The Tax Professional s Guide to the Deductibility of Charitable Contributions and the Importance of Complying with Substantiation Rules

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1 National Society of Tax Professionals The Tax Professional s Guide to the Deductibility of Charitable Contributions and the Importance of Complying with Substantiation Rules Developed, Written and Presented By Paul La Monaca, CPA, MST Director of Education

2 Disclaimer Statement Seminar materials and seminar presentations are intended to stimulate thought and discussion and to provide attendees with useful ideas and guidance in the areas of federal taxation and administration. These materials as well as the comments of the instructors do not constitute and should not be treated as tax advice regarding the use of any particular tax procedure, tax planning technique or device or suggestion or any of the tax consequences associated with them. Although the author has made every effort to ensure the accuracy of the materials and the seminar presentation, neither the author, the presenter nor the National Society of Tax Professionals assumes any responsibility for any individual s reliance on the written or oral information presented during the presentation. Each attendee should verify independently all statements made in the materials and during the seminar presentation before applying them to a particular fact pattern and should determine independently the tax and other consequences of using any particular device, technique or suggestion before recommending the same to a client or implementing the same on a client s or on his or her own behalf. Copyright Paul La Monaca 2016 These materials are the property of Paul La Monaca and may not be used or copied without his written permission.

3 Table of Contents Page Supplements: A. 170 Charitable Contributions... 1 Case Study: Charitable Contribution Deduction Denied Case Study: Poor Substantiation Kills Charitable Deduction for Non-Cash Contributions Table Volunteers Questions and Answers i

4 A. 170 Charitable Contributions (a) provides a general rule that there shall be allowed as a deduction any charitable contribution (as defined under 170( c) paid within the taxable year. Tax Professional Reminder: A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary (b)(1) provides that in the case of an individual taxpayer, the deduction shall be limited. The general rule provides that the contribution shall be allowed to the extent that the aggregate contributions do not exceed 50 percent of the taxpayer s contribution base for the taxable year (b)(1)(G) provides that the term contribution base means adjusted gross income computed without regard to any net operating loss carryback to the taxable year under (b)(1)(A) describes the qualifying organization for which the 50% limitation applies in general terms as follows: a. religious b. educational c. medical care, medical education, medical research d. entity supported by the United States, or any State or political subdivision thereof e. private foundations Tax Professional Note: Taxpayers can ask any organization whether it is a qualified organization and most will be able to prove immediately that they are. Taxpayers and Tax Professionals can also go to irs.gov. Click on Tools and then on Exempt Organizations Select Check ( Check). This online tool will enable the taxpayer to search qualified organizations. 1

5 Examples of Charitable Contributions Deductible As Charitable Contributions Money or property given to: Churches, synagogues, temples, mosques, and other religious organizations Federal, state and local governments, if the contribution is solely for public purposes (for example, a gift to reduce the public debt) Nonprofit schools and hospitals Public parks and recreation facilities Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, Boys and Girls Clubs of America, etc. War veterans groups Expenses paid for a student living with taxpayer if sponsored by a qualified organization (limited to $50 per month 170(g)). Out-of-pocket expenses to serve a qualified organization as a volunteer. Not Deductible As Charitable Contributions Money or property given to: Civic leagues, social and sports clubs, labor unions, and chambers of commerce Foreign organizations (except certain Canadian, Israeli, and Mexican charities) Communist organizations Groups that are run for profit Groups whose purpose is to lobby for law changes (e.g. labor unions) Homeowner s associations Individuals Political groups or candidates for public office Cost of raffle, bingo or lottery tickers Dues, fees or bills paid to country clubs, lodges, fraternal orders, or similar groups Tuition Value of time or services Value of blood given to a blood bank Qualified Charitable Distribution excluded from income under 408(d)(8)(E) Appraisal Fees 2

