Recent Court Decisions Highlight Need For Compliance With Substantiation Rules To Claim Income Tax Charitable Deduction

Author:Ms Michele McKinnon and Kelly L. Hellmuth
Profession:McGuireWoods LLP

Individuals who itemize their deductions on their federal income tax return can claim a deduction for contributions to qualifying charities, but only if the contributions are properly substantiated. To correct a number of perceived abuses, the Pension Protection Act of 2006 imposed additional requirements regarding the documentation necessary in some cases to claim an income tax charitable deduction for a gift to charity. Armed with these enhanced rules, the IRS, which has also likely grown weary of valuation disputes with taxpayers in the charitable contribution area, has changed its tactics and has been using these rules to deny the taxpayer's entire charitable deduction where the donor lacks the required substantiation, rather than contesting the valuation of the charitable gift to lower the deduction amount. In the last several years, the courts have been generally siding with the IRS in these cases and denying the taxpayers' income tax charitable deductions in full. Based upon these trends, it is imperative that donors and their advisers take steps to ensure that a charitable gift is properly substantiated so that the donors obtain the full tax benefits associated with their gifts.

As the amount of the charitable contribution becomes larger, the substantiation rules become more and more demanding. For gifts under $250, a taxpayer needs to maintain a record of the contribution, such as a cancelled check, credit card record, or a written communication from the charity, showing the charity's name, the date of the contribution, and the amount of the contribution. Under changes made by the Pension Protection Act of 2006, if the gift is cash (such as cash placed in the collection plate at church each week), the taxpayer's written records will no longer suffice and the taxpayer must have a written communication from the charity as described previously.

For gifts of $250 or more, a taxpayer must maintain a contemporaneous written acknowledgment from the charity. The acknowledgment must include the amount of cash, a description of any property contributed, and a statement that no goods or services were provided in return for the contribution or a good faith estimate of the value of any goods or services that were provided. For the receipt to be contemporaneous, the taxpayer must obtain the receipt on or before the earlier of the date the taxpayer files the return for the year of the contribution, or the due date, including extensions, for...

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