Another couple discovered that the documentation rules for charitable contributions are very strict in the case of Haag v. Commissioner, TC Summary Opinion 2016-29. This case dealt with both cash and noncash contributions, along with other deduction items the IRS disputed. But our key matter of interest will be for the charitable contributions, since the strict documentation rules are very difficult for taxpayers to comply with, but the Courts feel compelled to enforce those rules since Congress passed them.
The issue involved both cash and noncash contributions. The cash contributions related to the standard situation clients often assert in making a certain amount of weekly contributions to a church. Though we are not told so in this case, quite often the taxpayer will claim they put cash into an offering plate.
In this case the Court described the donations and claimed deductions as follows:
Petitioners attended and made donations to separate churches in 2012. Petitioners testified that they each donated approximately $20 per week at their respective churches in 2012. Petitioners did not provide any documentation to substantiate their cash contributions.
The Tax Court notes the provisions regarding documenting charitable contributions, stating:
Charitable contributions are deductible only if verified in accordance with regulations prescribed by the Secretary. Sec. 170(a)(1); see Van Dusen v. Commissioner, 136 T.C. 515, 530 (2011). No deduction for a contribution of cash, a check, or a monetary gift in any amount is allowed unless the donor maintains a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Sec. 170(f)(17).
Of course in this case the taxpayers did not maintain such documentation nor did they have a written communication from the charity acknowledging the contributions. As the Court notes, this is fatal to the deduction:
Petitioners claimed a deduction of $2,000 for cash donations made to their respective churches. Petitioners did not produce a written acknowledgment of the contributions from either church, nor did they produce any other records to substantiate the amounts and dates of their reported cash contributions. In the absence of additional corroborating evidence supporting petitioners’ trial testimony, respondent’s determination disallowing a deduction for cash contributions is sustained.
The taxpayer’s claimed noncash contributions are described by the Court as follows:
During the early months of 2012 Ms. Haag moved out of the couple’s home. She testified that she made two sizable donations of various household items to the Salvation Army, including clothing, furniture, and kitchenware.
...Petitioners attached Form 8283, Noncash Charitable Contributions, to their tax return and reported donations of various items to the Salvation Army and a veterans charity. Petitioners reported that they used “Comparative sales” to determine the fair market value of the items they donated. On a supplemental schedule Ms. Haag assigned a value of $2,082 to donated clothing and $1,087 to donated furniture and kitchenware.
This also is not that unusual—taxpayers tend to make large noncash contribution when moving, since it’s easier often to drop off unneeded items at a charity than haul it all to the new home and unpack it.
But the applicable documentation rules for these contributions are more involved than those that were involved for the cash church contributions. First, there is the issue the claimed deductions to each organization were more than $250, so the Court pointed out these issues would apply:
In the case of a charitable contribution deduction of $250 or more, section 170(f)(8)(A) provides that the taxpayer must obtain a contemporaneous written acknowledgment from the donee. Section 170(f)(8)(B) provides in relevant part that the contemporaneous written acknowledgment must include the amount of cash and a description of any property other than cash contributed, whether the donee organization provided any goods or services in consideration, in whole or in part, for any cash or property contributed, and, if so, a description and good-faith estimate of the value of any goods or services provided by the donee. See sec. 1.170A-13(b), (f), Income Tax Regs. Section 170(f)(8)(C) provides that a written acknowledgment is contemporaneous when the taxpayer obtains it on or before the earlier of (1) the date the taxpayer files a tax return for the year of contribution; or (2) the due date, including extensions, for filing that tax return.
Those rules would have applied had the single cash contributions to the church been $250 or more, but the $20 per week contribution would not have triggered these rules (though they still needed more than they had). But noncash contributions have additional requirements.
As the Court notes:
In addition to the written acknowledgment requirement, section 170(f)(11) and related regulations establish more detailed requirements for substantiation of contributions of property other than money. 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. subpara. (3); see Lattin v. Commissioner, T.C. Memo. 1995-233.
Similarly, the rules provide standards for what will be the deductible amount for a noncash contribution:
For noncash contributions, the value of the contribution generally is the fair market value of the property at the time of contribution. Hewitt v. Commissioner, 109 T.C. 258, 261 (1997), aff’d without published opinion, 166 F.3d 332 (4th Cir. 1998); sec. 1.170A-1(c)(1), Income Tax Regs. The fair market value of contributed property is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Sec. 1.170A-1(c)(2), Income Tax Regs.
In this case while the Court found that the taxpayers failed to meet those documentation tests, the IRS decided it could allow $250 for such deductions.
Petitioners failed to offer any contemporary written acknowledgments from the donee organizations stating whether they were provided any goods or services in return for the donations as required by section 170(f)(8)(A) or receipts or written records as required by section 170(f)(11) and the related regulations. Accordingly, we sustain respondent’s determination limiting petitioners’ deduction for noncash charitable contributions to $250.
Clients often balk at meeting these documentation requirements, instead continuing to claim they “put $20 in the offering plate each week” or responding with an inquiry about their charitable contributions with the statement that it’s “about what I gave last year” with no documentation.
As should be clear, that simply isn’t going to work when the taxpayer’s position is challenging. While the rules may be absurdly strict, reality is that Congress wrote them into the law and those rules are being enforced by the IRS and the Courts.