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Recent IRS Cases Point Out Need for Charitable Contribution Documentation

Posted Monday, April 1, 2013 by Michael A. Larson

alt textAs individuals prepare to file their 2012 federal income tax returns, it is extremely important to pay attention to obtaining the appropriate documentation for charitable contributions, especially if those contributions are significant. In two cases decided in 2012, taxpayers were denied substantial charitable contributions due to technical failures with respect to required documentation of charitable contributions.

In Mohamed v. Commissioner, TC Memo 2012-152, the taxpayers donated five properties worth millions of dollars to a charitable remainder unitrust. Despite sales of (he properties for amounts substantially in excess of the value claimed on the Mohameds’ tax returns, the IRS initially challenged the values assigned to the properties. However, upon reviewing the taxpayer’s filings, the IRS noted clear mistakes in properly documenting the transactions. This included a failure to obtain a qualified appraisal or to attach to their federal tax return and appraisal summary meeting the requirements of IRS regulations.

The Tax Court found that despite “substantial compliance” by the taxpayers, no qualified appraisals were obtained and therefore the lack of compliance with this “essential requirement,” resulted in a complete denial of the charitable contributions. This occurred even though the Tax Court was convinced that the taxpayer may well have undervalued the properties and that the IRS forms themselves provided potentially misleading information.

In Durden v. Commissioner, TC Memo 2012-140, the taxpayers were denied a charitable contribution of over $25,000 to their church due to a technical failure of a written acknowledgment of the charitable contribution received from the church. In response to a notice of deficiency, the taxpayers produced records of their contributions to the church, including canceled checks and a letter from the church acknowledging the contributions. The IRS refused to accept the documentation because the letter from the church did not contain a statement as to whether any goods or services were provided in consideration for the contributions, as required by IRS regulations.

The taxpayers obtained a subsequent letter from the church with the required language. The IRS denied this proof as well, because the statement was not “contemporaneous.” To be considered “contemporaneous” the statement must be obtained before the earlier of the date the taxpayer files the original return for the year contribution, or the due date (including extensions) for filing the original return for the year.

The Tax Court held that the second statement was not allowable because it was not contemporaneous. The court further held that the first statement provided to the IRS, although contemporaneous, did not meet the essential requirements of the statute and therefore the charitable contribution was disallowed in its entirety.

Given these recent decisions, taxpayers should be alert to make certain that they have the required contemporaneous documentation in their files to support charitable contributions included on their federal tax return. Further, contributions in excess of $5,000 have very specific requirements for the information necessary to be filed with the federal tax return. Taxpayers should carefully read the instructions and, preferably, work with an experienced tax advisor to make certain that the proper documentation is provided to support charitable contributions taken on their federal return.

For more information, contact Ronald Bueing at (206) 805-1490.

DISCLAIMER: This blog is not legal advice. This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice under any circumstances, nor should it be construed as creating an attorney-client relationship. The information on this blog is a general statement of the law and may not be up to date, accurate or applicable to your specific circumstances. Prior success in litigation is not an indication of future results; each case is unique and past results cannot predict future outcomes.

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