Noncash Contributions to Charity – Tax Court Strictly Enforces Substantiation Requirements
by Gregory S. Dowell
A recent tax court case leaves no doubt that noncash gifts to charity need to be substantiated, and individual taxpayers must take notice. In Smith vs. Commissioner, the Tax Court ruled that none of the taxpayer’s contributions were deductible, even though the Court conceded that it had little doubt that the items were actually donated to charity, due to the fact that Smith failed to comply with the substantiation requirements for noncash charitable gifts.
Smith’s noncash charitable donations for the tax year 2009, all given to AMVETS, consisted of the following:
- Furniture from his mother’s house, following her death: The furniture included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet, and three rugs. Smith valued these items at $11,730 for charitable contribution purposes.
- Clothing belonging to Smith and his children, consisting of 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats, and seven suits: The clothing was valued at $14,487 as a charitable contribution.
- Electronic equipment, which included two computer systems, a printer, and a copier: Ownership of these items was not clear. These items were valued at $1,550.
Smith, who had visited AMVETS several times during 2009, obtained a number of blank receipts signed by AMVETS representatives, then proceeded to consolidate all of the above contributions on two blank receipts. The two receipts were completed to reflect Smith as the donor and used August 30, 2009 as the date of the contributions. Smith prepared a spreadsheet to identify the property that was donated, but neither receipt included any description of the donated goods. The date the spreadsheet was prepared was not established and there was no evidence that it was actually submitted to AMVETS.
Smith testified that, in order to determine the value of the donated property, he used a Salvation Army website that listed estimated ranges of value for used property. A printout from the website was produced as evidence. It was noted during the case that the values Smith placed on the donated property exceeded the high range as indicated on the Salvation Army guide, and no explanation was provided as to why Smith believed the property to be more valuable. Smith did not have any of the items appraised, and no photographs or other evidence was introduced to substantiate the existence or condition of the donated items.
The Internal Revenue Code provides that charitable contributions are deductible if a taxpayer satisfies substantiation requirements. The substantiation requirements depend on the size of the contribution and on whether cash or property was donated, and separate requirements exist for all contributions of $250 or more, contributions of property with a claimed value exceeding $500, and contributions of property with a claimed value exceeding $5,000.
An individual may deduct a gift of $250 or more only if the contribution is substantiated with a contemporaneous written acknowledgment by the charitable organization. The acknowledgment must include a description of any property other than cash that was contributed.
If contributions exceed $500, similar items of property are aggregated for purposes of the substantiation rules. “Similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.
Noncash contributions in excess of $500 must be supported by written records with respect to each item of donated property that include (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 fair market value of the property at the time it was contributed; and (5) the method used in determining its fair market value.
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 term “household items” includes furniture, furnishings, electronics, appliances, linens, and other similar items, and no deduction is allowed for contributions of clothing or household items unless such items are in good used condition or better.
In the Smith case, the Tax Court found that there were three categories of property (the household items from his mother’s house, the clothing, and the electronic equipment). For all three categories, the Court said that Smith had to meet the substantiation requirements, but he failed to do so:
Requirements for charitable contributions of $250 or more: Smith obtained blank signed forms from AMVETS and later filled them out by inserting donation values. Because the forms were signed by AMVETS before the property was donated, the Court questioned whether they constituted an “acknowledgment” by AMVETS that it received anything.
The Court said that the AMVETS tax receipts did not contain the necessary description of the property donated. As an alternative, Smith created a spreadsheet showing the property he allegedly contributed, and there was no evidence that this spreadsheet was ever provided to or seen by AMVETS. In addition, there was no evidence as to when Smith’s spreadsheet was created. The only evidence as to the contemporaneous nature of the acknowledgment was the date of August 30, 2009, which Smith wrote on the blank receipts.
As a result, the Court said that Smith failed to satisfy the substantiation requirements for contributions of $250 or more.
Requirements for contributions exceeding $500: Smith made noncash contributions of clothing, furniture, and electronic equipment, and for each category of items he claimed a value exceeding $500. However, he did not maintain written records establishing when or how the items were acquired, what the cost bases were, and he did not maintain written records establishing the fair market value of the items at the time of the donation. It was noted that the values used were considerably higher than the “high” values from the Salvation Army guide that he produced, without any explanation as to the difference; no photos or other records were provided to establish the condition of the donated items or a justification for the higher values. Strikingly, the Tax Court noted that Smith’s donation largely consisted of clothing and household items and, as such, he presented no evidence that these items were in good used condition or better, which is a qualification for a charitable deduction.
Requirements for contributions exceeding $5,000: A qualified appraisal was not obtained and the requirement to attach an appraisal to the tax return was thus not met. The Court concluded that he failed to satisfy the substantiation requirements for his claimed contributions of clothing ($14,487) and household furniture ($11,730).
This is a meaningful case to study for any taxpayer who has more than a minimal amount of noncash contributions in a tax year. It is clearly important to maintain contemporaneous written records of charitable giving, with the appropriate acknowledgments from the charitable organization. In years where the noncash giving is exceptionally large due to an inheritance or some other occurrence, a taxpayer should strongly consider having an appraisal of the property performed. Pragmatically, the taxpayer will need to weigh the cost of the appraisal against the value of the possible charitable deduction.
This case provides the IRS with important precedent to disallow large noncash charitable deductions. More than ever, taxpayers will need to do some advance planning, and we encourage clients who are contemplating large noncash gifts to contact us to discuss their particular situation.