6 Canadian Charities. Taxpayers may deduct contribution to a Canadian charity if the taxpayer has income from sources in Canada. These Canadian organizations must meet the same qualifications that a U.S. charitable organization must meet under U.S. tax law. EXAMPLE: Don is a U.S. citizen living in Canada. Don has both U.S. and Canadian source income. During the tax year, Don contributes to Canadian organizations that would qualify as charitable organizations under U.S. tax law if they were U.S. organizations. In order to calculate Don s maximum amount of the contribution to Canadian organizations that Don can deduct on his U.S. income tax return, he must multiply his adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U.S. income tax law. Then he must include this amount on his return along with all of his domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U.S. income tax law. The appropriate percentage limit for U.S. tax purposes is applied to Don s total adjusted gross income from all sources. See IRS Publication 597: Information on the United States- Canada Income Tax Treaty. Mexican Charities: Taxpayers may be able to deduct contributions to Mexican charitable organizations under an income tax treaty with Mexico. The organization must meet tests that are essentially the same as the tests that qualify U.S. organizations to receive charitable contributions. Taxpayers should contact the organization. Taxpayer can also write to: Internal Revenue Service International Returns Section P.O. Box 920 Bensalem, PA In order to deduct the contribution to a Mexican charity the taxpayer must have income from Mexican sources. The limitation percentages are based on the taxpayers Mexican source income. 3

7 Israeli Charities: Taxpayer may be able to deduct contributions to certain Israeli charitable organizations under an income tax treaty with Israel. In order to qualify for the deduction the taxpayer must make the contribution to an organization created and recognized as a charitable organization under the laws of Israel. The deduction will be allowed in the amount that would be allowed if the organization was created under the laws of the United States. However, the contribution is limited to 25% of the taxpayer s AGI from Israeli source income (b)(1) also provides that certain charitable contributions shall be limited to 20% and 30% of the taxpayers adjusted gross income if those contributions are made to specific organizations. There are also special limitations for contributions of certain capital gain property (b)(1) provides for the carryover of unused charitable contributions in each of the 5 succeeding taxable years in order of time. Tax Professional Note: 170(d)(1) provides that the charitable contributions of the succeeding taxable years must be deducted first before the charitable contributions carried forward. Therefore, the use of the current year contributions could cause the loss of the contributions being carried forward (f) provides special rules addressing the disallowance of charitable deductions relating to substantiation requirements (f)(8)(A) provides that no deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous acknowledgment of the contribution by the donee organization that meets specific acknowledgment requirements (f)(8)(B) provides that these requirements include the following information: a. The amount of cash. b. A description (but not value) of any property other than cash. c. Whether the donee organization provided any goods or services in consideration, in whole or in part for any cash or other property contributed. 4

8 d. A description and good faith estimate of any goods or services provided to taxpayer. e. If such goods and services provided consisted solely of intangible religious benefits, then a statement to that effect. Tax Professional Note: For this purpose the term intangible religious benefit means any intangible benefit which is provided by an organization exclusively for religious purposes and which generally is not sold in a commercial transaction outside of the donative context. Tax Professional Reminder: If the taxpayer did receive a benefit as a result of making a contribution then only deduct the amount that is greater than the value of the benefit received. In order for the excess amount to qualify as a charitable contribution the excess must have been paid with the intent to make a charitable contribution. Example #1: Don pays $65 for a ticket to a diner-dance at a church. All the proceeds of the function go to the church. The ticket to the dinner-dance has a fair market value of $25. When Don buys the ticket, he knows that its value is less than the payment. In order to calculate the amount of the charitable contribution, subtract the value of the benefit received ($25) from the total payment ($65). Don can deduct $40 as a charitable contribution to the church. Example #2: At a fund-raising auction conducted by a charity, Don pays $600 for a week s stay at a beach house. The amount paid is no more than the fair rental value. He has not made a deductible charitable contribution. Athletic Events. If the taxpayer makes a payment to, or for the benefit of, a college or university and, as a result, receives the right to buy tickets to an athletic event in the athletic stadium of the college or university, then taxpayer can deduct 80% of the payment as a charitable contribution. If any part of the payment is for tickets (rather than the right to buy tickets), then that part is not deductible. In that case, subtract the price of the tickets from the payment, therefore 80% of the remaining amount is a charitable contribution. 5

