When it comes to the tax laws governing charities, the details matter.
As reported on our firm’s newsfeed, in a recent United States Tax Court case, the tax judge disallowed deductions for over $22,000 in charitable giving due to noncompliant documentation from the recipient church. Because the contributions were disallowed as deductions, the donor’s IRS-determined deficiency of $7,552 was upheld.
What was the problem with the documentation? The documentation provided by the church to the donors failed to include a statement regarding whether any goods or services were provided in consideration for the contributions.
Under 170(f)(8)(B) and sec. 1.170A-13(f)(2) of the Income Tax Regulations, for a charitable donation to be regarded as eligible for a tax deduction, the recipient of the donation (donee), must provide a written statement with the following three elements:
- The amount contributed,
- Whether the donee organization provided any goods or services in consideration for the contribution, and
- A description and good faith estimate of the value of any goods or services provided by the done organization.
Initially, the church’s documentation did not include a statement addressing the second of the elements. After the IRS notified the donors that their documentation was not sufficient, the donors submitted a second statement from the church, documenting their contributions and containing the charitable statement.
The Court found the first statement insufficient, and the second statement “not contemporaneous,” meaning not timely. The donors were on the hook for the more than $7,500 penalty.
Was the court nitpicky? Arguably yes. But strictly speaking the court followed the letter of the statute (26 U.S.C.A. § 170). And so we have a cautionary tale for religious organizations and other charities that receive the bulk of their funding from charitable contributions. Directors and Officers have a duty to their donors to ensure that contributors receive the significant benefits that are established under federal law.
For donors, understand that you are responsible for substantiating the tax-deductibility of your financial contributions. Understand what this entails and be mindful of the language on the charitable receipts you receive. The donors in this case were a married couple from Texas that, according to the opinion, both worked as public servants for the State of Texas and appeared to be faithfully giving charitable contributions to their church on a weekly basis. Due to the church’s receipting error, the couple is now on the hook for $7,552.
For the court's full opinion, please visit: http://www.ustaxcourt.gov/InOpHistoric/durdenmemo.TCM.WPD.pdf