions from them during 2007 totaling $22,517 (first acknowledgment). Respondent did not accept the first acknowledgment and informed petitioners that it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.
Petitioners obtained a letter from NCC dated June 21, 2009 (second acknowledgment), that contained the same information found in the first acknowledgment as well as a statement that no goods or services were provided to them in exchange for their contributions.
That seems to be pretty good substantiation, but it is not good enough. The first acknowledgment did not have the proper language. The second acknowledgment was not contemporaneous. No deduction allowed by the IRS and the Tax Court agreed.
In deciding this matter, we focus on whether petitioners’ first acknowledgment, which the parties agree was contemporaneous, complied with the substantiation requirements of section 170(f)(8)(B). The second acknowledgment was not contemporaneous, and we do not consider it. See sec. 170(f)(8)(C).
Church Treasurers Take Note – This Could Happen to You
It is not just churches, of course, many small NFPs make this error. They send out an acknowledgement, often an effusive letter of thanks, personally signed by the executive director that does not have the goods and services language. I’m always a little embarrassed when I have to call them up and tell them that their letter did not meet the requirements, but I realize that I am doing them a favor. If their major donors have their deductions disallowed it will not be pretty. If you are involved in a not-for-profit board, it would be a good thing for you to check that there is compliance in this area. Based on this case, the IRS is being very hard-nosed about it.
Thanks To Lu Gauthier
I get most of my material by reading original source material. I don’t know how I let this one pass me by. Must be spring fever. I picked it up from the Boston Tax Institute’s Boston Tax Institute provides the best CPE value around. Lu has a great faculty, including himself. He added this suggestion to practitioners:
Instead of merely asking your clients who donate $250 or more to charity if they have received a contemporaneous written acknowledgment from the charity, you may want to request to see a copy of the letter in order to ascertain that it says that no goods or services were provided in consideration for the contribution! This is now my standard operating procedure for all individual and S corporation clients.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on June 11, 2012