9 Example #1: Don pays $300 a year for membership in an athletic scholarship program maintained by a university (a qualified organization). The only benefit of membership is that Don has the right to buy one season ticket for a seat in a designated area of the stadium at the university s home football games. He can deduct $240 (80% of $300) as a charitable contribution. Example #2: The facts are the same as in Example #1 except that the $300 payment included the purchase of one season ticket for the stated ticket price of $120. Don must subtract the usual price of a ticket ($120) from the $300 payment. The result is $180. The deductible charitable contribution is $144 (80% of $180). Charity benefit events: If the taxpayer pays a qualified organization more than fair market value for the right to attend a charity ball, banquet, show, sporting event, or other benefit event, then deduct only the amount that is more than the value of the privileges or other benefits received. If there is an established charge for the event, then that charge is the value of your benefit. If there is no established charge, then the contribution is that part of the payment that is more than the reasonable value of the right to attend the event. Whether taxpayer uses the tickets or other privileges has no effect on the amount that can be deducted. However, if taxpayer returns the ticket to the qualified organization for resale, then the charitable deduction is the entire amount paid for the ticket. TAX PROFESSIONAL ALERT: Even if the ticket or other evidence of payment indicates that the payment is a contribution, this does not mean you can deduct the entire amount. If the ticket shows the price of admission and the amount of the contribution, then deduct the contribution amount. Example: Don pays $40 to see a special showing of a movie for the benefit of a qualified organization. Printed on the ticket is contribution - $40. If the regular price for the move is $8, then contribution is $32 ($40 payment - $8 regular price). 6

10 Membership fees or dues: A taxpayer may be able to deduct membership fees or dues paid to a qualified organization. However, deduct only the amount that is more than the value of the benefits received. Remember the taxpayer cannot deduct dues, fees or assessments paid to country clubs and other social organizations because they are not qualified organizations. Certain membership benefits can be disregarded: Both the taxpayer and the organization can disregard certain membership benefits received in return for an annual payment of $75 or less to the qualified organization. The benefits that can be disregarded are: 1. Any rights or privileges, other than those discussed under Athletic events earlier, that taxpayer can use frequently while a member, such as: a. Free or discounted admission to the organization s facilities or events, b. Free or discounted parking, c. Preferred access to goods or services, and d. Discounts on the purchase of goods and services. 2. Admission, while a member, to events that are open only to members of the organization if the organization reasonably projects that the cost per person (excluding any allocated overhead) is not more than $10.50 in 2015 and $10.60 in Token items: The taxpayer can deduct the entire payment to a qualified organization as a charitable contribution if both of the following are true: 1. Taxpayer receives a small item or other benefit of token value, and 2. The qualified organization correctly determines that the value of the item or benefit received is not substantial and informs taxpayer that he can deduct the payment in full. 7

11 The organization determines whether the value of an item or benefit is substantial by using Revenue Procedures and and the inflation adjustment in Revenue Procedure for purposes of 2016 returns. (For inflation adjustment purposes there is an updated Revenue Procedure each year.) Written statement: A qualified organization must give taxpayer a written statement if the taxpayer makes a payment to it that is more than $75 and is partly a contribution and partly for goods or services. The written statement must say that taxpayer can deduct only the amount of payment that is more than the value of the goods or services received. It must also give a good faith estimate of the value of those goods or services. The organization can give the statement either when it solicits or when it receives the payment. Exception: An organization will not have to provide this statement to the taxpayer if one of the following is true. 1. The organization is: a. Organized by the United States or any State, the District of Columbia, a U.S. Possession (including Puerto Rico), a political subdivision of a State or U.S. Possession, or an Indian tribal government or any of its subdivision that perform substantial government functions, or b. Formed only for religious purposes, and the only benefit the taxpayer receives is an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in commercial transactions outside the donative context, or 2. The taxpayer receives only items whose value is not substantial as described earlier, or 3. The taxpayer receives only membership benefits that can be disregarded, as described earlier (f)(8)( C) provides that an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of: 8

