Most people feel really great when they donate to charity, and the accompanying tax deduction can make the gift even sweeter. But recent cases show that the IRS is demanding strict compliance with its rules on substantiating charitable contributions, and messing up can mean losing the entire deduction.
Recent cases have highlighted particular issues the IRS is going to carefully review when it comes to charitable contributions; being forewarned is being forearmed:
- Make sure the charities statement/acknowledgment complies with IRS rules. What the charity states in its statement or acknowledgment can mean the difference between a charitable contribution being allowed or not. In David P. Durden, TC Memo 2012-140, the Tax Court denied charitable contributions for the taxpayers’ gifts to their church because church’s statement failed to state that no goods or services were received by the taxpayers, as required under IRS rules. A second statement from the church was too little, too late; the IRS totally disallowed the charitable contribution deduction and its decision was upheld by the Tax Court. Similarly, in Jolene M. Villareale, TC Memo 2013-74, the Tax Court held that the taxpayer couldn’t deduct her contributions because the charity didn’t provide her with a written acknowledgment that described the contributions and stated whether any goods or services were provided for them. In that case, the taxpayer was giving to her own charity and argued that it was futile to write herself an acknowledgment, but the Tax Court held that it was “immaterial that [she] was on both sides of the transaction.”
- Get all needed “qualified appraisals” and attach them to your return. The IRS is very strict on what constitutes a “qualified appraisal.” In Estate of Harvey Evenchik, TC Memo 2013-34, the taxpayers owned 72.3384 percent of the stock in Chateau Apartments (Chateau). Chateau’s only assets were two apartment buildings. The taxpayers attached appraisals for each building to their return, but didn’t attach an appraisal for the stock itself. The IRS found that the appraisals of the buildings, rather than of the stock itself, did not constitute a “qualified appraisal” and disallowed the deduction, and the Tax Court agreed. And an appraisal of the stock obtained after the IRS started its audit was too little, too late, because IRS rules require that the appraisal be made no more than 60 days before the gift and no later than the due date of the return.
- Use a “qualified appraiser.” Regardless of personal qualifications, never use the donor or donee as an appraiser. In Joseph Mohamed, TC Memo 2012-152, the taxpayers contributed real estate to a charitable remainder unitrust in 2003 and 2004 and claimed charitable contribution deductions. One of the taxpayers was a real estate broker and certified real estate appraiser and he used his own appraisals to support the charitable deductions. The IRS disallowed the charitable deductions, because IRS rules state that the donor or taxpayer claiming the deduction or the donee of the gift cannot act as the “qualified appraiser.” Even though the IRS’s own appraiser and subsequent third-party sales evidenced that the value of the donated real estate was much greater than the amount deducted by the taxpayers, the Tax Court disallowed their charitable contribution deductions in full because the taxpayer was not a “qualified appraiser.”
The IRS appears to be focusing on the taxpayer’s strict adherence to its rules rather than the merits of the deduction. The court decisions state that the taxpayer needs only to “substantially comply” with the IRS substantiation rules to be entitled to the deduction, but taxpayers would be well advised to follow the rules strictly by the book rather than rely on the uncertain parameters of “substantial compliance.”
For more on the risks to your charitable deduction, check out the complete article, Making a Big Gift to Charity? Follow IRS Rules or Lose Your Deduction, in the May 2013 issue of CEB’s California Business Law Reporter, providing business attorneys with coverage of hot issues and new opportunities with expert commentary. Also check out CEB’s Advising California Nonprofit Corporations, chapter 15 on Charitable Giving.
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