IRS Denies a $65 Million Charitable Tax Deduction

Written by Founder Raul Rivera on Aug 24, 2017 in IRS Compliance

In order for your donors to claim a tax deduction for the donations they give to your church, they must properly “substantiate” their donations.The word substantiate means to provide evidence to support or prove the truth of something. So, for those who donate to your church, they must be able to “prove” the charitable deductions claimed on their taxes were actually given to your church.

Unfortunately, many churches and their administrative teams are unaware of a donor’s substantiation requirements. This is especially the situation when it comes to the substantiation requirements of noncash donations. 

To help you understand the importance of being familiar with your responsibilities to donors as the donee organization, we will briefly look at an instance where the IRS denied a charitable tax deduction of $65 million.

Why was a $65 million charitable contribution deduction denied?

In 2007, a partnership claimed a charitable contribution of $65 million on its tax return. The IRS audited the partnership’s tax return and denied the entire charitable contribution deduction of $65 million.

When the case was docketed in the U.S. Tax Court** (hereinafter Tax Court) the donee organization that received the charitable donation valued at $65 million submitted an amended Form 990 that included the information specified in Internal Revenue Code (IRC) section 170(f)(8)(B).

I want to pause right here because it is important to explain the significance of this.

We teach at all of our conferences that IRC section 170(f)(8)(A) states that in order for charitable contributions of $250 or more to be “substantiated,” the donor must obtain a “contemporaneous written acknowledgment” of the contribution from the donee organization.

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Section 170(f)(8)(B) explains that in order for a written acknowledgment to be “contemporaneous” it must meet certain requirements that includes the following information:

  • (i) The amount of cash and a description (but not value) of any property other than cash contrubuted.
  • (ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any preperty described in clause (i).
  • (iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) or, if such goods or services consist solely of intangible religious benefits, and a statement to that effect.

Therefore, when the donee organization amended its Form 990, it did so in a way to meet these requirements.

The Tax Court, however, still upheld the IRS’s decision to deny the charitable contribution deduction of $65 million because the giving receipt issued by the recipient organization was not “contemporaneous.” 

In its opinion, the Tax Court stressed that “[t]he requirement that a [contemporaneous written acknowledgment] be obtained for charitable contributions of $250 or more is a strict one.” 

How does this relate to your church and donors?

Your church members can freely give to your church both cash and noncash donations. Moreover, they can deduct the amount of the donations on their income tax returns.

However, in order for your church members to receive a tax deduction for their donations, they must be able to substantiate their donations with a contemporaneous written acknowledgment. This is especially so for contributions of $250 or more.

When it comes to substantiating cash donations, that is an easier task than substantiating noncash donations. There are different rules for properly substantiating the noncash donations given to your church.

For instance, when someone gives your church a noncash donation, such as a television for the youth ministry, you are not supposed to assign a value to that item (IRC section 170(f)(8)(B)). 

Instead, it is the responsibility of the donor to obtain the fair market value for the item donated. You will still need to provide them with a contemporaneous written acknowledgment. 

To provide you with some assistance, we will examine how to properly substantiate noncash donations. We will look at the responsibility of your church and the responsibility of the donor. 

How to properly substantiate noncash donations

The requirements listed below are gathered from Treasury Regulation §1.70A-133 and IRC section 170(f)(8).

1. Donations of $0 - $249.99

Organization responsibilities: The organization must provide a contemporaneous written acknowledgment to the donor that contains the following information:

  • The name of the charitable organization,
  • The date and location of the charitable contribution, and
  • A reasonably detailed description of the property.

Donor responsibilities: The donor must retain the following for his/her own records:

  • The contemporaneous written acknowledgment given from the organization,
  • The fair market value of the item and how the value was determined,
  • Basis (original cost) of the property (if depreciable),
  • The amount that was claimed as a deduction, and
  • Any stipulation attached to the donation.

2. Donations of $250 - $499.99

Organization responsibilities: All of the required responsibilities from donations of $0 - $249.99, plus the following:

  • A statement that no goods or services were provided in exchange for the contribution other than intangible religious benefits. If any goods or services were provided, then the organization must include a description containing a good faith estimate of the value of any goods or services.
  • The written acknowledgment must be contemporaneous, meaning the individual receives written acknowledgment either before he/she files a tax return for the year the contribution was given or before the due date, including extensions, for filing that tax return.

Donor responsibilities: No additional requirements are needed other than the ones listed above for donations with a value of $0 - $249.99. The donor must be sure to have the written acknowledgment before filing his/her return.

3. Donations of $500 - $4,999.99

Organization responsibilities: No additional requirements are needed other than the requirements for donations with a value of $250 - $499.99. 

Donor responsibilities: All of the required responsibilities from donations with a value of $250 - $499.99, plus the following:

  • A description of how the donor first received the property,
  • The approximate date the donor first received it,
  • Basis of the property (regardless if it is depreciable), and
  • The completion of Section A of IRS Form 8283.

4. Donations of $5,000 - $499,999.99

Organization responsibilities: All of the requirements for donations with a value of $500 - $4,999.99, plus the following: 

  • The completion of Part IV of IRS Form 8283.

Donor responsibilities: All of the requirements for donations with a value of $500 - $4,999.99, plus the following:

  • The completion of Section B of Form 8283 (instead of Section A), and
  • A qualified written appraisal of the donated property from a qualified appraiser.

5. Donations of $500,000 and up

Organization responsibilities: All of the requirements for donations with a value of $500 - $499,999.99.

Donor responsibilities: All of the requirements for donations with a value of $500 - $499,999.99, plus the following:

  • Attach the qualified written appraisal to the tax return for the donor. 

Maintain accountability with your donors

Today's tax laws are filled with challenging requirements, and many people are simply unaware such laws exist. In addition, there are countless other laws that affect the way your church handles donations and giving receipts to your donors.

However, when you understand how to properly handle the donations your church receives, you will be able to give peace of mind to your donors and serve them well by providing properly documented giving statements. 

If you are searching for more information on how to manage the donations your organization receives, we can help!  

Register to attend one of our conferences near you, or call us at 877-494-4655 and speak with one of our knowledgable team members. 

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Raul Rivera

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