(Note: While the following post is focused on individuals more than charities, charities can learn from the woes of donors and make changes in practices and procedures to assist their donors in claiming noncash charitable contributions.)
We have all done it in the past - gathered up the old clothes and unused household items and delivered them to the charity of our choice. If we are lucky, the charity's attendant hands us a "receipt" (I use this term loosely) for our donation. We fill in the receipt as best we can and then add them to our tax information. At tax time, we take them out and use them to determine our deduction for our noncash contributions (or worse hand them over to our tax preparer uncompleted, believing they have some intrinsic gift to know what was given and how much it was worth.)
Meet Mr. & Mrs. Kunkel (T.C. Memo 2015-71). The Kunkels followed the above scenario to the amount of more than $37,000 of items donated to various charities. The IRS audited the Kunkels and found that the substantiation for the noncash donations failed to meet the requirement of Internal Revenue Code Section 170 and disallowed the deductions. The Kunkels took this position to court in hopes of achieving a more lenient decision from a judge. The court was just as stringent as the IRS and also disallowed the deductions based on the following:
- The Kunkels did not have any "contemporaneous written acknowledgements" from any of the charities;
- In instances where a charity had picked up the donation from the Kunkels home and left the obligatory "thank you" receipt, the receipt was insufficient to justify a donation since it failed to contain any of the required information;
- The Kunkels did not maintain a written record detailing each item that was donated, how it was acquired and it original price;
- The Kunkels did not maintain any information on how the fair market value of the items was determined; and
- The Kunkels did not present any credible evidence that the items donated were "in good used condition or better."
There are several interesting lessons to be learned from this case:
- The IRS may aggregate all the items donated into categories to determine if the requirement for an appraisal (value at more than $5,000) is met. For example, out of all the donations, the Kunkels estimated that the clothing given away was valued at $8,000. This was spread out among various charities, but the IRS aggregated the values and stated that an appraisal was required to claim the donation. Other groups of items, i.e., household items or toys, were aggregated to determine if the additional substantiation requirements for donations of $500 or more were met. This level of documentation requires the donor to keep records to describe and list each of the items donated, its original price when it was acquired and what condition it is in in addition to the date donated and the value at the time of donation.
- Receipts, such as door hangers and blank receipts, often used by charities, do not meet the substantiation tests, since they are not donor specific, do not contain a description of the items donated and generally may not even be dated.
- Failure to claim deductions without the required substantiation may be considered as negligence and subject a donor to a 20% accuracy related penalty in addition to any additional taxes that are due.
Donors who desire a tax deduction for noncash contributions, including clothing and household items, should take great care to have records that contain all the required substantiation for the donation. Charities, including churches, should become aware of the substantiation requirements, so they can assist donors by issuing receipts including all the required information.
A charities receipt should include:
- The date the donation was received by the charity;
- The name and address of the donor;
- A complete description of the items donated;
- A general statement as to the condition of the items donated; and
- The "no goods or services" statement, as generally required for cash contributions.
In addition to obtaining a qualifying receipt, donors must also be able to:
- Maintain records establishing when or how the donated items were acquired and what the donor's cost basis is in the items;
- Maintain records on how the fair market value of the items were determined by the donor;
- Confirm that a receipt is always obtained and confirm that it is sufficient to meet the "contemporaneous written acknowledgment" when the aggregate of items donated is more than $250;
- Understand when and how the appraisal requirements are applied with donations, either for an individual item or the aggregate of similar items, exceeding $5,000.
There have been other cases of similar nature decided in the last few years. The IRS is taking a strong stance on the substantiation of both cash and noncash charitable contributions and the courts are consistently siding with the IRS. Both donors and charities need to be familiar with all of the requirements for substantiating charitable contributions. Additional information on substantiation requirements can be found in IRS Publications 526, Charitable Contributions and 561, Determining the Value of Donated Property at www.irs.gov.