12 a. the date on which the taxpayer files a return for the taxable year in which the contribution was made, or b. the date the return was due including extensions (f)(8)(D) provides a special exception to the taxpayer substantiation provision if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes all the information required for acknowledgment (f)(8)(E) provides that the Secretary may prescribe regulations pertaining to substantiation that are necessary or appropriate in order to carry out the purposes of allowing a charitable deduction (f)(11) provides the requirements for descriptions, Qualified Appraisals and other documentation for certain contributions (f)(11)(A)(i) provides in general that no deduction shall be allowed for any contribution of property for which a deduction of more than $500 is claimed unless the taxpayer meets the property description requirements for contributions of more than $500. Tax Professional Audit Issue: The law does provide an exception to the denial of a deduction if the taxpayer can show that the failure to meet the requirement was due to reasonable cause and not to willful neglect (f)(11)(B) provides that in the case of contributions of property for which a deduction of more than $500 is claimed, the description and documentation requirements will be met if the taxpayer includes with the return for the taxable year in which the contribution is made a description of such property and other information as the Secretary may require (f)(11)(C) provides that in the case of contributions of property for which a deduction of more than $5,000 is claimed, the substantiation requirements will be met if the taxpayer obtains a qualified appraisal of such property and attaches to the return for the taxable year in which such contribution is made such information regarding such property and such appraisal as the Secretary may require. 9

13 Tax Professional Note: 170(f)(11)(i) provides that for purposes of determining a threshold of more than $5,000, property and all similar items of property donated to 1 or more donees shall be treated as 1 property (f)(11)(E)(i) provides that the term qualified appraisal means, with respect to any property, an appraisal which is: a. treated as an appraisal under the regulations or other guidance prescribed by the Secretary, and b. conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the Secretary (f)(11)(E)(ii) provides a general rule that the term qualified appraiser means an individual who: a. has earned an appraisal designation from a recognized professional appraiser organization, or b. has otherwise met minimum education and experience requirements set forth in the regulations prescribed by the Secretary, and c. regularly performs appraisals for which the individual receives compensation, and d. meets such other requirements as may be prescribed by the Secretary in regulations and other guidance. Tax Professional Note: 170(f)(11)(E)(iii) addresses the issue of specific appraisals and provides that an individual will not be treated as a qualified appraiser with respect to any specific appraisal unless the individual: 1. Demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and 2. Has not been prohibited from practicing before the IRS by the Secretary under 330(c) of Title 31 USC, at any time during the 3 year period ending on the date of the appraisal. 10

14 (f)(11)(G) provides that if a partnership or S-Corporation makes a contribution at the entity level which is not in compliance with any rule pertaining to documentation, substantiation, qualified appraisals etc., then the deduction will be denied at the partner or shareholder level (f)(12) provides the law pertaining to contributions of used motor vehicles, boats and airplanes. The general rule provides that in the case of a contribution of a qualified vehicle where the value claimed exceeds $500, the general rules of substantiation, documentation and appraisal do not apply and has more specific requirements (f)(12)(A) provides that no deduction shall be allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets specific requirements and includes the acknowledgment with the taxpayer s return. In addition, if the donee organization sells the vehicle without significant intervening use or material improvement of such vehicle by the organization then the amount of the deduction shall not exceed the gross proceeds received from such sale (f)(12)(B) provides that the acknowledgment meets the requirements if it contains the following information: a. taxpayer name and social security number b. vehicle identification number (VIN), and c. if sold, a certification that the vehicle was sold: (1) in an arm s length transaction between unrelated parties, (2) the gross proceeds from the sale, (3) and a statement that the deductible amount may not exceed the amount of such gross proceeds (f)(12)(B)(iv) provides that in a case where the qualified vehicle is not sold, the acknowledgment must not only provide the taxpayer s name and social security number and VIN but must also provide a certification: 11

15 a. of the intended use or material improvement of the vehicle and the intended duration of such use, and b. that the vehicle was not transferred in exchange for money, other property, or services before completion of such use or improvement. Tax Professional Note: In all cases, whether the qualified vehicle is sold, improved or used in the charity, additional substantiation requires disclosure of whether the donee organization provided any goods or services in whole or in part for the qualified vehicle (f)(12)(B)(vi) provides that if any goods or services were provided then a description and good faith estimate of the value of any goods and services must be provided. Tax Professional Reminder: If such goods and services consist solely of intangible religious benefits then a statement to that effect must be made. The term intangible religious benefit means any intangible benefit which is provided by an organization exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context (f)(12)(C) provides that for purposes of the contemporaneous written acknowledgment, the donee organization must provide such acknowledgment to the taxpayer within 30 days of: a. the sale of the qualified vehicle, or b. contribution of the qualified vehicle in the case where the property is used in the charity s work or material improvement. Tax Professional Education Fact: 170(f)(12)(D) provides the donee organization is required to provide an acknowledgment to the Secretary in the time and manner as the Secretary may prescribe. Deduction of more than $500: If the taxpayer donates a qualified vehicle to a qualified organization and claims a deduction of more than $500, then deduct the smaller of: 12

