cash contribution deduction

[DaveO]

Not to interrupt the argument as much as I enjoy it. But, I see this sort of outcome as a "teachable moment" for my individual clients and for the handful of 501c(3) clients that I service. I've already tucked away a note in my annual letter folder to make mention of this court case in next years missive.

That being said I find the Judge to have been very much “by the letter” and correct as far as my legalese challenged brain can discern. When I have a client looking to take what I feel is a excessive deduction I tell them something to this effect, “If you file your return with this deduction it will almost certainly be audited, in which case you will need to provide iron clad documentation to support the deduction, that being the case bring it in right now so I can look at it and determine I’ll represent you.” That approach has always resulted in one of two outcomes or a combination. Production of satisfactory documentation and or a dramatic adjustment of the deduction.

[travis bickle]

Been There, Done That, Got The T-Shirt

Not to interrupt the argument as much as I enjoy it. But, I see this sort of outcome as a "teachable moment" for my individual clients and for the handful of 501c(3) clients that I service. I've already tucked away a note in my annual letter folder to make mention of this court case in next years missive.

That being said I find the Judge to have been very much “by the letter” and correct as far as my legalese challenged brain can discern. When I have a client looking to take what I feel is a excessive deduction I tell them something to this effect, “If you file your return with this deduction it will almost certainly be audited, in which case you will need to provide iron clad documentation to support the deduction, that being the case bring it in right now so I can look at it and determine I’ll represent you.” That approach has always resulted in one of two outcomes or a combination. Production of satisfactory documentation and or a dramatic adjustment of the deduction.

LOL.

I usually tell them "You realize you are putting a flag on your return that says 'Please Audit Me.'" And, I type up some written "Preparer Notes" that are stored in their file documenting the event.

[AuditorTurnedGood]

I see this has sparked

some discussion. I agree, my position on this is a little on the fence. On the one had, I don't think judge's should be making policy. On the other, I feel like the judiciary system has introduced so much grey into the black and white letter of the law so far (think Cohan rule) it seems odd to stop dead with a flat reading of the code. I suppose this is where my personal convictions and my position as a tax accountant crash into each other. Same thing happens when I argue politics with my family. In any event, a previosu poster was right - great learning opportunity for us and our clients, and another value we add to the tax prep process.

[Zee]

You can argue that point, but in the original posting there was no mention of "special circumstances". The taxpayer apparently made single contributions of over $250 each which currently require [and did require in 2005] a written acknowledgment from the organization. Such acknowledgment must be in hand before the return is filed. It wasn't. Case closed.

That's correct. Originally, I responded I was "surprised the auditor disallowed the deduction before it reached the tax court". I still am.

If the auditor followed a strict interpretation of the law (like the judge), there's no question it would be disallowed for the reasons stated above.

However, it's my understanding that auditor's have accepted mileage logs that have been recreated, and are reasonable and can be substantiated. It's my understanding that mileage logs have the same "contemporaneous" requirement. Of course, other auditor's might not accept recreated mileage logs (and maybe no auditor's do any longer).

I have no idea how much "discretion" an IRS auditor is allowed to utilize. Perhaps, "Auditor gone good" can help with that. Certainly, if allowed that discretion, I would think many auditor's would accept the church's letter along with the checks, etc.

Of course, I could be wrong...

By they way, Travis...Yes, I'm introducing new facts into a hypothetical discussion. But, taxpayer's do indeed have records destroyed by hurricanes, floods, tornado's, and other Acts of God.

I'll ask again...(to everyone) how would you feel if the facts were changed a little to include destruction of the taxpayer's records by an Act of God? Should the letter of the law be followed, or an exception allowed for a reasonable re-creation of documentary evidence supporting such a deduction? Travis, I believe you agreed it wouldn't have reached the TC, correct? Or, should the strict wording of the law be followed (assuming there is no written exception available...which I don't think there is)?

If the answer is "yes" an exception should be allowed, on what basis of law? If there is no basis in law allowing the exception, why couldn't the same exception be made by the auditor given the original facts & circumstances? After all, there was no question, whatsoever, to the validity of the contributions.

[AuditorTurnedGood]

when I was auditing

in MN for the state, we had plenty of discretion. In a case like this, I would have been inclined to allow the deductions, since everything else was solid. It would seem that perhaps the IRS auditor was either very conservative, or the service wanted to create an example for this case with all of the new, stricter rules and enforcement around contributions.

As for things like mileage, if they could re-create it, and I found it to be credible, they got it. The IRS has allowed people to recreate documents lost or destroyed with mixed results.

I've got a feeling that if the documents in question were destroyed by and Act of God, this thing never would have gotten out of the audit stage.

[travis bickle]

Several things crowd together in my small brain

As for things like mileage, if they could re-create it, and I found it to be credible, they got it. The IRS has allowed people to recreate documents lost or destroyed with mixed results.

I've got a feeling that if the documents in question were destroyed by and Act of God, this thing never would have gotten out of the audit stage.

First of all Zee, I am NOT trying to set myself up as a tax/audit expert. You people have forgotten more about taxes than I know.

I believe -- for what that is worth -- that if the taxpayer could document the instance of an act of God, that the auditor would have allowed it. As ATG wrote [in MN], "we had plenty of discretion."

However my point is this -- why try and cloud the issue? We have a TC decision that forbade the deduction, and the case referenced makes no mention about "special circumstances," so why drag them in? Period. Applies in certain narrow situations.

Also consider this situation -- and ATG please feel free to correct me if this would NEVER happen-- what if the Auditor's boss had given explicit instructions "NO EXCEPTIONS FOR *ANY* REASON." What do you think the auditor would have then done?

