The Internal Revenue Code (Code) does not treat income and deductions equally. Generally, all economic benefits received by a taxpayer, not a gift, are includible in one’s gross income under Section 61 unless specifically exempted by anther Code Section. Contrariwise, when it comes to deductions the opposite is true: No deduction may be rightfully claimed in a return unless a Code Section specifically allows the deduction and the taxpayer proves he or she is entitled to the particular deduction and also proves the amount paid (most individual taxpayers report on the cash basis of accounting) within the year in question. This burden of proof for most deductions can be overcome with any relevant and credible evidence that establishes entitlement and payment. Thus, testimony, if credible, may establish the deduction under the so-called Cohan rule or by showing “substantial compliance” with the law.
Some Code Sections allowing a deduction also provide specific record keeping requirements that must be met to claim the deduction. Thus, Section 274(d) requires “adequate records” for travel, entertainment, meals, gifts and all use of certain property (called “listed property” such as automobiles. Treasury Regulations amplify what specific records will be deemed adequate.
In the case of charitable donations exceeding $250, Section 170(f) provides, in part, as follows:
(8) Substantiation requirement for certain contributions
(A) General rule
No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).
(B) Content of acknowledgement
An acknowledgement meets the requirements of this subparagraph if it includes the following information:
(i) The amount of cash and a description (but not value) of any property other than cash contributed.
(ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property 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, a statement to that effect.
For purposes of this subparagraph, the term “intangible religious benefit” means any intangible religious benefit which is provided by an organization organized exclusively for religious purposes and which generally is not sold in a commercial transaction outside the donative context.
For purposes of subparagraph (A), an acknowledgment shall be considered to be contemporaneous if the taxpayer obtains the acknowledgment on or before the earlier of—
(i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or
(ii) the due date (including extensions) for filing such return.
(D) Substantiation not required for contributions reported by the donee organization
Subparagraph (A) shall not apply to a contribution if the donee organization files a return, on such form and in accordance with such regulations as the Secretary may prescribe, which includes the information described in subparagraph (B), with respect to the contribution.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations that may provide that some or all of the requirements of this paragraph do not apply in appropriate cases. (Underlined emphasis added).
In Durden v. Comr., T.C. Memo 2012-140 (5/17/12) the taxpayers, husband and wife, generously donated $25,171 to their church in 2007 and deducted that amount on their joint Form 1040 for the year. In January, 2008, they received an acknowledgment letter from the church for the amount of their 2007 donations but not stating whether the church provided benefits to them and not stating the value of such benefits, if any.
The IRS did not accept the January 2008 acknowledgment as satisfying Section 170(f) (8). The IRS also refused to accept as not contemporaneous a second acknowledgment letter from the church sent in 2009 which did state that no goods or services were provided to the taxpayer. Following issuance of Notice of Deficiency in 2009, the taxpayers petitioned the Tax Court for a redetermination of the IRS proposed assessment based on the disallowance of the entire church donation of $25,171. The IRS moved for Summary Judgment. The court granted the IRS motion even though the taxpayers had submitted cancelled checks and the 2009 letter from the church.
The court granted Summary Judgment because there was no material issue of fact or law to be tried by the court. Section 170(f) (8) must be strictly followed to obtain a deduction, however unfair the result. The 2009 letter was received after the cut-off dates provided in the statute. Thus, IRS and the court have no discretion to alter what congress has legislated in clear and uncertain terms. Substantial compliance with the law, is insufficient proof where the Code Section allowing a deduction contains specific mandatory record keeping requirements.
Steinberg comment: The statute ought to be amended to allow later submission of the required documentation at least for donations to organizations that customarily provide no more than nominal benefits to its donors. Requiring a statement, as does Section 170(f)(8)(D)(iii), as to intangible religious benefits, seems superfluous and creates only a trap for the innocent uninformed taxpayer. The rule should be continued as is for clubs, tax exempt event providers, such as orchestras, ballets, operas or other such charitable organizations that provide free tickets or merchandise. Organizations like the American Red Cross and churches usually provide only incidental benefits to members. When the tax law attempts to capture every possible dollar of economic benefit and close every loophole, however minor, it becomes overly complex and unwieldy. It also becomes unfair when it penalizes well-meaning taxpayers who have behaved nobly but are unaware of rules that are arbitrary and needless.
The IRS has to date prescribed no regulations as provided by Section 170 (f) (8) (E) under which charities could report the required information to obviate the need to include the specific statement regarding benefits in a letter to donors. Absent regulations, one court has held that including the information in the charities annual Form 990 does not let the taxpayer off the hook for the required documentation. Again, what is the purpose of these rules: for common sense enforcement, or to create an endless maze of tax headaches?
Lesson from this case: If you donate more than $250, obtain the required letter of acknowledgment and make sure it contains the “no quid-pro-quo” language.
© 2012 by Robert S. Steinberg, Esquire
All rights reserved