One of the most popular deductions for taxpayers is the one allowed for donations to charitable organizations—from the local church or synagogue to the Red Cross and various other national organizations. Unfortunately, over the last several decades, this deduction has been among the most abused. Thus, perhaps it’s not surprising that Congress has responded to the problem by regularly enacting more rules around documenting donations.
What we’re left with is a confusing array of rules that you have to comply with in order to claim a deduction. A recent Tax Court case illustrates how easy it is to run afoul of the documentation requirements.
In the case, a partnership purchased a remainder interest in a web hosting facility for $2.95 million. The following year, it assigned the remainder interest to the University of Michigan. On its federal income tax return, the partnership claimed a charitable contribution deduction of approximately $33 million. Because the value of the donated property exceeded $5,000, the partnership got a formal appraisal and filed Form 8283 (Noncash Charitable Contributions) with its return. However, the space on the form was left blank for the partnership’s cost or other adjusted basis of the remainder interest.
Upon audit of the partnership, the IRS disallowed the charitable contribution deduction. It claimed the partnership had failed to comply with the substantiation requirements because it omitted a key part of Form 8283. The partnership, however, argued that it had substantially complied with the regulations. The Tax Court sided with the IRS, finding that the partnership’s omission of the basis amount prevented the appraisal summary from achieving its intended purpose. In other words, if the partnership had disclosed its basis in the remainder interest, the IRS would have seen the huge disparity between the amount of the deduction and the price the partnership had paid for the property.
While this letter has given you just a glimpse at the substantiation rules for charitable donations, the rules can get much more complicated. This is because the requirements vary based on donation type (cash versus property) and the value of the property contributed. We’d be happy to discuss with you any of the requirements for specific types of donations. Please feel free to call us as the need arises.