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Deduction For A Donation Fails Because Taxpayer Did Not Meet Substantiation Requirements Of The Internal Revenue Code
Martha Albrecht and her husband acquired a large collection of Native American jewelry during their marriage. In December 2014, Albrecht and her husband donated about 120 items of this collection to the Wheelwright Museum of the American Indian in Santa Fe, New Mexico. In connection with the donation, Albrecht executed a five-page “Deed of Gift.” The first page of the deed stated that Albrecht “hereby donates the material described below to the Wheelwright Museum of the American Indian under the terms stated in the Conditions Governing Gifts to the Wheelwright Museum of the American Indian.”
The second page of the deed specified the conditions governing gifts to the museum. One of the conditions stated that the donation was “unconditional and irrevocable” and that all rights, titles, and interests held by Albrecht in the property are included in the donation unless otherwise stated in the Gift Agreement. The final three pages of the deed listed the items of donated property. However, no Gift Agreement was included with the deed, despite the reference on the second page of the deed.
Albrecht filed Form 1040, an Individual Income Tax Return, in which she reported the donation on Schedule A, Itemized Deductions. She attached a copy of the deed to the return. The Internal Revenue Service issued Albrecht a notice of deficiency disallowing the donation on the ground that the requirements of Internal Revenue Code Section 170 were not met. Albrecht sought review in federal tax court.
In order to obtain a charitable contribution tax deduction, various substantiation requirements must be made based on the type of gift and the amount being claimed. For contributions of $250 or more, Section 170 requires that a taxpayer obtains from the donee organization, and maintains in their files, a “contemporaneous written acknowledgment” (CWA). The CWA must include (1) the amount of cash and a description (but not value) of any property other than cash contributed; (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for any such property; and (3) a description and good faith estimate of the value of any such goods or services. The taxpayer must also receive the CWA from the donee organization on or before the earlier the date the taxpayer files their return or the due date for filing the return.
The Tax Court agreed with the Internal Revenue Service and held that Albrecht failed to meet the substantiation requirements for her donation. Specifically, the deed did not state whether the Wheelwright Museum provided any goods or services with respect to the donation. The deed provided that “all rights, titles, and interests held by the donor in the property are included in the donation unless otherwise stated in the Gift Agreement.” The terms of the deed were subject to a separate agreement but the Wheelwright Museum did not provide Albrecht with this agreement before the return was filed. The deed left open the question of whether the parties entered into a side agreement that included additional or superseding terms; therefore, the deed failed to meet the strict terms of the CWA requirements. The Court noted that Albrecht made a good faith attempt to substantially comply with the Internal Revenue Code by executing the deed, but substantial compliance does not satisfy the strict requirements of Section 170.
Albrecht v. Comm’r, T.C. Memo 2022-53.
This case is an important reminder of the rigid standards for charitable contributions under the Internal Revenue Code. Donors are responsible for obtaining a written acknowledgment from nonprofit organizations, such as private K-12 schools, colleges, and universities that have 501(c)(3) status, for contributions of $250 or more before the donor can claim the charitable contribution on their income tax return. The gift deed, in this case, failed to meet the strict substantiation requirements for contributions over $250, and therefore, the taxpayer could not claim the charitable deduction. Tax-exempt nonprofits should carefully review gift deeds and agreements to ensure they comply with the Internal Revenue Code. LCW previously wrote about the requirements to provide a written acknowledgment to donors here.