16 1. The gross proceeds from the sale of the vehicle by the organization, or 2. The vehicle s fair market value on the date of the contribution. If the vehicle s fair market value was more than the cost or other basis, reduce the fair market value to calculate the deductible amount. Form 1098-C: The taxpayer must attach the copy of the IRS Form 1099-C Contributions of Motor Vehicles, Boats, and Airplanes, (or other statement containing the same information as Form 1098-C) that the taxpayer received from the organization. The Form 1098-C (or other statement) will report the gross proceeds from the sale of the vehicle. If the taxpayer does not attach Form 1098-C (or other statement), then you cannot deduct the contribution. The taxpayer must receive Form 1098-C (or other statement) within 30 days of the sale of the vehicle. But if exception 1 below applies, then the taxpayer must receive Form 1098-C (or other statement) within 30 days of your donation. Exceptions: There are two exceptions to the rules just described for deductions of more than $500. Exception #1: Vehicle used or improved by organization. If the qualified organization makes a significant intervening use of or material improvement to the vehicle before transferring it, then the taxpayer generally can deduct the vehicle s fair market value at the time of the contribution. Exception # 2: Vehicle given or sold to needy individual. If the qualified organization gives the vehicle, or sells it for a price well below fair market value, to a needy individual to further the organization s charitable purpose, and taxpayer claims a deduction of more than $500, then you generally can deduct the vehicle s fair market value at the time of the contribution. This exception does not apply if the organization sells the vehicle at auction. In that case, the taxpayer cannot deduct the vehicle s fair market value. 13

17 Example: Don donates a used car to a qualified organization. He bought it 3 years ago for $9,000. A used car guide shows the fair market value for this type of car is $6,000. However, Don receives a Form 1099-C from the organization showing the car was sold for $2,900. Neither exception 1 nor exception 2 applies. If Don itemized his deductions, then he can deduct $2,900 for his donation. He must attach Form 1098-C and Form 8283 to his return. Deduction $500 or less. If the qualified organization sells the vehicle for $500 or less and exceptions 1 and 2 do not apply, then deduct the smaller of: $500, or The vehicle s fair market value on the date of the contribution. If the vehicle s fair market value is at least $250 but not more than $500, then taxpayer must have a written statement from the qualified organization acknowledging the donation. The statement must contain the information and meet the tests for an acknowledgment described earlier (f)(12)(E) provides that the term qualified vehicle means any: a. motor vehicle manufactured primarily for use on public streets, road and highways, b. boat, or c. airplane Tax Professional Note: The term qualified vehicle does not include any property which is described in 1221(a)(1). The property in 1221(a)(1) includes inventory of the taxpayer held primarily for sale to customers in the ordinary course of the taxpayer s trade or business. Therefore, a used car dealer would not be required to comply with these provisions and would therefore be under the provisions dealing with charitable contributions of inventory items (f)(12)(F) provides that the Secretary shall subscribe any regulations or guidance necessary to carry out the intent of the law. 14

18 (f)(16) provides the law for contributions of clothing and household items. 170(f)(16)(A) provides in general that no deduction shall be allowed for any contribution of clothing or a household item unless such clothing or household item is in good used condition or better (f)(16)(B) provides that the Secretary may, by regulation, deny a deduction for any contribution of clothing or a household item which has minimal monetary value (f)(16)( C) provides an exception to the requirements of good used condition or better and minimal monetary value of a single item of clothing or a household item for which a deduction of more than $500 is claimed. This exception is applicable if the taxpayer includes with the taxpayer s return a qualified appraisal with respect to the property (f)(16)(D)(i) provides that in general the term household items includes: a. furniture b. furnishings c. electronics d. appliances e. linens, and f. other similar items (f)(16)(D)(ii) provides excluded items and the term does not include: a. food b. paintings, c. antiques d. other items of art e. jewelry f. gems, and g. collections 15

