David and Veronda Durden contributed $25,171 to their church a few years ago, taking the itemized tax deduction. The IRS challenged their deduction on a technicality, and the Tax Court sided with the IRS in 2012.

As we head into the 2013 tax season, advisors should tell clients to be sure they won’t be hit with a Durden-style disallowance.

The Durdens’ contributions consisted primarily of checks written to the church for amounts larger than $250. According to Marty James, a CPA who heads an investment and tax management firm in Mooresville, Indiana, for any contribution of $250 or more a taxpayer must take specific steps to substantiate the donation in order to support a deduction.

These steps are spelled out by the IRS. The taxpayer needs a “contemporaneous written acknowledgment” of the contribution. In his blog, James explained that this document, from the recipient of the donation, must include:

  • The amount of cash and a description (but not the value) of any property other than cash contributed.
  • Whether the organization receiving the donation provided any goods or services in consideration, in whole or in part, for any cash or property that was contributed.
  • A description and good faith estimate of the value of any goods or services received by the donor or if such goods and services consist solely of intangible religious benefit.

In this case, the Durdens had received a year-end statement from the church, acknowledging its receipt of the contributions. However, this statement did not say whether any goods or services were provided in consideration for the contributions. In disallowing the deduction, the Tax Court noted that the terms of the relevant statute require an affirmative statement that no goods or services were received.
Fortunately, it is not too late for advisors to help clients sustain deductions for large charitable contributions on their 2012 tax returns. James said that an acknowledgment is considered "contemporaneous" if it was received on or before the date the taxpayer filed the appropriate return or the due date (including extensions) for filing the return, whichever came earlier. The document should have this type of language: "You did not receive any goods or services in connection with these contributions other than intangible religious benefits."

Therefore, advisors can urge clients to collect the necessary paperwork by the tax return due date, if they don’t already have the letters in hand. For claimed contributions over $5,000, a qualified appraisal prepared by a qualified appraiser generally must be obtained as well.