Charity's insufficient written acknowledgment costs donor entire deduction

The Tax Court recently ruled on a case that should prove a cautionary example for taxpayers making charitable contributions. A married couple's deduction for charitable contributions of $25,171 to their church was disallowed because the written acknowledgment they received from their church did not meet the substantiation requirements under Code Sec. 170. The written acknowledgment had not included a statement regarding whether services were provided to taxpayers as consideration for their contribution.

The Tax Court found that the deductions should be disallowed even though, after receiving the Notice of Deficiency from the IRS, the taxpayers contacted their church and obtained a second written acknowledgment containing a statement that the church had provided no goods or services. The Tax Court found that the second written statement was not contemporaneous.

Requirements of Code Sec. 170

Under Code Sec. 170(f)(8)(A)-(B), charitable contributions of more than $250 are subject to strict substantiation requirements. Among them are requirements that state taxpayers must receive from that organization a contemporaneous written acknowledgment of cash donations to a qualified donee organization. The written acknowledgement must state the amount contributed, whether the organization provided any goods or services in consideration of the contribution and, if so, a description and good faith estimate of the value of any goods or services the organization provided. If the donee organization did not provide goods or services in exchange for the contribution, then the written acknowledgement must include a statement to that effect.

Factual Background

Married joint filers timely filed their 2007 tax return, claiming $25,171 in total charitable deductions made to their Code Sec. 501(c)(3) eligible church. The donations were made by cash and check in amounts larger than $250.

In spring 2009, after receiving the IRS's Notice of Deficiency disallowing the deduction, taxpayers produced records of their contributions, which included copies of cancelled checks and a letter from their church acknowledging receipt of the contributions. The written acknowledgment did not include a statement regarding whether or not the organization had provided goods or services to the taxpayers in consideration for their contributions. Also in response to the 2009 Notice of Deficiency, the taxpayers also obtained a second acknowledgment from the church with a statement that it had not provided goods or services in exchange for the contributions.

Court's analysis

The Tax Court rejected the taxpayers' argument that they had substantially complied with the statute and upheld the IRS's disallowance of the deductions. The court found that the Tax Code contained plain language requiring a written acknowledgment to contain a statement describing any goods or services (or lack thereof) given in consideration of charitable contributions. Such a statement was necessary, and without it, the IRS and Tax Court did not have enough information to determine whether the contributions were in exchange for meals or other goods or services.

The Tax Court found that the second written acknowledgment was not contemporaneous and declined to consider it. It cited the requirements of Code Sec. 170(f)(8)(C) and Reg. § 1.170(A)-13(f)(3).