When it comes to the tax code, some documentation requirements are flexible, while others are dictated by law and there's no exception. A recent Tax Court case illustrates the importance of following the strict charitable contribution rules.

Facts of the case. David and Veronda Durden filed a joint return for 2007 claiming a deduction of $25,171 for charitable contributions made by cash or check. Most of the contributions were made to the taxpayers' church. Except for five checks, the amounts the taxpayers wrote checks for were larger than $250. 

In April 2009, the IRS sent a notice of deficiency disallowing the taxpayers' claimed charitable contribution deduction for 2007. The taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church dated January 10, 2008, which acknowledged contributions from them during 2007 totaling $22,517. The IRS did not accept this first acknowledgment and informed the taxpayers that it lacked a statement regarding whether or not any goods or services were provided in consideration for the contributions.

The Durdens obtained a letter from the church dated June 21, 2009 that contained the same information in the first acknowledgment as well as a statement that no goods or services were provided in exchange for the contributions.

Under the tax code, the court noted that no deduction is allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organization. For donations of money, the donee's written acknowledgment must state the amount contributed, indicate whether the organization provided any goods or services in consideration for the contribution, and if so, provide a description and good faith estimate of the value. 

A written acknowledgment is contemporaneous if it is obtained by the taxpayer on or before the earlier of:

  • The date the taxpayer files the original return for the year of the contribution or
  • The due date (including extensions) for filing the original return.

The IRS argued that the first acknowledgment received by the Durdens did not meet the requirements of the law because it did not state whether or not any goods or services were received. The second acknowledgment failed because it was not contemporaneous.

The Durdens conceded they did not strictly comply with the law, but argued that they substantially complied and were still entitled to the deduction. The court noted that it has allowed "substantial compliance" in some cases where, despite a lack of strict compliance, the taxpayer substantially complied by fulfilling the essential statutory purpose. The doctrine of substantial compliance is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible, but nonetheless fails to comply with the specific requirements of a provision. The court listened to the Durdens' arguments but sided with the IRS and held that the taxpayers failed to strictly or substantially comply with the clear requirements of the law. Therefore, the deduction was disallowed. (Durden, T.C. Memo. 2012-140) 

What the Case Means for All Taxpayers

The result here seems unduly harsh considering the church made the error, but it's not the first time a taxpayer has been denied a charitable contribution deduction because of poor documentation. The rules are strict.

As the taxpayers in the above case learned, you can't just rely on the charity to provide the correct documentation. Many organizations know the rules and are careful, but some are not. Obviously, the larger the contribution, the more care you should take.

Shortly after a contribution, most charities will follow up with a statement. Some organizations mail out their statements just after the end of the year. Large contributions may be acknowledged quickly. 

After making a substantial contribution, set up a reminder to look for the acknowledgment. Then, make sure the amount listed is correct and the other requirements are met.

Here's a synopsis of the most frequently encountered charitable donation rules:

Cash contributions.  No matter how small the amount, you need:

  • A canceled check, credit card statement, or other banking record or 
  • A receipt or other written documentation from the charity with the donee's name, amount, and date of contribution. 

For contributions of $250 or more, you'll need an acknowledgment from the charity (see below). The $5 bill you drop in the kettle during the holidays isn't deductible unless you get a receipt.  

Noncash donations under $250. For each donation, you must have a receipt or letter from the organization indicating the organization's name, date and location of donation, and a description (no indication of value required) of the property donated. 

Many charities are lax with the rules. Make up a detailed list of items before contributing (don't just write "five bags"). If that's impractical, for example in the case of a clothing drop box, you may be able to satisfy the requirement with a reliable written record.

Contributions of $250 or more. For these donations, you must receive a contemporaneous written acknowledgment from the organization. It must include:

  • The amount of cash and/or a description of the property contributed.
  • Whether or not any goods or services were provided in return for the contribution and a good-faith estimate of the value of the goods or services.
  • A statement that the only benefit you received was an intangible religious benefit, if that was the case. 

Noncash contributions of more than $500.  Property contributions of more than $500 require a description on IRS Form 8283 of your tax return of the donated property and certain other requirements. The $500 threshold is determined by totaling all similar items of property donated to one or more organizations and treating that as a single item. 

Noncash contributions of more than $5,000. You need a qualified appraisal of the property donated. There are certain exceptions to this rule. One is for publicly traded securities for which market quotations are available on a securities market. 

Vehicle contributions. If the vehicle is valued at more than $500, you need an IRS Form 1098-C or other contemporaneous written acknowledgment from the charity. The rules here can get complicated. Talk with your tax adviser before contributing. 

Payroll deductions. Save the W-2, pay stubs, or other documentation provided by your employer. You must also have a pledge card or other document prepared by, or for, the qualified organization that shows its name. If your employer withheld $250 or more from a single paycheck, you must also have an acknowledgment from the charity that you did not receive any goods or services in return for any contribution.

There are other rules dealing with conservation easements, contributions of appreciated property, facade easements, etc. And, while there are chances to save some significant tax dollars with these types of donations, there are plenty of traps. If you're making a substantial contribution, or a series of contributions over time, check the rules carefully and consult with your tax adviser.

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