In the case of Legaspi v. Commissioner, TC Summary Opinion 2015-14, the Tax Court denied deductions claimed by a taxpayer—but did so using a standard that raises questions about what many clients obtain to document their charitable contributions.
Mr. Legaspi had claimed a $4,230 deduction for noncash contributions. The detail of the contribution, as described in the opinion, is as follows:
Goodwill issued a receipt to petitioner, dated June 13, 2010, acknowledging that he donated six bags of clothing, one bag of shoes/accessories, and six pieces of furniture. The Goodwill receipt does not include a detailed description of the items petitioner donated or a statement whether he received anything of value in exchange for the items. At trial petitioner produced photographs of seven pieces of furniture he claimed to have donated--a three-piece bedroom set, an armoire, a console table, a CD rack, and a mirror. Each photograph included petitioner's handwritten notes listing the year the item was purchased, the original purchase price for the item, and the item's fair market value--an amount equal to one-third of the listed purchase price. Petitioner did not obtain an independent appraisal of the noncash items that he donated to Goodwill, but rather he assigned a value to each item himself.
The Court notes that in addition to complying with the standard documentation requirement for charitable deductions under §170(f)(8) for charitable contributions in excess of $250 (the need for an acknowledgement from the charity that indicates the taxpayer received nothing of value in exchange for the contribution or the value of what was received), noncash contributions have additional documentation requirements.
The Court outlines those requirements as follows:
For noncash contributions of $500 or less, the taxpayer must substantiate the contribution with a receipt from the donee indicating the donee's name, the date and location of the contribution, and "[a] description of the property in detail reasonably sufficient under the circumstances." Sec. 1.170A-13(b)(1), Income Tax Regs. For noncash contributions in excess of $500, the taxpayer normally must also maintain written records showing the manner in which the item was acquired, the approximate date of acquisition, and the cost or adjusted basis of the property. Id. para. (b)(3); see Lattin v. Commissioner, T.C. Memo. 1995-233.
Applying those rules to the Goodwill receipt described above, the Court found the receipt, along with the other information Mr. Legaspi provided, failed to meet this test:
Goodwill issued a receipt to petitioner acknowledging that he donated clothing, shoes/accessories, and furniture in June 2010. The receipt does not include a statement whether Goodwill provided any goods or services in consideration, in whole or in part, for the property that petitioner contributed, and the receipt does not include a detailed description of the donated items. Under the circumstances, petitioner has failed to meet the substantiation requirements for contributions of $250 or more prescribed in section 170(f)(8), and, therefore, we sustain respondent's determination that he is not entitled to a deduction for the noncash charitable contributions claimed on his return.
Obviously Mr. Legaspi had claimed an amount for his deduction just below the level requiring an appraisal. The Court also had Mr. Legaspi’s pictures of the furniture and his notes on value. It’s very possible the Court was skeptical of the claimed values given the evidence in front of it, but that by using a standard of “you failed to obtain a proper receipt” it avoided having to raise that issue.
Nevertheless the rules cited by the Court as justification for denying the deduction would appear to justify throwing out a number of noncash contributions far below this level. For instance, the lack of a statement regarding the issue of whether the taxpayer had received something in exchange for the contribution is concerning considering the receipt came from a well known charity that is effectively in the business of receiving noncash contributions—under this standard everyone who claimed more than $250 for a noncash contribution relying on this type of receipt from the charity would not be allowed a deduction.
Similarly, the Court seems to imply that something more than simply a list of articles given by the taxpayer is required to document the donation and the Court was certainly critical of the taxpayer valuing the property on his own, virtually suggesting that the lack of an appraisal was a problem with the contribution.
Most likely this is a case of “bad facts” leading to the Court simply finding the simplest way to deny a deduction—but the logic of the case is, to put it simply, troubling though perhaps not surprising. The charitable contribution documentation requirements are very strict and are found in the IRC itself.
For instance, the Tax Court noted the basic unfairness of these rules that Congress wrote into the law in the case of Durden v. Commissioner, TC Memo 2012-140, where the lack of those magic words (no goods or services were provided in exchange for the contribution) on a charitable contribution receipt obtained before the return was filed caused the taxpayer to lose a contribution of over $20,000. That was true even though the Court found that Mr. Durden had actually made the contribution, it was made with true charitable intent, he had received nothing of value and obtained a revised acknowledgement from the charity confirming he had received nothing of value during the exam.
So advisers must be aware that the Courts will back up what appear to the client to be “absurd” requirements to obtain a charitable contribution. The good news is that Legaspi is a summary opinion and thus, officially, not precedent. The Court’s complaints about Mr. Legaspi not having obtained an appraisal seem to be a bit of an aberration, since the Code does not mandate having an appraisal until the numbers exceed $5,000. So this preference of the Court is clearly not a “hard and fast” rule and more likely reflects the fact that, in this case, the Court simply didn’t believe the taxpayer.
The bad news is that there does not appear to be any real flaw in the Court logic in denying the deduction based on the plain language of the IRC for the lack of that acknowledgment (just ask Mr. Durden, whose case is not stuck with the “not precedential” tag). Thus, the case serves as a reminder that advisers need to remind clients that they need to make sure that they have receipts that contain such an acknowledgment for any donation (cash or noncash) that is $250 or more—and that such acknowledgment needs to be in the taxpayer’s hands before the return is filed (that is, as Mr. Durden found, you cannot go back to the charity once the IRS shows up to obtain that document).