TAXPAYERS SCREWED BY TAX COURT

The recent issue of NATP’s TAXPRO MONTHLY discussed David P and Veronda L Durden v Commissioner (TC Memo 2012-140).  This was another case where the Tax Court upheld the IRS disallowance of a legitimate charitable contribution made to a qualified charity because the taxpayers did not comply with the strict letter of the law.

In 2007 the taxpayers did legitimately donate over $20,000, in several separate contributions of more than $250, to a qualified 501(c)(3) organization eligible to receive tax-deductible donations.

The taxpayers were audited in 2009, and produced cancelled checks and a statement from the church, dated January 10, 2008, that documented the full amount they had deducted.  Unfortunately the statement from the church did not specifically indicate that no goods or services, other than intangible religious benefits, were provided in exchange for the donation, and was therefore not accepted by the IRS.

The couple obtained a second statement from the church, dated June 21, 2009, that clearly indicated that no goods or services were provided.  But the IRS ignored this second statement because it was not “contemporaneous” – i.e. received from the done organization before the earlier of the date the original tax return is filed or the extended due date of the tax return.

The first letter, dated January 10, 2008, was contemporaneous but did not contain the requirement statement.  The second letter, dated June 21, 2009, contained the required statement but was not contemporaneous.

I do agree it is right to require proper documentation to support a charitable deduction.  Before the stricter rules that require a hard-copy receipt for every single dollar contributed to a church or charity in order to claim a tax deduction on Schedule A I would venture a guess that at least 50% of all charitable deductions claimed on Schedule A each year were at least slightly overstated.  And I do believe that recipient organizations should be required to verify that no goods or services were provided in exchange for the donation.  But I draw the line at this strict adherence to a “contemporaneous” statement.

If the taxpayer can provide proper documentation that the money was actually given to the charity, via cancelled checks, and that it was an actual charitable donation, via an acknowledgement from the charity, and the charity confirms to the IRS or the Tax Court either in writing or by oral testimony that no goods or services were provided, the deduction should be allowed.  The written statement that no goods or services were provided, if not contemporaneous, should be allowed to be provided, under penalty of perjury, either during the audit or in court.

I do understand, and know full well, that cancelled checks by themselves are not sufficient proof that a donation was actually made. 

I am reminded of the tale of the church member who approached his pastor one Sunday after the service.  The member told the pastor that he noticed there was a lot of loose cash in the collection plate each week, which would be kept in the church overnight before counting and depositing, and that he, as a retail business owner, needed lots of cash at the beginning of each week for his cash register.  He proposed that after the service each Sunday he write a check to the church in exchange for all the loose paper bills in the collection plate.  This way the church would not have excessive cash in its office overnight and he would have extra cash for use at his retail location – a benefit for both parties.

Each week the businessman would write a personal check to the church for $100-$200 and take the cash home with him.  On his tax return he claimed a deduction for the total of all the checks he wrote to the church for the year.

{I have told this story to prove a point, and not to suggest a way to cheat on your taxes!}

So it is better to have both cancelled checks and an independent individual or cumulative receipt or statement, regardless of the amount of each separate contribution.    

 

I discuss the court case and the rules for documenting donations in more detail in "Documenting Charitable Deductions--Don't Get Screwed by the Tax Code" at MainStreet.com.

Do you agree with me that the Tax Court decision, while legally appropriate, was basically wrong in this and other similar cases, and that “non-contemporaneous” statements regarding the receipt of goods or services should be acceptable?

TTFN