A recent summary opinion by the United States Tax Court highlights the importance of following the substantiation and record-keeping rules that the federal tax code has put in place for charitable contribution deductions. It is imperative that churches and other religious organizations do their part to comply with these requirements to ensure that their church members are eligible to receive charitable contribution deductions for their gifts and tithes.
In Gomez v. Comm’r, (T.C. Summary Op. 2008-93, 2008) a husband and wife contributed a total of $6,548.27 to their local Texas church. The taxpayers made the donations by writing 20 separate checks. Ten of the checks were each for an amount over $250. The IRS challenged the deductions related to the ten donations over $250 by arguing that the petitioners failed to meet the substantiation requirements imposed by section 170(f)(8) of the Internal Revenue Code (the “Code”).
Specifically, section 170(f)(8)(A) of the Code disallows a charitable contribution deduction of $250 or more unless the church member substantiates the contribution by a “contemporaneous written acknowledgment.” The acknowledgment must come from the church and must include the following information: (i) the amount of cash and a description (but not value) of any property other than cash contributed by the church member to the church; (ii) whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. To be “contemporaneous,” a church must provide the written acknowledgment on or before the earlier of: (i) the date on which the church member files a return for the taxable year in which the contribution was made; or (ii) the due date, including extensions, for filing the return.
Because their church did not provide the Gomez family with a contemporaneous acknowledgement, the Tax Court denied them a deduction for any of the contributions that were for $250 or more. The Tax Court determined that a letter from the church written almost three years after the contributions did not meet the federal tax law requirements for a “contemporaneous” acknowledgment. The court was careful to note that even though it was clear that the Gomez family wrote checks for tithes to their church, and the cancelled checks for these tithes were “reliable,” the failure to meet the necessary substantiation requirements required the court to disallow the claimed charitable contribution deductions for checks equal to or greater than $250. (The IRS allowed the Gomez family to deduct eight other checks that were less than $250, and the court acknowledged that this was the appropriate result with respect to those checks.)
The Tax Court again reiterated that a taxpayer cannot deduct a charitable contribution without complying with the § 170(f)(8)(A) substantiation requirements. Durden v. Commissioner, T.C. Memo. 2012-140 (May 17, 2012).
Mr. & Mrs. Durden contributed $22,517 to their church in 2007. Although the church provided them with a timely statement acknoweldging the $22,517 contribution, it did not state whether they had received any goods or services as required by § 170(f)(8)(A) (the “first acknowledgment”). After being notified by the IRS of this deficiency, the Durdens obtained another statement from the church acknowledging the $22,517 contribution and stating that they received no goods or services (the “second acknowedgment”)..
The Tax Court accepted the IRS’s position that both acknowledgments failed § 170(f)(8)(A): (1) the first acknowledgment did not include the required goods or services statement; and (2) the second acknowledgment was not contemporaneous within the meaning of Reg. § 1.170A-13(f)(2) because it was not received by the Durdens before they filed their 2007 return.
The issue considered by the Tax Court in Gomez is inherent in the context of church-plate offerings. Thus, it is important that both donee churches, as well as their tithing members, are aware of the recordkeeping requirements for charitable contribution deductions. In this regard, churches and other religious organizations should consider the following:
- Churches should encourage church members to make donations using checks rather than cash. A cancelled check provides the tithing member with an appropriate “bank record” to substantiate the donation and makes it easier for the church to track and record each donation for purposes of preparing a written contemporaneous acknowledgement.
- For church members making cash contributions, churches should provide an envelope for a donor to fill out his or her name and the date and amount of the contribution. The church can then use this envelope for providing a written communication to the church member that the member can use to meet his or her recordkeeping requirements.
- Churches should keep ongoing records of the amounts received from each church member and update those records each week. See the IRS Publication 1771 Charitable Contributions: Substantiation and Disclosure Requirements.
- As soon as possible after the close of each calendar year, churches should send a letter containing the following information to each tithing church member: (i) the amount of each contribution of cash (whether made in currency or by check); (ii) a statement explaining whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. Delay in sending out this letter could result in a tithing member being unable to deduct his or her tithes on his or her federal income tax return.
If your church or religious organization has additional questions concerning these or other substantiation and recordkeeping requirements for charitable contribution deductions, please contact us at 954-591-8290 or use our Contact form.