Charitable Gifting… Don’t Forget the Receipt!

Many of us love to benefit charities and make gifts of used clothing, furniture and miscellaneous items. In a recent Tax Court Memorandum case, Kunkel, the Internal Revenue Service (the “Service”) reminds us what needs to be done to be able to deduct the value of those items on your income tax return. What many people don’t realize is that no matter how small the item contributed, substantiation is required.

In 2011, Mr. Kunkel claimed deductions for property given to four charitable organizations. He gave $13,115 to the Church consisting of books, household items, clothing toys, telescopes, jewelry and houseful furniture. He also donated items to Goodwill, the Military Order of the Purple Heart and Vietnam Veterans of America consisting of clothing valued at $20,920, household furniture of $2,680, household items at $350 and toys valued at $250 for a total of $24,200.

Mr. Kunkel would take batches of items at various times to Goodwill locations or their bins and also schedule pickups by charities. Individuals from the charities would come by to pick up items outside his house and leave a note thanking him for his contribution. Mr. Kunkel took charitable contribution deductions on his income tax return.

Deductions are allowed for contributions to charities if certain substantiation requirements are met. The substantiation requirements depend on the size of the contribution and whether the gift is of cash or property. If a contribution is less than $250 the donor should obtain a receipt from the charity unless impractical (there is no definition of “impractical”). If impractical, the donor must STILL maintain reliable written records which would include the name of the charity, the date and location of the contribution, a description of the contributed property and the method used to determine the contributed property’s fair market value.

For contributions of $250 or more, you must obtain a contemporaneous written acknowledgement from the charity which includes a description of the gift, a statement whether the charity provided any goods or services in exchange for the gift and if the charity did provide goods or services, the value of those goods and services. Contemporaneous means that the taxpayer obtains the acknowledgment from the charity on or before the taxpayer’s filing date or the tax return due date including extensions.

For non-cash contributions in excess of $500, taxpayers must maintain a written record that includes the date the property was originally acquired, a description of the property, cost or other basis, the fair market value and the method used in determining its value.

For contributions of property in excess of $5,000, the taxpayer must satisfy the above requirements and obtain a qualified appraisal and attach a complete appraisal summary to the taxpayer’s tax return

The court determined that Mr. Kunkel had not met any of the substantiation requirements and disallowed the entire contribution deduction. He did not maintain written records, did not have cost basis or how he calculated the items’ fair market value and, for the items above the $5,000, did not have a qualified appraisal.

To make matters worse, the Court imposed a 20% negligence penalty. The Court was not convinced that Mr. Kunkel thought he didn’t need to obtain receipts because he left the donations at unattended drop off locations and because each batch of items was worth less that $250. Further, such reasoning would not apply to those items he did not drop off. The Court also found that Mr. Kunkel’s assertion that all other donations were under $250 implausible. Further, Mr. Kunkel had NO written records.

ADVICE: While the result in the Kunkel case seems obvious because there were NO written records, many people believe they can take a charitable deduction by merely placing items in bins or giving items away to a favorite charity. GET A RECEIPT or if under $250 keep a contemporaneous record of what you give. You do not want to get hit with a negligence penalty.

New Word: Pecuniary… You may see a term in a will or trust that refers to a “pecuniary” amount. A pecuniary amount is a sum of money. Thus, if I give Sam an amount of $10,000 that is a pecuniary distribution. Unlike a fractional amount, which you don’t know for sure what the amount is until the moment of death (50% of what I own at my death), a pecuniary amount is fixed. We know that Sam is getting a dollar amount of $10,000.
 
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