In order for a U.S. taxpayer to deduct contributions to charity on his or her federal income tax return (Form 1040), the taxpayer must comply with very specific rules set forth in the Internal Revenue Code (the “Code”) which are designed to ensure that the amount deducted does not exceed the amount given as a charitable contribution. These rules are commonly referred to as the “substantiation rules” and can vary depending on the amount and the nature of the property contributed. This article will focus on contributions of money given by a donor to a charitable organization. While money includes cash, it also includes cash equivalents such as checks, electronic funds transfers, debit cards, credit cards and payroll deductions.
Substantiation Burden on Taxpayer
The burden of proving that a charitable contribution satisfies the requirements for a charitable deduction under the substantiation rules falls squarely on the shoulders of the donor taxpayer claiming the contribution deduction. It is important to note that in addition to substantiating a deduction for a charitable contribution, a donor must also establish that the donee is an organization eligible to receive the tax deductible contribution.
Section 170(a)(1) of the Code provides the general rule for a taxpayer that “[a] charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.” Many of the substantiation rules are set forth in Section 170(f) of the Code and regulations promulgated by the Secretary of the Treasury.
There are two classes of money contributions under the substantiation rules – the first class consists of contributions of less than $250, and the second class consists of contributions of $250 or more. While the donor taxpayer is not required to include the substantiating documents when filing the taxpayer’s federal income tax return, the taxpayer must maintain such documents with the taxpayer’s tax records.
Contribution Under $250
For purposes of the first class of contributions (i.e., contributions of money less than $250), the donor is allowed a deduction on the taxpayer’s federal income tax return if the taxpayer substantiates such deduction with either a bank record or a written communication from the charitable donee showing (1) the name of the donee organization, (2) the date of the contribution, and (3) the amount of the contribution. For example, bank records may include items such as a canceled check, bank or credit union statement or credit card statement. Alternatively, a written communication from the donee organization could include a letter, receipt or other written communication.
Contribution of $250 or More
With respect to the second class of contributions (i.e., contributions, of either money or property, of $250 or more), the taxpayer must obtain a “contemporaneous written acknowledgement” from the donee organization in order to substantiate the contribution as a deduction. If more than one contribution of $250 is made to the same donee organization during a tax year, the taxpayer may substantiate the contributions with either a single contemporaneous written acknowledgement that reflects each contribution or on a separate contemporaneous written acknowledgement for each contribution.
The acknowledgement is required to contain the following information:
(1) the amount of cash contributed and a description (although not value) of any property other than cash contributed;
(2) whether the donee organization provided any goods or services in consideration, either in whole or in part, for any cash or property contributed;
(3) if the donee organization provided any goods or services other than intangible religious benefits, a description and good faith estimate of the value of such goods or services; and
(4) if the goods or services provided by the donee organization consisted solely of intangible religious benefits, a statement to that effect.
Although the acknowledgement may be provided to the donor in paper (e.g., a letter) or electronic (e.g., an e-mail) form, it is important that such acknowledgment be generated by the donee organization as opposed to the donor. In addition, the acknowledgement will be considered “contemporaneous” if the donor obtains the acknowledgement on or before the earlier of the date on which the taxpayer files a return for the taxable year in which the contribution was made or the due date (including extensions) for filing such return.
Example of What Not to Do
Commentators believe that the language of the substantiation rules and their regulations indicate that Congress intended for them to be applied literally for purposes of discouraging taxpayers from deducting amounts that exceed the taxpayer’s actual contribution. For example, in Villareale v. Commissioner, T.C. Memo 2013-74, the taxpayer made 44 contributions totaling $10,022 to an animal rescue organization co-founded by the taxpayer and recognized by the Internal Revenue Service (“IRS”) as a charitable organization. Of the 44 contributions, 27 were for less than $250 (totaling $2,393) and 17 were for $250 or more (totaling $7,629). The dates and amounts of each contribution were reflected in both the taxpayer’s personal bank account and the donee organization’s bank account.
The IRS did not dispute that the taxpayer made the contributions to the donee organization or that the donee organization was a valid charitable organization. Furthermore, the IRS did not dispute that the taxpayer was entitled to deductions for each contribution of less than $250, presumably because such contributions were substantiated by proper bank records. However, the IRS took the position that the taxpayer was not entitled to deduct the contributions of $250 or more because none of these contributions were substantiated with one or more contemporaneous written acknowledgement. The U.S. Tax Court ultimately found that the bank statements did not constitute a contemporaneous written acknowledgement as required by the Code and regulations because the statements did not state whether the taxpayer received any goods or services in exchange for the taxpayer’s contributions to the donee organization. Accordingly, the taxpayer lost all deductions for charitable contributions of $250 or more, totaling $7,629.
A taxpayer whose charitable contribution deduction is disallowed by the IRS for failure to comply with the substantiation rules may appeal such decision to a court in hopes that the court will reverse such disallowance. Case law suggests that courts vary in their approach to the substantiation rules, ranging anywhere from a strict to lenient application. In any event, however, the better course of action for a taxpayer is to ensure that the taxpayer’s records comply with the substantiation rules, including confirmation (before the contribution is made) that a donee organization, when necessary, will issue a contemporaneous written acknowledgement to the taxpayer for the taxpayer’s contributions.