19 (f)(17) provides that no deduction shall be allowed for any contribution of a cash, check, or other monetary gift unless the donor maintains as a record of such contribution a bank record or a written communication from the donee showing: a. the name of the donee organization, b. date of the contribution and c. amount of the contribution. 34. Volunteer work for qualified organizations will allow a charitable contribution for any cash, property or out of pocket expenses paid. 170(i) provides that the deduction for the use of a passenger automobile is calculated using a standard mileage rate which shall be 14 cents per mile. The actual cost is also permitted to be deducted. Tax Professional Education Fact: Parking and tolls can be included under either method used (j) provides that no deduction shall be allowed for traveling expenses while away from home unless there is no significant element of personal pleasure, recreation, or vacation in such travel. Tax Professional Note: Traveling expenses include food and lodging. The deduction for travel expenses will not be denied simply because the taxpayer enjoys providing services to the charitable organization. Even if the taxpayer enjoys the trip, a charitable contribution deduction for travel expenses is allowable if the taxpayer is on duty in a genuine and substantial sense throughout the trip. However, if taxpayer has only nominal duties, or if for significant parts of the trip does not have any duties, then taxpayer cannot deduct the travel expenses. Example #1: Don is a troop leader for a tax-exempt youth group and he helps take the group on a camping trip. He is responsible for overseeing the setup of the camp and for providing adult supervision for other activities during the entire trip. He participates in the activities of the group and really enjoys his time with them. He oversees the breaking of camp and helps transport the group home. He can deduct his travel expenses. 16

20 Example #2: Don sails from one island to another and spends 8 hours a day counting whales and other forms of marine life. The project is sponsored by a charitable organization. In most circumstances, he cannot deduct expenses because it would appear there is more personal pleasure than charitable work. However, every situation is to be determined under all the specific facts and circumstances as they apply. Example #3: Don works for several hours each morning on an archeological dig sponsored by a charitable organization. The rest of the day is free for recreation and sightseeing. He cannot take a charitable contribution deduction even though he works very hard during those few hours because it appears to have more personal pleasure than charitable. Example #4: Don spends the entire day attending a charitable organization s regional meeting as a chosen representative. In the evening he goes to the theater. Don can claim his travel expenses as charitable contributions, but cannot claim the cost of the evening at the theater. Daily allowance (per diem): If the taxpayer provides services for a charitable organization and receives a daily allowance to cover reasonable travel expenses, including meals and lodging while away from home overnight, then the taxpayer must include in income the amount of the allowance that is more than the deductible travel expenses. Also, taxpayer can deduct the necessary travel expenses that are more than the allowance. Deductible travel expenses include: Air, rail, and bus transportation, Out-of-pocket expenses for taxpayer s vehicle, Taxi fares or other costs of transportation between the airport or station and the hotel, Lodging costs, and The cost of meals. 17

21 Tax Professional Note: Since these travel expenses are not businessrelated, they are not subject to the same limits as business related expenses. Therefore the 50% limitation under 274 does not apply. Suggested References: IRC 170; IRS Publications 78, 526, 561, 597, 1771, 4303, IRS Form 8283 and Instructions. 18

22 Charitable Contribution Deduction Denied: Taxpayers did not Comply with Contemporaneous Records Requirements Durden, T.C. Memo , May 17, The taxpayers deducted charitable contributions most of which were made to their church. In response to a notice of deficiency disallowing the claimed charitable contribution deductions, the taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church which acknowledged their contributions. 2. The IRS did not accept the acknowledgment letter because it lacked a statement regarding whether any goods or services were provided in consideration for the contributions. 3. The taxpayers then produced a second letter from the church 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. The IRS did not accept the second acknowledgment letter because it was not contemporaneous (f)(8)(A) provides that no deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets specified requirements. For donations of money, the donee s written acknowledgment must state the amount contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution, and provide a description and good faith estimate of the value of any goods or services provided by the donee organization. 5. The regulations under 170 state that a written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of: a. The date the taxpayer files the original return for the taxable year of the contribution, or b. The due date (including extensions) for filing the original return for the year. 6. The IRS argued the taxpayers were not entitled to the deduction because the first acknowledgment letter from the church failed to include the language that no goods or services were provided in consideration for the contribution, and the second acknowledgment letter that included the no goods or services language failed to meet the contemporaneous requirement. 7. The taxpayers conceded that they did not strictly comply with the statute. However, they claimed they did substantially comply with the statute. The Court disagreed with the taxpayers. Nothing in the statute or legislative history requires the IRS to look beyond the written acknowledgment when on its face the acknowledgment fails to provide the information required to substantiate a charitable contribution deduction. Result: The taxpayers did not comply with the clear substantiation requirements of 170(f)(8), and their deduction for charitable contributions was disallowed. 19

