IRS Denies Couple's $37,315 Charitable Deduction

Written by Raul Rivera on Aug 25, 2016 in IRS Compliance

Donations are the life blood of charitable organizations.

Churches rely on weekly tithes and offerings. Housing programs rely on funds, furniture, and clothing. The truth of the matter is that virtually every charity relies on the generosity of donors in order to keep operating.

But in order for donors to claim tax deductions for donations they give, donors must properly substantiate their giving.

The word “substantiate” is a fancy term meaning to provide evidence to support or prove the truth. For donors, they must be able to “prove” the charitable deductions they take on their taxes.

Unfortunately, many donors are unaware of all substantiation requirements. In fact, there are many charitable organizations that are also unaware of a donor’s substantiation requirements.

One of the most common points of misunderstanding with charitable donations is how to handle non-cash donations.

Such was the case for Kenneth and Susan Kunkel. (Kunkel v. Commissioner: T.C. Memo 2015-71)

A brief look at what happened

When filing their federal income tax return for 2011, Kenneth and Susan Kunkel claimed a charitable deduction of $42,455.

Of the total amount claimed, $5,140 came from cash donations. The IRS determined that the couple was able to support their claim of $4,840 of the cash donations. The couple did not dispute the disallowance of the remaining $300.

The Kunkels, however, were unable to provide sufficient evidence for their claim of $37,315 in non-cash contributions. So, the IRS disallowed the claim in its entirety.

In order for donors to claim tax deductions for donations they give, donors must properly substantiate their giving.

The Kunkels claimed to have donated that the non-cash contributions in 2011 to four charitable organizations: the Upper Dublin Lutheran Church; Goodwill Industries; the Military Order of the Purple Heart Service Foundation; and the Vietnam Veterans of America.

Here’s a breakdown of their claim:

  • They claimed that they donated items such as book, household items, clothing, toys, telescopes, jewelry, and household furniture to the church’s flea market that were worth a total $13,115.
  • They also contended that they had donated similar non-cash items to the other three charitable organizations that totaled in value at $24,200.

The problem was that the Kunkels were unable to produce a receipt or written acknowledgment from any of the four charitable organizations showing that the items were actually donated.

The couple claimed that the donations given to Goodwill were dropped off in the early morning or evening when the Goodwill warehouse was unattended.

For the donations given to Purple Heart and Vietnam Veterans, the couple claimed that those items were left outside their house for scheduled pick ups, and were left doorknob hangers saying, “Thank you for your contribution.”

The doorknob hangers contained no other information.

Although the Kunkels produced a spreadsheet in which they assigned “estimated amounts” for the items given to Goodwill and doorknob hangers from Purple Heart and Vietnam Veterans, the court stated that “they supplied no evidence concerning their cost bases in these items or the manner in which they determined fair market values.”

Good intentions without good information

The Kunkel's case is a good example of good intentions without good information.

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The key principle of charitable donations that would have saved the Kunkels is called donor's burden of proof. Had they applied this principle in its entirety, then they may have never found themselves in such a predicament.

So here’s what you need to know.

Section 170 of the Internal Revenue Code allows for contributions made to charitable organizations to be used as a deduction within the taxable year. However, such deductions are allowed only if the individual(s) claiming the deduction(s) can meet the substantiation requirements.

In its opinion, the Tax Court stated that, “the Commissioner’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving those determinations erroneous.” (emphasis added)

In addition, Publication 1771 states that a charitable organization is not penalized for not providing giving receipts. However without a written acknowledgement, taxpayers may not claim a tax deduction.

In reviewing the case briefing, it becomes evident that the key issue was not substantiation of cash donations, but of non-cash donations.
Since it is not uncommon for churches and ministries to receive non-cash donations, I want to use the remainder of this post as an educational tool that you and your staff can reference regarding the substantiation requirements for both the church and the donor.

How to properly substantiate non-cash donations

The contribution requirements listed below are derived from Treasury Regulation §1.70A-133 and 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 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:

  • 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 the he/she files their 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 or 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:

  • A description of how the donor first received the property,
  • The approximate date the donor first received it,
  • Basis of the property, regardless of whether or not 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 completion of Part IV of the IRS Form 8283.

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

  • 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:

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

Challenging requirements made easier

Today’s tax laws are filled with challenging requirements, and many are simply unaware such laws exist. Unfortunately for the Kunkels, they had to learn the hard way.

The difference between them and you is that you are now armed with information that can help you avoid the mistakes. Understanding how to handle donations will serve you well on two front:

  1. As a ministry, you will be able to provide peace of mind for your donors and serve them well by providing well documented giving statements.
  2. As a donor, you will know what types of documents you should be receiving from the organizations you support. You may even find yourself positioned to provide valuable information that will help other churches and ministries serve their members better.

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

Why not attend a conference, or call us at 877-494-4655 and ask to speak with one of our trained specialists? I believe you have many questions, and I know we can help.

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Raul Rivera

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