A taxpayer can benefit from an enhanced deduction by donating appreciated property to charity; however, in a recent Tax Court case, Albrech, TC Memo 2022-53, 5/25/22, the Court held that a person must meet strict substantiation requirements to secure this tax break.
Basic premise: If you donate property that you acquired within the last year, you can only deduct your basis in the property (normally, the amount paid for it). Conversely, if the property would have qualified for long-term capital gain if you had sold it instead (i.e., you’ve owned it for more than one year), you may deduct the property’s fair market value (FMV) on the date of the donation.
For example, if you donate stock bought five years ago for $2,500 that’s now worth $10,000, you can deduct $10,000. The $7,500 of appreciation in value remains untaxed forever.
The tax law limits your current deduction for charitable gifts of property to 30 percent of your adjusted gross income (AGI) for the year. Any excess is carried forward for up to five years.
Caution: The IRS won’t simply accept your word on large donations. To claim a deduction of $250 or more, you must obtain a contemporaneous written acknowledgement (CWA) including the following information:
- Name of the organization;
- Amount of cash contribution;
- Description of non-cash contribution;
- Statement that no goods or services were provided by the organization;
- Description and good faith estimate of the value of goods or services, if any, that the organization provided in return for the contribution; and
- Statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
Facts of the new case: In 2014, a taxpayer donated approximately 120 items from a collection of Native American artifacts to a museum. Pursuant to this gift, the taxpayer executed a five-page deed detailing important information.
The second page of the deed specified conditions governing gifts to the museum. One of these conditions stipulated in relevant part that “the donation is unconditional and irrevocable; 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 final three pages of the deed listed items of donated property.
Despite this reference to the “Gift Agreement,” no such agreement was included with the deed. The museum did not provide the taxpayer with any further written documentation concerning the donation.
The IRS denied the deduction because the taxpayer could not produce a CWA complying with all the tax law requirements. Eventually, the case went to the Tax Court.
Tax outcome: The deed doesn’t specifically state whether the museum provided any goods or services with respect to the donation. Where a deed doesn’t contain an explicit statement, the Court looks to the deed as a whole. Based on the lack of a statement in the deed, the Court determined that the donation failed to meet substantiation requirements. Accordingly, the Tax Court sided with the IRS.
Be aware that other rules may come into play. For instance, if you donate property to a charity, it must be used to further the organization’s tax-exempt mission (e.g., a museum should put the property on display).
Finally, for gifts valued above a $5,000 threshold, you must attach an independent appraisal of the property to your return, in addition to meeting the other recordkeeping rules.