23 Poor Substantiation Kills Charitable Deduction for $27,000 of Non-Cash Contributions (Thad Deshawn vs. Commissioner 108 T.C.M. 384, TC Memo ) (October 2, 2014). Despite its having no doubt that the taxpayer actually donated property to a charitable organization, the Tax Court ruled that none of taxpayer s contributions were deductible because he failed the charitable contribution substantiation tests. Facts: a. At his Tax Court trial, the taxpayer testified that after his mother died he donated the inherited furniture from her house to the American Veterans National Service Foundation (AMVETS), in These items included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet and three rugs. For charitable contribution purposes, the taxpayer deducted a value of $11,730 on these items. b. The taxpayer testified that he also donated to AMVETS during 2009 the following items of clothing belonging to him or his children: 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats and seven suits. Smith deducted a value of $14,487 on those items. c. Smith also testified that he donated to AMVETS during 2009 electronic equipment that included two computer systems, a printer and a copier. The record did not establish who previously owned this property. The taxpayer deducted a value of $1,550 on those items. d. Smith testified that he had visited AMVETS on several occasions earlier in 2009 and had obtained a number of blank tax receipts signed by AMVETS representatives. Smith testified that he consolidated all of the contributions described above on two blank receipts. He filled out each receipt by identifying himself as the donor, inserting August 30, 2009 as the date, and indicating the donation values mentioned above. The tax receipts informed the donor that it was his responsibility to determine the fair market values (FMVs) of all items. e. The tax receipts didn t identify any specific items of donated property. To identify the property he allegedly contributed, Smith prepared a spreadsheet. The record did not establish when this spreadsheet was prepared, and there was no evidence that it was submitted to AMVETS. f. In determining that the items listed on his spreadsheet had FMVs of $27,767, Smith testified that he used a Salvation Army website that lists estimated low and high values for used property. The record included a guide printed from that website. The value that Smith placed on his spreadsheet for many of the items he allegedly donated in 2009 were considerably higher than the high values shown in this guide and the taxpayer offered no explanation for this discrepancy. g. He did not take photographs of any of the items he allegedly donated, and he introduced no evidence to establish their condition. He did not obtain an appraisal of any item. 20

24 Background: (a)(1) provides that charitable contribution deductions are allowable only if the taxpayer satisfies substantiation requirements. The nature of the required substantiation depends on the size of the contribution and it depends on whether it is a gift of cash or property. 170(f)(8) provides that there are separate requirements for all contributions of: a. $250 or more, b. contributions of property with a claimed value exceeding $500 ( 170(f)(11)(B)), and c. contributions of property with a claimed value exceeding $5,000. ( 170(f)(11)(C)) (f)(11)(F) provides that for contributions exceeding $500, similar items of property are aggregated for purposes of the substantiation rules. (Reg A- 13(c)(1)(i)) The term similar items of property is defined to mean property of the same generic category or type, such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware. (Reg A-13(c)(7)(iii)) (f)(8)(A) provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with a contemporaneous written acknowledgment of the contribution by the donee organization. 170(f)(8)(B) provides that this acknowledgment must include a description of any property other than cash contributed. 4. For noncash contributions in excess of $500, taxpayers are required to maintain written records with respect to each item of donated property that include, among other things: a. the approximate date the property was acquired and the manner of its acquisition; b. a description of the property in detail reasonable under the circumstances; c. he cost or other basis of the property; d. the FMV of the property at the time it was contributed; and e. the method used in determining its FMV. (Reg A-13(b)-(2)(ii)-(C); Reg A-13(b)(2)(ii)(D); Reg A-13(b)(3)(i)(A); Reg A- 13(b)(3)(i)(B)) (f)(16)(A) provides that no deduction is allowed for contributions of clothing or household items unless such items are in goo used condition or better. 170(f)(16)(D) provides that the term household items includes furniture, furnishings, electronics, appliances, linens and other similar items. 21

