The feeling of gratitude combined with the possibility of meaningful deductions leads many to consider making charitable contributions at the end of the year. The publicity surrounding Giving Tuesday, five days after Thanksgiving, will prompt many to donate. While the practice is welcomed by charitable organizations, practitioners should be ready to advise clients on the deductibility of their gifts.
Most contributions of cash or property made to a charitable organization are deductible as an itemized deduction on Form 1040, Schedule A. Cash contributions include those made by check, credit card or debit card, as well as unreimbursed out-of-pocket expenses connected with volunteer services to a qualifying charitable organization. However, the Internal Revenue Service notes that the following are not tax-deductible:
- Donations made to a supporting organization;
- Donations intended to help establish or maintain a donor-advised fund;
- Donations carried forward from prior years;
- Donations made to most private foundations;
- Donations made to charitable remainder trusts; and,
- Donations of time spent volunteering.
Donations of property other than cash are generally deductible at their fair market value. But strict adherence to the Tax Code requirements is required, including a contemporaneous written acknowledgement.
A recent Tax Court case illustrates the importance of strict compliance, observed David Sacarelos, a partner at Top 100 Firm Seiler.
"The taxpayer was denied a deduction for a contribution of Native American jewelry and artifacts to a museum because she didn't meet the substantiation requirements," he said. "The code requires that a contemporaneous written acknowledgment be in the hands of the taxpayer before they file their individual income tax return."
In
The IRS disallowed the donation because the requirements of Code Section 170 were not satisfied. The Tax Court agreed, noting that for any contribution of $250 or more, the code requires a contemporaneous written acknowledgment, or CWA.
The court stated, "The CWA must include (i) the amount of cash and a description (but not value) of any property other than cash contributed; (ii) whether the donee organization provided any goods or services in consideration, in whole or in part, for any such property; and (iii) a description and good faith estimate of the value of any such goods or services."
"A CWA is not required to take any particular form but the requirement that a CWA be obtained is 'a strict one,'" the court said. It noted that a deed of gift can serve as a de facto CWA, but in this case it failed to comply with Section 170(f)(8)(B) because it did not specify whether the Wheelwright Museum provided any goods or services in return for the donation, or state that it represented the entire agreement between the museum and Albrecht. "Specifically, [the IRS] points out the reference in the deed to the 'gift agreement' as creating ambiguity as to whether additional terms, including donee provisions of goods or services, were part of the donation," the court said. "We appreciate what appears to have been a good faith attempt by [Albrecht] to substantially comply with the code by executing the deed with the Wheelwright Museum. Substantial compliance, unfortunately for [Albrecht], does not satisfy the strict requirements of Section 170(f)(8)(B)."
In a footnote, the court stated that the fact that the parties now agree that the Wheelwright Museum did not provide any consideration as part of the donation is of no consequence: "In assessing whether a taxpayer has strictly complied with Section 170(f)(8)(B), the focus is exclusively on what the taxpayer obtained from the donee organization at the earlier of the time the return was filed or the filing due date."
"Practitioners think, and have argued that, if the taxpayer is in substantial compliance, that's enough," said Sacarelos. "Older cases have suggested that you might have an argument for substantial compliance, but more recent cases have shut these down. If there were any goods or services provided by the donee, that's OK, but you need to make a good faith effort to estimate the value and take the difference as a deduction."
It's an easy thing to do, but the failure to do it can cost the taxpayer, observed Sacarelos: "A lot of practitioners ignore this. They get a letter from the client and put it in the file, thinking that's good enough. These requirements are not new, but a lot of people, including preparers, are surprised by them."
