June 27, 2022

Don’t Be the Reason Your Donor Loses a Tax Deduction

By Mary Antonetti, CPA, Partner, Tax & Business Services

Don’t Be the Reason Your Donor Loses a Tax Deduction Nonprofit Tax Services

Today, there is growing concern over high gas prices, a seemingly never-ending pandemic, and a potential recession on the horizon. That means the need for mission-based organizations will grow at the same time purse strings tighten. Many charitable organizations rely on donor support to fulfill their mission — and all charitable organizations seek to keep their donors happy.

In late May, the Tax Court handed down a decision disallowing a charitable contribution deduction in the case of Martha L Albrecht v. Commissioner, T.C. because of inadequate contemporaneous written acknowledgment (CWA). While I will not list all the details of preparing a CWA, I think it is important to understand what happened and what you need to know to prevent this from happening to one of your donors.

In the case, the taxpayer (donor) donated 120 items from her collection of Indian artifacts to a museum through a “deed of gift.” The donor had a five-page package of support. The first page, which was signed by the taxpayer and a museum official, included the museum’s logo, a reference to an attached list of items donated, the petitioner’s address, and the donor’s taxpayer identification number. The second page of the document contained conditions governing the gift and stated that the donation was unconditional and irrevocable and that all rights, titles, and interests held by the donor were included unless otherwise stated in the gift agreement. Additional pages listing the items gifted were attached.

In this case, both the museum and the donor agreed it was a charitable contribution. However, the five-page package noted above referenced, but did not contain, the gift agreement. The donor took a deduction on her individual income tax return for the amount of the contribution, which was ultimately denied by the IRS. The Tax Court upheld the denial.

The IRS argued the deduction was not allowable since the reference to the gift agreement created ambiguity about whether any additional terms (including donee provision of goods or services) existed. The taxpayer argued that since no agreement was included in the document, the presumption was that there were no other provisions, rights retained, or goods or services received. In actuality, this was true — no rights were retained and no quid pro quo existed.

However, the IRS prevailed because the CWA requirements were not met. As a reminder, the CWA requirement increases as the value and complexity of the gift increase.

For small contributions under $250, taxpayers must keep adequate records to substantiate the contribution. For contributions of $250 or more, Section 170(f)(8)(A) of the Internal Revenue Code requires a taxpayer to obtain a CWA from the donee organization and maintain it in their files. While there is no required CWA form, there is required information, including:

  1. The amount of cash and a description (but not value) of any property other than cash contributed;
  2. Whether the donee organization provided any goods or services in consideration, in whole or in part, for any such property; and
  3. A description and good faith estimate of the value of any such goods or services provided, if any. If the benefits were solely intangible religious benefits, this should be noted.

To be contemporaneous, the CWA must be obtained on or before the date on which the taxpayer files their return or the extended due date of that return, whichever is earlier.

The substantiation requirement becomes more complex as the value of the charitable contribution increases, including qualified appraisals for property contributions over $5,000. In some cases Form 8283, Noncash Charitable Contributions needs to be signed by multiple parties.

You should take a quick look at your organization’s policies and procedures regarding donor acknowledgments. You should review both the content of the acknowledgment to ensure all requirements are met, along with the process for sending the acknowledgment. Nonprofit organizations have always been able to do more with less, but you want to make sure these acknowledgments don’t fall too far down the to-do list. As the IRS showed once again, unless it is complete and contemporaneous, your donor runs the risk of losing their charitable contribution deduction.

If you need any assistance with reviewing your policies or procedures, Marcum would be happy to help.