25 A-13(c)(2) states that for contributions of property valued in excess of $5,000, the taxpayer must generally satisfy the substantiation requirements discussed above and must also: a. obtain a qualified appraisal of the items; and b. attach to his tax return a fully completed appraisal summary. The Court Disallows all of Taxpayer s Charitable Deduction: 1. The Tax Court found that Smith did not meet the substantiation requirements with respect to any of the contributions and therefore disallowed his entire charitable contribution deduction. 2. For purposes of A-13(c)(1)(i), the Tax Court found that there were three categories of property, i.e., the household items from Mr. Smith s mother s house, the clothing and the electronic equipment. It said that for all three categories, Smith had to meet the substantiation requirements imposed by 170(f)(8) and 170(f)(11)(B). For the first two categories of items, Smith had to also meet the stricter substantiation requirements imposed by 170(f)(11)(C). 3. The Court then analyzed whether taxpayer met those requirements: Requirements for contributions of $250 or more: Smith obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. Because these forms were signed before the property was allegedly donated, the Court questioned whether they constituted an acknowledgment by AMVETS that it received anything. In any event, the Court said, the AMVETS tax receipts do not contain a description of any property contributed. ( 170(f)(8)(B)(i)). Rather, Smith created at a time that could not be ascertained, a spreadsheet showing the property he allegedly contributed, and there was no evidence that this spreadsheet was ever provided to or seen by AMVETS. Moreover, the only evidence as to the contemporaneous nature of the acknowledgment was the date August 30, 2009 which Smith placed on the blank receipts himself. The Tax Court concluded that Smith failed to satisfy the substantiation requirements for contributions of $250 or more. 4. Requirements for contributions exceeding $500: Smith allegedly made noncash contributions to AMVETS of clothing, furniture and electronic equipment, and for each category of items he claimed a value exceeding $500. But he did not maintain written records establishing when or how these items were acquired or what their cost bases were, nor did he maintain written records establishing the items FMVs at the time they were donated. 22

26 He testified that he determined these values using a guide from a Salvation Army website, but the values he used were considerably higher than the high values the guide displays. He did not maintain photographs or other records to establish the condition of the donated items, and he therefore provided no reason for the Court to believe that each donated item should be accorded a high rather than a low value. Most of the items Smith allegedly donated consisted of clothing and household items. He presented no evidence that these items were in good used condition or better and therefore did not meet the requirements of 170(f)(16)(A). 5. Requirements for contributions exceeding $5,000: Smith acknowledged that he did not obtain a qualified appraisal for any of the items and did not attach a fully completed appraisal summary to his 2009 tax return. He therefore failed to satisfy the substantiation requirements for his claimed contributions of clothing ($14,487) and household furniture ($11,730) Individuals: Accuracy-related penalty: 1. Smith also was liable for an accuracy-related penalty under 6662 on the portion of the underpayment attributable to negligence or disregard of rules and regulations. The taxpayer s original return was prepared by a tax professional; however, the taxpayer provided no evidence that the preparer gave tax advice on which he reasonable relied. In addition, the taxpayer admitted that he had claimed deductions to which he was not entitled, and that he had not carefully reviewed the return prior to its being filed imposes a 20% penalty upon the portion of any underpayment attributable to (among other things) negligence or disregard of rules or regulations. 6662(c) provides that the term negligence includes any failure to make a reasonable attempt to comply with the tax laws, and disregard includes any careless, reckless, or intentional disregard. Negligence also includes any failure to keep adequate books and records or to substantiate items properly (b)(1), Income Tax Regs.; see Olive v. Commissioner [Dec. 59, 146], 139 T.C. 19, 43 (2012). With respect to an individual taxpayer s liability for a penalty, 7491(c) places on the Commissioner the burden of proof, there by requiring the Commissioner to come forward with sufficient evidence indicating that imposition of a penalty is appropriate. Higbee v. Commissioner [Dec. 54,356], 116 T.C. 438, (2001). Once the Commissioner meets his burden or proof, the taxpayer bears the burden of proving that the Commissioner s determination is incorrect. Ibid; Rule 142(a); Welch v. Helvering, 290 U.S. at

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