If you are make charitable gifts, you must play by the rules, and what may seem like substantial compliance won’t satisfy the Internal Revenue Service or the United States Tax Court. That’s the lesson from In re Durden, T.C. Memo.2012-140 (May 17, 2012).

Here are the basic facts. In 2007 David and Veronda Durden gave the Nevertheless Community Church $24,854 in a series of checks, each of which was for more than $250. The church sent an acknowledgment letter that covered every check, and sent it before the the Durdens filed their 2007 federal income tax return. Unfortunately, the church forgot to mention in the letter that the Durdens received no goods or services in return for the contributions. When the IRS asked raised the concern during a routine audit in 2009, the Durdens promptly obtained a new letter from the church that seemed to meet the IRS concern. Alas, while the new letter contained the right language, it wasn’t dated before the 2007 return was filed. No deduction, said the IRS, and “Durdens, you lose,” said the Tax Court.

The relevant section of the Internal Revenue Code is 170(f)(8). Subparagraph (A) states:  “No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee
organization that meets the requirements of subparagraph (B).” Subparagraph (B) must state the gift amount, whether the gift recipient gave goods or services in return for the gift and, if so, describe the goods or services and state their value.”

The Tax Court only considered the first, contemporaneous letter. Since it lacked any statement concerning the goods or services issue, that issue is mentioned in subparagraph (B) and subparagraph (B) is incorporated into subparagraph (A), the deductions were not adequately documents and were thus disallowed. The Durdens lost the ability to deduct their donations and were assessed at least one penalty.

Key takeaways from the Durden case:

First, if you are a giver check your letters as you do your tax return preparation. If you haven’t filed yet, you may still have time to get a corrected letter from the charity.

Second, if you are the charity, the short term problem is not yours, but consider how likely it is that you will retain a donor whose deduction is disallowed because your letter failed to include the right language.

Here are links to Durden and IRS Publication 526, which tells all about taking charitable deductions.

This post is intended to provide general information. Every situation is different, and by providing this information Mark Rubin provides no specific legal advice to anyone. For more information contact Mark Rubin at Mesch, Clark & Rothschild, P.C., 520.624.8886 or mrubin@mcrazlaw.com.