A recent Tax Court case (Smith, TC Memo 2014-203) disallowed nearly $27,000 of non-cash charitable donations (i.e. donations of clothing and household items to a thrift store such as Goodwill, Salvation Army, or the National Council of Jewish Women) due to the taxpayer’s failure to substantiate the donation. The Tax Court ruled this way despite there being “no doubt” that the donations actually occurred. While many taxpayers believe that a donation receipt is sufficient, the truth is, as it always is in tax law, “it depends.”
In general, all charitable contribution deductions must be substantiated, although the level of substantiation depends upon the fair market value of the contribution and whether cash or other property was donated. Contributions of cash or property valued at $250 or more are allowed only if there is “a contemporaneous written acknowledgement of the contribution” by the donee organization (Internal Revenue Code Section 170).
For non-cash contributions of $500 or more, donated items must be categorized and total values for the year must be aggregated into these categories. Examples of categories include clothing, household items, furniture, jewelry, electronics, etc. Furthermore, under Reg. Section 1.170A-13, taxpayers are required to have written records of the following:
1) The acquisition date and how it was acquired (i.e. purchase or gift);
2) A description of the property;
3) The cost or other basis of the property (i.e. what it was purchased for);
4) The fair market value of the property at the time of contribution; and
5) The method used to determine fair market value (i.e. thrift shop value).
For non-cash contributions of $5,000 or more, the taxpayer must follow the substantiation requirements for contributions of $500 or more AND must also obtain a “qualified appraisal” of the items and attach it to the taxpayer’s tax return.
The actual specifics of the Smith Tax Court case are almost irrelevant, since Smith kept virtually no records whatsoever. What is important to draw from this case, however, is that form often matters more than substance. The Tax Court had no doubt that a substantial charitable donation was made – yet it was disallowed completely because the rules were not followed. If, however, the substantiation requirements were nominally followed, the result would likely have been different.
If you would like to find out the best way to substantiate your charitable donation or have any questions about the charitable donation rules in general, please don’t hesitate to contact us.