Industry Insights

A recent U.S. Tax Court case, Didonato v. Commissioner of Internal Revenue, concluded a taxpayer could not deduct a $1.87 million charitable conservation easement contribution due to lack of contemporaneous substantiation. In this case, the taxpayer entered into a settlement agreement with the local government, but the court determined the agreement was not an acknowledgment of the gift. The local government also had to wait roughly 15 months for approval from the commission to accept the gift.

The court looked at two key aspects when reviewing this case:  substantiation and contemporaneous. Substantiation is the donor’s responsibility to value the donation and obtain an organization’s written acknowledgment substantiating the donation. A written acknowledgment is contemporaneous if the donor obtains it by the earlier of the date the donor files their original return for the tax year in which the contribution was made or the due date (including extensions) for filing the donor’s original return.

The court case highlights the need to periodically review gift acknowledgment procedures. The rules are:

• For donors to deduct charitable contributions of more than $250, they must receive an acknowledgment from the charitable organization substantiating the contribution. The acknowledgment from the charitable organization must:
• Be written
• Be contemporaneous
• State the amount of any cash received
• State whether the organization gave the donor any intangible religious benefits (no valuation needed)
• State whether the organization gave the donor any goods or services in return for the contribution
• Describe goods or services the organization received (no valuation needed)
• Describe goods or services the organization gave (good faith estimate of the value needed)
• If an organization receives a quid pro quo contribution—a contribution made by a donor in exchange for goods and services—of more than $75, it also must meet the requirements above and inform donors that their charitable deduction is limited in value. The deductible contribution is equal to the donor’s contribution, less the organization’s money, goods and services given in return.
• The written acknowledgment does not need to include a good faith estimate of the value of goods and services given to the donor if they are:
• Goods and services with insubstantial value
• Certain membership benefits
• If a donation of property is given and valued at more than $5,000, the donor should give the organization an IRS Form 8283. The organizations must complete the form and return it to the donor, keeping a copy for its own records.
• A charity knowingly providing a false substantiation acknowledgment to a donor may be subject to penalties for aiding and abetting an understatement of tax liability. An organization failing to provide proper acknowledgment for a quid pro quo contribution can incur a penalty of $10 per contribution, not to exceed $5,000 for a fundraising event or mailing.

Organizations should periodically review their acknowledgment letters and procedures to make sure they comply with federal tax laws. If you have questions about these laws, contact your BKD advisor.