Tax Court Decisions Highlight Importance of Strict Compliance With Charitable Contribution Substantiation Rules

The U.S. Tax Court issued two decisions earlier this year that send a clear warning to people wishing to make large charitable contributions: to receive the tax benefits of these contributions, you must make certain you follow the substantiation rules to the letter.

The case of Durden v. Commissioner began in 2007, when David and Veronda Durden gave more than $25,000 in cash to their church. The church issued them a receipt, but did not indicate whether the Durdens received any goods or services in exchange for their money. The Durdens attempted to deduct the donations from their taxes, but the IRS disallowed the deduction because the receipt lacked the “goods and services” language.

The church later generated a second letter, which stated that the taxpayers received no goods or services, but the IRS again denied the deduction. The second letter failed, the IRS concluded, because 26 USC 170(f)(8) requires a contemporaneous letter answering the goods-and-services question. The Durdens took their case to the U.S. Tax Court, but the court sided with the IRS. Section 170(f)(8) expressly requires a contemporaneous acknowledgement that listed the amount of cash and/or value of the donated property and statement regarding whether the donor received any goods or services in exchange. The first letter lacked the required details regarding goods and services, and the second letter was not contemporaneous, so the Durdens lacked the proper documentation to take the deduction, the court ruled.

The case of Mohamed v. Commissioner yielded an even harsher result. In 2003 and 2004, Joseph and Shirley Mohamed donated several million dollars of real estate to Joseph’s charitable remainder unitrust. Joseph, who was a certified appraiser, prepared his own appraisal of the property. The IRS ultimately denied the entire deduction for the donations.

The Tax Court reluctantly agreed. The court noted that, although the Mohameds’ property was probably worth more than the $15.8 million amount Joseph claimed, and he was a certified appraiser, the couple still failed to comply. The regulations required the taxpayer to obtain an appraisal from a “qualified” appraiser. Since 26 CFR 1.170A-13(c)(5)(iv)(A) expressly excluded the donor and the “taxpayer who claims or reports” the deduction from the group of qualified appraisers, the Mohameds lacked the required appraisal. “[T]he problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deduction, and we cannot in a single sympathetic case undermine those rules.” The rulings also serve as a cautionary tale for charitable organizations. For example, had the Durdens’ church included the “magic words” in the first receipt, that couple may have avoided their tax troubles. These organizations, to help foster their donors’ charitable inclinations, should know the requirements imposed by the tax code and regulations, and make sure that their procedures for receiving donations fully comply with them.

The tax attorneys at Samuel C. Berger, P.C. and the CPAs at S.C. Berger, P.C. can help people throughout New York and northern New Jersey who seek to express their charitable desires, and receive the maximum tax benefit allowable for such philanthropy. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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