“Close” counts with horseshoes and hand grenades. Unfortunately, it doesn’t count for entitlement to deduct a charitable contribution, once the amount claimed exceeds a trigger point. When that happens, the taxpayer’s own records – no matter how convincing – won’t suffice. There has to be an acknowledgement from the charity itself that follows the law and regulations precisely. Otherwise no income tax deduction whatsoever will be allowed.
The “rant” below was brought on by a client’s question about contributions of property to charities, unfortunately asked too late to save a large deduction. It concerns only that – contributions of property – and only in situations where the deduction sought is large enough to invoke this acknowledgement requirement.
Documentation of a property contribution in a taxpayer’s own records won’t be considered here.[1] My focus is on what the recipient charity must give the taxpayer. Proof of the value of what was contributed – potentially a significant documentation burden – likewise isn’t addressed. (There, close does count, since experts can disagree about the value of virtually anything.[2])
Special relevance to older clients and personal representatives
In retirement planning or estates and trusts practice, we deal with two very common events that involve atypically large property contributions, and thus potentially significant tax benefits. One of those events is the transition from a single-family home to a smaller living space, often to gain access to some personal services such as daily living assistance or medical care. The other event involves the settling of a decedent’s affairs where, not infrequently, contributions are made by the individuals who succeed to the property (rather than as permitted by or directed by a will or trust instrument[3]). This might be done to dispose of what is left after an estate sale, or as a result of second thoughts (e.g., no room for the grand piano).
In either of these cases, the people who arrange the property contributions are often under stress, and critical details may be overlooked. Or there may just be a belief (not unreasonably) that a good faith effort to substantiate the deduction should be enough. Compounding the problem, many charities and thrift shops offer curbside pickup, or drive-through drop-off sites, where the donor is given a DIY (do it yourself) receipt that is often not dated or signed (and thus, as discussed below, it fails as support of a deduction).
So once more, with feeling: if the deduction sought is above a threshold, whether even dollar one will be allowed depends on receipt of a proper acknowledgement.
The trigger point.
When the total value of property (or cash, or both) given to one charitable organization in one tax year is $250 or more, the taxpayer must obtain a “contemporaneous written acknowledgement” from the recipient organization to be entitled to any deduction whatsoever.[4] The focus here is on property contributions, but one-time or infrequent cash contributions also involve risks that necessary acknowledgements will not be obtained.
Contemporaneous means contemporaneous.
Waiting to obtain a charity’s acknowledgement until there’s a request for it in a return examination means the deduction is lost. The acknowledgement must be obtained before the earlier of the date of filing of the original return for the year of the contribution or the due date (including extensions) for that return.[5] A court might express its sympathy for a taxpayer who was late obtaining an acknowledgement but had solid proof of the fact of a contribution and its value; nevertheless, the court would still disallow the deduction.[6]
There can be a trap in this earlier-of requirement. Many charities issue acknowledgements in a batch process after the end of each calendar year, which only makes sense for their supporters who make several yearly contributions. But what about the one-time contributor who might also want to file a tax return as early as possible? If the return is filed before the acknowledgement is received, the deduction is lost, even if the acknowledgement arrives before the return’s due date. Clearly, the safest approach for a one-time contributor is to obtain the acknowledgement at the time of the contribution.
Written means written.
Apparently, a writing can be paper or electronic, and it need not be on official letterhead or of a particular size.[7] How much of the writing can be done by the taxpayer, and how much by the charity, is not settled, and perhaps is unnecessary hair-splitting, but clearly some part must be produced by the charity in order for the writing to reflect an act of acknowledgement.
Acknowledgement means acknowledgement.
Someone at the recipient charity, or someone acting as an agent[8] at the time of the contribution, must have done something to recognize and memorialize the event. Pre-signed receipts, or unsigned thank-you cards, will fail as acknowledgements because they don’t show that someone other than the taxpayer actually observed and logged the items received.[9] More colloquially, if an inference can be made that the taxpayer supplied all of the content of a document that was simply “rubber-stamped” by the charity, that document will probably fail as an acknowledgement.
All means all.
The following information has to be included in a charity’s acknowledgement if a deduction of $250 or more will be claimed for transfers to it during a given tax year:
- The amount of cash, a description of the property (but not necessarily its value[10]), or both, received from the donor;
- An affirmative statement of whether or not the charity provided any goods or services as consideration, in whole or in part, for what it received from the donor;
- If the charity did provide any consideration (other than intangible religious benefits), then a separate statement of its good faith estimate of the value of that consideration; and
- If the charity provided the donor with any intangible religious benefits, either as the sole consideration or as part of the consideration, an affirmative statement that it did so.[11]
Comments about two of the terms here may be helpful.
