Case — Substantiation of Charitable Contributions

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TL Case Summ

THE QUESTION

Can a taxpayer deduct contributions to a charity she co-founded?

THE DISPUTE

Taxpayer Says: The contributions are substantiated by her bank statements and those of the charity and should be allowed.

Internal Revenue Service Says: None of the contributions are substantiated by contemporaneous written acknowledgment, and the taxpayer is not entitled to deduct them.

THE LAW

From Internal Revenue Code Section 170(a)(1), (c): In general, a taxpayer is entitled to deduct charitable contributions made during the taxable year to or for the use of certain types of organizations.

From Internal Revenue Code Section 170(f)(8)(A): Contributions of cash or property of $250 or more require the donor to obtain contemporaneous written acknowledgment of the donation from the donee.

From Internal Revenue Code Section 170(f)(8)(B): At a minimum, the contemporaneous written acknowledgment must contain a description of any property contributed, a statement as to whether any goods or services were provided in consideration, and a description and good-faith estimate of the value of any goods or services provided in consideration.

From Internal Revenue Code Section 170(f)(8)(C): A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of (1) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (2) the due date (including extensions) for filing such return.

From Federal Tax Regulation 1.6001-1(a): A taxpayer is required to substantiate charitable contributions; records must be maintained.

From Federal Tax Regulation 1.170A-13(a)(1): A cash contribution of less than $250 may be substantiated with a canceled check, a receipt, or other reliable evidence showing the name of the donee, the date of the contribution, and the amount of the contribution.

THE CAUSE OF THE DISPUTE

In order to deduct charitable contributions on your federal income tax return, you’re required to maintain records of your donations. The records you have to keep vary with the amount and type of your contribution, and more detail is required as the amount increases.

For example, under present law, all cash contributions require substantiation such as a bank record or a written acknowledgement from the charity showing the name of the organization, the date of the contribution, and the amount of the contribution. Contributions of more than $250 require written acknowledgment that includes the amount of cash and a description of any property other than cash contributed, a statement whether the organization provided any goods or services in consideration for the contribution, and a description and good faith estimate of the value of any goods or services provided in consideration for the contribution.

In this case, during 2006 the taxpayer made 44 contributions totaling $10,022 to a charity she co-founded. She made the contributions by electronic transfers from her personal account to the charity, or by calling the bank with instructions to make a transfer. The dates and amounts of the transfers were shown on her bank statements as well as those of the charity. She claimed the deduction in full on her 2006 federal income tax return.

The IRS disallowed the deduction. While not disputing the contributions were made or that the charity is legitimate, the IRS says the taxpayer is not entitled to deduct the contributions of $250 or more because none is substantiated by a contemporaneous written acknowledgment.

The taxpayer argues that the bank statements are adequate substantiation. In addition, since she was party to both sides of the transaction, she says it would have been futile to issue herself a statement that expressly provided that no goods or services were provided in exchange for her contributions.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 13KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
For the IRS. The essential statutory purpose of the contemporaneous written acknowledgment required by section 170(f)(8) is to assist taxpayers in determining the deductible amounts of charitable contributions and to assist the IRS in processing tax returns on which charitable contribution deductions are claimed. Although the taxpayer may not have needed a contemporaneous written acknowledgment to assist her in determining the deductible amounts of her charitable contributions, the IRS still needed it to assist in determining whether she was entitled to the charitable contribution deduction she claimed. In addition, this court has consistently held that the specific statement regarding whether goods or services were provided in consideration for the contributions, as required by section 170(f)(8)(B)(ii), is necessary for the allowance of a charitable contribution deduction. Thus, taxpayer is not entitled to deduct the contributions of $250 or more.
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