Please, please, please -- it is NOT necessary to answer my question, because each of us can drag in hypotheticals all day long, but all they do is cloud the issue.

Let's let it rest.

[JG EA]

All,
Just read about a court case from last summer we all should be aware of. The taxpayers donated $6,500 to church, had all the cancelled checks, and got written acknowledgement from the church for the contributions. The letter from the church, though, was done in 2008 for the 2005 contributions. The IRS denied the deduction, and the tax court upheld IRS's position, because the letter was late and therefore not contemporaneous with the contributions. Expensive technicality.

I take it that the cancelled checks were for $250 or more? If under $250 on each day, that would have been enough proof.

[AuditorTurnedGood]

to answer

I take it that the cancelled checks were for $250 or more? If under $250 on each day, that would have been enough proof.

Yes, that is the case. The IRS and Court allowed $420.75 in donations to the church made in less than $250 amounts in the year in question.

[New York Enrolled Agent]

If the auditor followed a strict interpretation of the law (like the judge), there's no question it would be disallowed for the reasons stated above.

However, it's my understanding that auditor's have accepted mileage logs that have been recreated, and are reasonable and can be substantiated. It's my understanding that mileage logs have the same "contemporaneous" requirement. Of course, other auditor's might not accept recreated mileage logs (and maybe no auditor's do any longer).

By they way, Travis...Yes, I'm introducing new facts into a hypothetical discussion. But, taxpayer's do indeed have records destroyed by hurricanes, floods, tornado's, and other Acts of God.

If the answer is "yes" an exception should be allowed, on what basis of law? If there is no basis in law allowing the exception, why couldn't the same exception be made by the auditor given the original facts & circumstances? After all, there was no question, whatsoever, to the validity of the contributions.

I think we need to be careful to distinguish between the requirements between deductions for contributions v. mileage. The requirements are DIFFERENT. The two applicable code sections are different.

§170(f)(8) specifically contains the "contemporaneous" requirement for contributions of $250 or more. §274(d) does NOT contain any such requirement. §274(d) says there must be adequate records or evidence to support deductions and the regulations basically say the best records are those which are "made at or near the time of the expenditure". But, the absolute stringent requirement of §170(f)(8) is NOT present. The word "contemporaneous" is not found in §274(d). BTW, the regulations for §274(d) do also contain a discussion about lost, destroyed records.

Back to the original case - assuming arguendo that the taxpayer had the proper documenation before his/her return was filed and the documentation was destroyed by an Act of God or theft or whatever, then the judge could look for EVIDENCE that this was, in fact, correct. Testimony from the Church official could be secured that the letter had been timely sent to the taxpayer. Police or news reports could be used to verify that a calamity had indeed taken place. The judge could make a decision based on EVIDENCE that the taxpayer had indeed complied with the contemporaneous requirement of §170(f)8). That's not an exception but an adherence to the law.

[AuditorTurnedGood]

thanks for

brining us back to the reality of the code. I learn a new perspective every time I come onto the board.

ATG

[joanmcq]

I thought I had posted this yesterday, but its not here...

had an audit that went to notice of deficiency status, and got an appeals officer that is a stickler for the regs & code. The code is very clear regarding what is required for charitable and trust me, I have this stuff pretty much memorized. One donation got shot down for not having an appraisal. Wouldn't even let us have 5K because the letter from the organization did not state no goods or services were received. Shot down one reciept from the church because the fax date clearly showed it wasn't contemporaenous. Taxpayer luckily dug up the original reciept that was. But auditor also disallowed payroll deduction for the United Healthcare Workplace for Giving Campaign. I list the employer just to stress that this was not a small firm or anything. The taxpayer gave 3 or 4 contributions from one paycheck. all 250+ (one was for $1000) were disallowed because the UHC receipt did not have the 'no goods or services' statement. I mean, these were payroll deductions! we had the paystub, we had the receipt. UHC was only a conduit for the actual charities, but it didn't matter. I argued the spirit of the law to no avail. And that it was the organization's fault, not the taxpayers. And the auditor basically said, what would you argue in court? the law is the law.

In another audit, I spoke with a church bookkeeper when I got another receipt without the required statement....she said, "oh that used to be on there, but I changed it to something more friendly.." (!).

[MAMalody]

Personally, I used this case to demonstrate to a CPE class I was teaching last fall of the importance of reviewing contribution documentation, when it appears to be warranted. In my practice, I ask to see the contribution record of any contribution that would appear to be a problem. I have found that about 50% of that provided does not meet IRS criteria. To me this is critical because over 95% of my clients have contributed between 5-30K to a specific church and a loss of that deduction would be significant. As a preparer, I am not really concerned if the auditor or judge has descretion when I prepare the return. I am interested in the return being in conformity to what I see the requirments of the law are. When I would represent a client, then I would pursue any and all discretionary judgments possible. But that's just me.

As a prior auditor, I am not sure what I would have done. Unless this was the first or second year after the documentation change, I would have probably disallowed it. This was a big deal for churches and well publicized by the various denominations.

[FEDUKE404]

Other related questions

1 - Did the church ever prepare the necessary document sometime in 2005 or shortly thereafter? If not, why not?

2 - Assuming the church did prepare the document in a timely manner, then the taxpayer for whatever reason later lost the document, and the church subsequently faxed a copy of the 2005 document to the client in 2009 (time-stamped), would that be a problem?

3 - Does this apply to other situations? Example: Client has 2005 receipt from Dr. Surgeon Jones for expensive services in 2005, perhaps something as simple as "paid on account." Client has all insurance reimbursements, canceled checks, etc. IRS wants more proof in 2009 for tax year , so doctor "creates" a new document listing all of the events that occurred during 2005. Problem or no problem?

FE