First, consideration is anything that the donor expects to receive in exchange for what was given, including anything expected to be received at a later time.[12] Even some value to be provided in the following year, such as discounted or free admission to a ticketed event conducted by the charity, is included. Second, whether an intangible religious benefit was present is only a question for an organization operating exclusively for religious purposes, and this type of benefit is limited to something not generally sold in commercial transactions.[13] So an organization having a mixed spiritual and social welfare mission would not have to address the issue in an acknowledgement.
Why substantial compliance with the rule isn’t good enough
One major purpose of enacting this all-or-nothing rule was to increase compliance with another one that Congress believed was subject to abuse – that in a bargain sale to a charity, only the bargain element can be deducted.[14] Even so, the acknowledgement rule applies equally to contributions made without any return consideration of any kind. An acknowledgement that omits any of the required information totally forecloses the possibility of a deduction for what was “acknowledged”.[15]
Conclusion
The above is old news. But it seems to be overlooked frequently, and where the potential tax savings may be large enough to justify more attention. A taxpayer’s own documentation of a property contribution may be above reproach, but that will not save the deduction if an acknowledgement from the charity is also required, and that acknowledgement is not obtained or is obtained too late. Zero means zero: no acknowledgement, or late or incomplete acknowledgement, no deduction at all. In situations where unusually large property contributions will be made, this unforgiving rule has to be top of mind.
[1] Those documentation requirements are not insubstantial, and have their own trigger points at which additional requirements are imposed. See generally, IRC § 170(f); Treas. Reg. §§ 1.170A-13(b) and (f).
[2] Valuation of property is a question of fact. Treas. Reg. § 1.1001-1(a). But the Tax Court, at least, has upon occasion made very clear that it wants disagreements about valuation resolved between the parties, and that it discourages any effort “…to infuse a talismanic precision into an issue which should frankly be recognized as inherently imprecise and capable of resolution only by a Solomon-like pronouncement.” Messina v. Commissioner, 48 TC 502, 512 (1967).
[3] Charitable contributions of an estate or trust are deductible under IRC § 642, not IRC § 170. The acknowledgement requirement discussed here applies only to deductions under the latter Code Section. Treas. Reg. § 1.170A-13(f)(1). No corresponding requirement exists in the former, or its Regulations, which authorize charitable deductions “in lieu of the limited charitable contributions deduction authorized by section 170(a).” Treas. Reg. § 1.642(c)-2(a). Note, however, that the acknowledgement requirement does apply to charitable contributions passed through to owners of S corporations and partnerships. Treas. Reg. § 1.170A-13(f)(15). And it applies to C corporations, because IRC § 170 controls the deduction of charitable contributions in arriving at corporate taxable income. IRC § 170(b)(2).
[4] IRC § 170(f)(8)(A); Treas. Reg. § 1.170A-13(f)(1).
[5] IRC § 170(f)(8)(C); Treas. Reg. § 1.170A-13(f)(3). Possible statutory postponements of these deadlines, e.g., under IRC § 7508 for Presidentially-declared disaster areas, are not covered here.
[6] Daniel Gomez, et ux., TC Summary Opinion 2008-93.
[7] IRS Publication 1771, Charitable Contributions (Rev. 3/16), page 3.
[8] An otherwise acceptable acknowledgement can be made by an agent, e.g., for a car donation. Rev. Rul. 2002-67, 2002-2 C.B. 873.
[9] Thad D. Smith, TC Memo 2014-203 1468, 1472.
[10] Apparently, including a value estimate for what was received is an option, though anecdotal evidence suggests that few charities will actually do so.
[11] IRC § 170(f)(8)(B); Treas. Reg. § 1.170A-13(f)(2).
[12] Treas. Reg. § 1.170A-13(f)(6). Note, however, that relatively insubstantial consideration (e.g., a coffee mug or refrigerator magnet) given by the charity can be disregarded in the acknowledgement. Treas. Reg. § 1.170A-13(f)(8). Because no value has to be assigned to such consideration, it won’t be treated as a quid pro quo that reduces the amount of a donor’s deduction.
[13] IRC § 170(f)(8)(B). Likewise here, because no value has to be assigned to such a benefit, it won’t reduce the amount of a donor’s deduction.
[14] Addis v. Commissioner, 94 AFTR 2d 2004-5134, 2004-5137 (9th Cir. 2004).
[15] Addis, 94 AFTR 2d at 2004-5139.
