By Hugh Sprunt
Each year millions of Americans who itemize their deductions on
Schedule A of Form 1040 deduct the fair market value of items they
donate to charity (Line 16 on the 2000 Schedule A). A recent tax
court decision shows that many taxpayers, not to mention the
charities that provide receipts to their donors, need to be more
careful when producing the supporting documentation taxpayers are
required to maintain in their files in case of audit by the IRS.
Until recently, from the IRS perspective, the biggest controversy
surrounding non-cash contributions was the tendency of taxpayers in
the last few years to value a donated auto by using the car's full
"blue book" value even though the particular vehicle had
abnormally high mileage for its model year, was in need of
significant body or engine work, or had other flaws meriting a
significant discount from the published "blue book" value
(fair market value).
However, a recent 2001 tax court decision (T.C. Memorandum
Decision 2001-45) looks like it will provide the IRS with a powerful
weapon in its battle to insure that non-cash charitable
contributions in general are properly documented by taxpayers before
such deductions are allowed on a tax return.
Although it appears reasonable that the court in this particular
case, unfavorably impressed by taxpayer's documentary and other
shortcomings regarding other types of deductions under review,
supported a strict standard that many taxpayers today could NOT
satisfy if they had to prove-up the value reported on their tax
returns for non-cash charitable contributions, all taxpayers making
non-cash donations of property to charity should beware.
Before turning to the specifics of this recent tax court case and
the hard line endorsed by the court that requires taxpayers to judge
the sufficiency of the receipts provided by charities, Part I and
Part II of this article will cover by way of background the general
IRS rules for itemized non-cash charitable contribution deductions
on Schedule A.
Leaving aside for a moment the additional documentation that a
taxpayer must provide by completing Form 8283, Section A, Part II,
and Section B for items (or groups of similar items) for which a
deduction(s) of more than $5,000 is being claimed, or for items
donated subject to conditions, or for property in which less than
the entire ownership interest is being donated, what sort of
documentation must a taxpayer have available to support a deduction
for non-cash charitable contributions on Schedule A?
If the deduction for an amount donated in a single donation (for
example, a single "run" to Goodwill Industries collection
center) is less than $250, taxpayer should obtain a receipt
containing the charity's name as well as the date, location and
description of the donation... OR, in the absence of such a receipt,
must have his or her own "reliable written records"
substantiating the donation.
A receipt is specifically NOT required in this case if the
contribution is made under circumstances in which it is impractical
to obtain one (e.g., when donated property is deposited at a
charity's unattended drop site). Note that the fair market value
need not be stated by the charity on the receipt even if it provides
a receipt.
The alternative "reliable written records" requirement
tends to be met if the taxpayer's "writing" is
contemporaneous with the donation (dated taxpayer list of items
donated and their value), or consists of writings of a regular
nature by the taxpayer (such as daily diary entries that provide the
information in question) or, in the case of "small"
contributions, the existence of written or any other evidence from
the donee organizations that does not rise to the level of a receipt
(such as a donor's lapel pin or similar item).
This discussion of the IRS rules for obtaining a proper deduction
for non-cash charitable contributions via an itemized deduction on
Schedule A of Form 1040 will continue in next week's Part II. In the
two weeks after that, Parts III & IV will conclude this article
by covering the recent 2001 hardline interpretation by the tax court
in the area of non-cash charitable contributions and describing what
taxpayers can do to protect themselves from having their non-cash
charitable deductions disallowed.
CAUTION: This article is intended to provide accurate information
regarding the subject matters covered. However, it is distributed
with the understanding that neither the author nor the publisher is
engaged in rendering legal, tax, financial, or other professional
services. If legal advice or other expert assistance is required,
the services of a competent professional should be sought in the
context of the individual's particular situation and general
circumstances. Since each individual's overall tax situation is
unique, a tax strategy that turns out to be appropriate for one
individual is often totally unsuitable for someone else. No
significant transaction with potential tax ramifications should be
undertaken without consulting one's individual tax advisor about its
specific application. Taxing authorities in states that have an
income tax enforce statutes whose rules and requirements often
differ significantly from those of the Federal government's Internal
Revenue!
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