No Good Deed Goes Unpunished

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Summary
A recent U.S. Tax Court decision provides an important warning to the innocent and well meaning.

On May 17, 2012, the U.S. Tax Court upheld the IRS disallowance of a deduction for a gift of $25,171 made by Mr. and Mrs. David Durden to their community church. The decision turned on the Durdens' failure to strictly comply with the rules governing the date and contents of written acknowledgements of charitable gifts of $250 or more.

The facts of this case are instructive:

When Mr. and Mrs. Durden filed their 2007 tax return, they claimed a deduction of $25,171 for contributions to their local Texas church. On April 13, 2009, the IRS sent a notice of deficiency, denying the charitable deduction. In response, the Durdens submitted the church's acknowledgment of the contribution, which was dated January 10, 2008. Though the church's acknowledgment was timely, it failed to state specifically that "no goods or services were provided in consideration for the contribution," and the IRS would not accept it. The Durdens then submitted a second letter from the church, dated June 21, 2009, that confirmed that no goods or services were provided to them in exchange for their contributions. The IRS refused to accept the second letter because it was not written contemporaneously with receipt of the contribution.

To be contemporaneous, the rules require that the charity's letter be written prior to the earlier of the date a taxpayer files a return or the due date (including extensions) for filing the original return. The Tax Court upheld a strict reading of the rule, finding that the IRS should not be required to consider information beyond that first acknowledgment.

By following these simple steps you will avoid this unfortunate result:

  1. Make sure that each gift to a charity of $250 or more is acknowledged in writing; and
  2. Require that the charity's acknowledgment states "no goods or services were provided in consideration for the contribution;" and
  3. Keep track of each gift of $250 or more that you have made to each organization and make sure you have received an acknowledgment that is contemporaneous: i.e. dated prior to the earlier of the date you file your return or the due date (including extensions) for filing the original return.

If you have questions regarding the content of this Alert, please contact Nancy S. Hearne in our Princeton, New Jersey office at 609-452-3156 (nhearne@saul.com) or any member of Saul Ewing Personal Wealth, Estates and Trusts Practice.