A Charitable Gift Receipt Is Worth a Lot More Than the Paper it Is Written on—Tax Court Denies $64 Million Deduction Due to Defective Donation Acknowledgment
In 15 West 17th Street LLC v. Commissioner, the US Tax Court denied a $64.5 million deduction claimed by the taxpayer for a charitable contribution to a historic preservation organization in 2007. The court held that the taxpayer failed to properly substantiate the charitable contribution under the requirements set forth in the Internal Revenue Code (Code), due to the taxpayer’s failure to receive a complete gift receipt from the donee organization.
Section 170(f)(8) of the Code requires a taxpayer to substantiate a charitable contribution of $250 or more with a “contemporaneous written acknowledgment” from the donee organization. The acknowledgment must include the following information:
- The amount of cash and a description (but not value) of any property other than cash contributed by the donor;
- Whether the donee organization provided any goods or services in exchange for the contribution; and
- If the donee organization has provided any such goods or services, a description and good faith estimate of the value of the goods or services.
For the acknowledgment to be contemporaneous, the taxpayer generally must receive the acknowledgment from the donee organization before the taxpayer files its next tax return. If a donor does not receive this acknowledgment, or if the acknowledgment does not include the information required by Section 170(f)(8), the IRS will disallow the claimed deduction.
The taxpayer in the 15 West 17th Street LLC case donated a conservation easement to a section 501(c)(3) organization in 2007 and received an acknowledgment letter from the donee organization in 2008, but the acknowledgment did not state whether the donee organization provided any goods or services in exchange for the contribution. A few years later, the donee organization amended its Form 990 for 2007, the annual information return most nonprofit organizations file with the IRS, to report the charitable contribution and to state that no goods or services were provided to the donor in exchange for the contribution.
The IRS disallowed the $64.5 million deduction claimed by the taxpayer on its 2007 return, finding that the taxpayer failed to properly substantiate the contribution under Section 170(f)(8). Relying on a separate provision in Section 170(f)(8), the taxpayer argued that a contemporaneous written acknowledgment was not required in this case because the donee organization reported the contribution on its Form 990. Section 170(f)(8)(D) provides that a contemporaneous written acknowledgment is not required to substantiate a contribution where the donee organization files a return reporting the charitable contribution in accordance with regulations issued by the Treasury Department.
The Tax Court rejected the taxpayer’s argument. While Treasury has issued regulations requiring nonprofit organizations to file annual returns with the IRS, it has not issued regulations under Section 170(f)(8) relating to donee reporting of charitable contributions. Treasury considered but later withdrew proposed rules on the topic in 2016, citing concerns about donor privacy and reporting burdens for donee organizations. Finding that the taxpayer failed to properly substantiate the charitable contribution under Section 170(f)(8), the court sided with the IRS in disallowing the deduction.
The IRS is particularly attentive to substantiation in the preservation context, given that donations of conservation easements can result in large deductions, but the requirement applies to all charitable contributions of $250 or more. Because this is a taxpayer requirement, and not a requirement of the donee organization, the taxpayer should ask the donee organization for a “contemporaneous written acknowledgment” that meets the requirements of Section 170(f)(8) of the Code, and should make sure that the donee organization sends an adequate receipt before the taxpayer files its next tax return. Depending on the type of gift and the amount of the claimed deduction, the taxpayer may be subject to further reporting and substantiation requirements, including obtaining a qualified appraisal and filing Form 8283 with the IRS. The taxpayer should be aware of the substantiation requirements specific to the gift and should confirm the donee organization’s ability to provide receipt of the contribution.