A Case on the Importance of Substantiation in Claiming Charitable Deductions
Posted on 11.25.14
Author: Laura Fore, CPA, Tax Senior Associate
As year-end approaches and the holiday season takes over, many of our clients begin the annual clean out of their closets and kitchens. This process is as much about giving used clothing and furniture to charitable organizations as it is about claiming a deduction on their impending tax returns.
In a recent case (TC Memo 2014-203), the Tax Court denied a taxpayer a $27,000 charitable deduction for household items because he failed the charitable contribution substantiation tests. The facts outlined in this case indicate just how important it is to document your contributions in order to satisfy the IRS.
Mr. Smith testified that in 2009 he donated the following items to AMVETS, a charitable organization: Furniture - seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet and three rugs which Smith valued at $11,730; Clothing - 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats and seven suits which Smith valued at $14,487; and electronic equipment which Smith valued at $1,550.
Smith testified he obtained a number of blank "tax receipts" signed by AMVETS representatives, consolidated all of the contributions on two blank receipts and filled out each receipt by identifying himself as the “donor”, inserting Aug 30, 2009 as the “date” and indicating the donation values mentioned above. Neither receipt identified any specific items of donated property rather a spreadsheet was prepared to identify the property contributed. The record did not establish when the spreadsheet was prepared and there was no evidence that it was submitted to AMVETS.
Smith testified he used a Salvation Army website that lists estimated "low" and "high" values for used property to determine the value of the contributed property. The values that Smith placed on his spreadsheet for many of the items were considerably higher than the "high" values shown in this guide and no explanation for this discrepancy was provided by Smith.
No appraisal of any item was obtained, no photographs were taken of any of the items donated and Smith introduced no evidence to establish their condition.
Charitable contribution deductions are allowable only if the taxpayer satisfies substantiation requirements. (Code Sec. 170(a)(1)) The nature of the required substantiation depends on the size of the contribution and whether it is a gift of cash or property. There are separate requirements for all contributions of $250 or more (Code Sec. 170(f)(8)), contributions of property with a claimed value exceeding $500 (Code Sec. 170(f)(11)(B)), and contributions of property with a claimed value exceeding $5,000. (Code Sec. 170(f)(11)(C))
An individual may deduct a gift of $250 or more only if he substantiates the deduction with "a contemporaneous written acknowledgment of the contribution by the donee organization." This acknowledgment must include a description of any property other than cash contributed.
For noncash contributions in excess of $500, taxpayers are required to maintain written records with respect to each item of donated property that include, among other things: (1) the approximate date the property was acquired and the manner of its acquisition; (2) a description of the property in detail reasonable under the circumstances; (3) the cost or other basis of the property; (4) the FMV of the property at the time it was contributed; and (5) the method used in determining its FMV.
No deduction is allowed for contributions of clothing or "household items" unless such items are "in good used condition or better." The term "household items" includes furniture, furnishings, electronics, appliances, linens, and other similar items.
For contributions of property valued in excess of $5,000, the taxpayer must generally satisfy the substantiation requirements discussed above and must also: (1) obtain a "qualified appraisal" of the items; and (2) attach to his tax return a fully completed appraisal summary.
The Tax Court found that Mr. Smith did not meet the substantiation requirements with respect to any of the contributions and therefore disallowed his entire charitable contribution deduction.
The Court found there were three categories of property, i.e., the furniture, the clothing and the electronic equipment. It said that, for all three categories, Smith had to meet the substantiation requirements imposed by Code Sec. 170(f)(8) and Code Sec. 170(f)(11)(B). For the first two categories of items, Smith had to also meet the stricter substantiation requirements imposed by Code Sec. 170(f)(11)(C).
The Court then analyzed whether taxpayer met those requirements:
Requirements for contributions of $250 or more. Smith obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. Because these forms were signed before the property was allegedly donated, the Court questioned whether they constituted an "acknowledgment" by AMVETS that it received anything.
In any event, the Court said, the AMVETS tax receipts do not contain a "description...of any property...contributed." Rather, Smith created, at a time that could not be ascertained, a spreadsheet showing the property he allegedly contributed, and there was no evidence that this spreadsheet was ever provided to or seen by AMVETS. Moreover, the only evidence as to the contemporaneous nature of the acknowledgment was the date—Aug. 30, 2009—which Smith placed on the blank receipts himself.
The Court said that Smith failed to satisfy the substantiation requirements for contributions of $250 or more.
Requirements for contributions exceeding $500. Smith allegedly made noncash contributions to AMVETS of clothing, furniture and electronic equipment, and for each category of items he claimed a value exceeding $500. But he did not maintain written records establishing when or how these items were acquired or what their cost bases were, nor did he maintain written records establishing the items' FMVs at the time they were donated. He testified that he determined these values using a guide from a Salvation Army website, but the values he used were considerably higher than the "high" values the guide displays. He did not maintain photographs or other records to establish the condition of the donated items, and he thus provided no reason to believe that each donated item should be accorded a "high" rather than a "low" value.
Most of the items Smith allegedly donated consisted of clothing and household items. He presented no evidence that these items were "in good used condition or better" and thus didn't meet the requirements to claim a deduction.
Requirements for contributions exceeding $5,000. Smith acknowledged that he did not obtain a qualified appraisal for any of the items and did not attach a fully completed appraisal summary to his 2009 tax return. He thus failed to satisfy the substantiation requirements for his claimed contributions of clothing ($14,487) and furniture ($11,730).
In summary, it is extremely important to maintain records of property contributed to charity in order to claim a deduction. Equally as important is the timeliness of the documentation as it should not be created “after the fact”. If you have questions about the charitable contribution substantiation tests feel free to contact your Keiter representative or call 804-747-0000 | email firstname.lastname@example.org.