August 16, 2012
Properly Documenting Donors' Contributions
A recent Tax Court decision underscores the critical steps churches must take.
In the August 2012 edition of Church Finance Today, Richard Hammar examines a recent, high-profile case involving a couple whose substantial contributions to a church were denied tax deductibility by the Internal Revenue Service:
A married couple (the “taxpayers”) timely filed their 2007 income tax return. On Schedule A they claimed a deduction of $25,171 for charitable contributions made by cash or check. Most of the contributions were made by check to their church. Except for five checks totaling $317, the checks were for amounts larger than $250.
In 2009 the IRS sent a notice to the taxpayers disallowing their charitable contribution deduction for 2007.
In response, the taxpayers produced records of their contributions, including copies of canceled checks and a letter from the church which acknowledged contributions from them during 2007 totaling $22,517 (the “first letter”). The IRS did not accept the first letter and informed the taxpayers that it lacked a statement regarding whether any goods or services were provided in consideration for the contributions.
The taxpayers obtained a second letter from the church (the “second letter”) that contained the same information found in the first letter as well as a statement that no goods or services were provided to them in exchange for their contributions.
The IRS concluded that the taxpayers were not entitled to a deduction for the charitable contributions of $250 or more made to their church during 2007 because neither the first nor the second letter from the church satisfied the requirements of section 170(f)(8) of the tax code, which lists ... substantiation requirements for individual contributions of $250 or more.
The couple appealed the IRS decision. To learn what the Tax Court ruled, and to learn more from Rich about proper substantiation requirements for donations of $250 or more (including several relevant examples for churches), subscribe to Church Finance Today. Those who subscribe now should also call our customer care office (1-800-222-1840) to make sure they receive the August edition.
Rich also comprehensively covers charitable contributions for churches in Chapter 8 of his annual Church & Clergy Tax Guide.