CHARITABLE CONTRIBUTIONS—WHAT CHARITIES AND DONORS NEED TO KNOW

April 15th is around the corner. How are you doing with your income tax return preparation? Do you have all of your documentation in order? W-2s and 1099s should already have been issued, but have you received acknowledgments of the contributions that you made to charities last year?

Donors who itemize can claim a deduction on their federal income tax returns for contributions to qualified charities, but only if the donors have proper substantiation of their contributions. Charities who wish to keep their donors happy, and giving, should also have a good understanding of the substantiation required by the IRS. In a recent Tax Court case, Durden v. Commissioner, T.C. Memo 2012-140, a mistake made by a charity in the technical requirements of contribution acknowledgment resulted in denial of the donors' charitable deduction and, once made, the mistake could not be corrected.

In Durden, the donors made a series of monetary gifts to their church during 2007, mostly by check in amounts in excess of $250 each, and their church provided a written acknowledgment of contributions totaling $22,171. The Internal Revenue Code and related regulations provide that no deduction is allowed for any charitable contribution of $250 or more unless the donor substantiates the contribution by a "contemporaneous written acknowledgment of the contribution by the donee organization" that provides the following information:

1. the name of the donee organization;

2. the amount of any cash contribution;

3. a description (but not value) of any non-cash contribution;

4. a statement that no goods or services were provided by the donee organization in return for the contribution, if that was the case;

5. a description and good faith estimate of the value of goods or services, if any, that the donee organization provided in return for the contribution; and

6. a statement that goods and services, if any, that the donee organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

In addition, to be "contemporaneous," the acknowledgment must be provided by the earlier of (a) the date the donor files his return for the taxable year in which the contribution is made or (b) the due date (including extensions) for filing such return.

When their church provided the Durdens with its acknowledgement of their contributions in January 2008, it failed to state whether any goods or services were provided in exchange for the contributions—this information is necessary to determine the allowable amount of the deduction as the value of any goods or services received reduces the amount of the deduction. Subsequently, after the IRS challenged the Durdens' charitable deduction, their church issued a revised acknowledgment in June 2009 that included the required statement that no goods or services were provided in exchange for the contributions. Unfortunately for the Durdens, both of these acknowledgments were defective—the first, because it did not include the required statement and, the second, because it was not timely as it did not meet the "contemporaneous" standard.

To avoid such a harsh result, taxpayers and the charitable organizations to which they contribute are encouraged to review their forms of acknowledgments of charitable contributions before tax returns are filed this year, so that corrected acknowledgments can be issued in a "contemporaneous" fashion. For more information on the substantiation rules, check out IRS Publication 1771, Charitable Contributions—Substantiation and Disclosure Requirements, on the IRS website at http://www.irs.gov/pub/irs-pdf/p1771.pdf.