Charitable Deductions Denied by Insufficient Acknowledgment

August 29, 2012

Some charities and other tax exempt organizations rely heavily on contributions from generous donors. On the other hand, those donors benefit by being able to deduct those donations from their taxes. However, a recent decision by the US Tax Court makes it clear how a simple mistake by the tax-exempt organization can prevent a donor from making the deduction.

In Durden v. Commissioner, TC Memo 2012-140, the Court prevented a married couple from claiming $25,000 in charitable deductions. The donations had been made to a church in various amounts throughout 2007. The Internal Revenue Service initially disallowed the deductions, and the taxpayers responded by producing records of their donations, which included a January, 2008 letter from their church acknowledging the donations.

Unfortunately, the 2008 letter did not include any statement that the church had not provided goods or services to the taxpayers in return for their donations. Because applicable tax laws specifically require such a statement, the IRS rejected the 2008 letter as an adequate acknowledgment of the donations. 

In response, the taxpayers obtained a June, 2009 letter from the church that included the required statement, however the IRS rejected the 2009 letter as untimely. The IRS based their decision on a specific tax law that requires taxpayers to receive acknowledgments from charities by the date on which they file their returns for the year the deduction is claimed, or by the return due date, including any extensions, whichever occurs earlier. In this instance, the 2009 letter was received by the taxpayers well after the return was filed in 2008.

The taxpayers attempted to argue that they substantially complied with the rules, but the Court disagreed, stating that they could find no provision in the relevant laws allowing for substantial compliance. As a result, the Court upheld the IRS’s decision to disallow the charitable deductions.

So what can we learn from this? From the perspective of donors, it is imperative that you make sure the acknowledgments you are receiving comply with the relevant requirements. On the other hand, it is essential for tax-exempt organizations to protect (and not hinder) their donors’ ability to make deductions. If donors or organizations are unsure whether certain acknowledgments meet the rules, I would advise consulting with a tax professional.

Matthew Grosh is an attorney at Russell, Krafft & Gruber LLP in Lancaster, Pennsylvania. He received his law degree and LL.M. in Taxation from Villanova University and practices in a variety of areas including Taxation and Nonprofit & Tax-Exempt Organizations.