For Want of a Proper Acknowledgement, Taxpayer Loses A $5.2 Million Deduction.

Previously, I discussed the impact of failure to get a goods thank you letter from a charity to be able to take a deduction for a charitable gift. The Tax Court has again denied a charitable deduction on the same grounds, now to the tune of $5.2 million.

In the case of Janet R. Braen, et al., v. Commissioner, T.C. Memo. 2023-85, the Tax Court dealt with consolidated charitable deduction cases concerning the sale of undeveloped property by taxpayers/family members’ mining S corp. to the town as part of a settlement for zoning litigation. The court concluded that the taxpayers failed to demonstrate the value of all consideration received in the sale, resulting in their disqualification from claiming a proportionate share of the deduction. It was particularly evident, when reviewing the land purchase agreement and settlement, that the reversion of the zoning designation for the portion of the property retained by the corporation was a form of consideration that should have been valued for deduction purposes. Additionally, the taxpayers did not satisfy the Contemporaneous Written Acknowledgement (CWA) requirement of Code Sec. 170(f)(8) by providing a description and good-faith estimate of the value of any goods or services received as consideration. Although the corporation received an acknowledgement letter from the town, it did not identify the zoning change as consideration and instead indicated that the town did not provide any goods or services other than cash. Furthermore, the reasonable cause exception of Code Sec. 170(f)(11)(A)(ii)(II) did not apply to the CWA requirement.

Due to the meticulous substantiation requirements, the Court upheld the IRS’s decision to disallow the deduction in both cases. The Court cannot infer compliance with the requirements based on the absence of a reference to goods or services, the Gift Agreement, the Deed of Gift, the documents filed with the tax return, or the forms filed with the tax return itself. No subsequent fact or document after the filing date of the tax return can be considered. In the Albrecht case, Judge Greaves does not hold Mrs. Albrecht responsible, as she made a genuine effort to comply with the substantiation requirements of the Internal Revenue Code. The Court sympathizes with her unfortunate outcome but still denies the deduction.

Once again, the Court emphasizes the importance of promptly sending a thank-you letter for any gifts received, even if it’s an unattractive sweater hidden in the closet (or in this case the zoning change hidden in the agreement). This is especially crucial for charities that receive donations. The key lesson here is for donors to verify whether the documents provided by the charity acknowledge their donation sufficiently as a Contemporaneous Written Acknowledgement. Additionally, if there is any mention of other documents, such as the Gift Agreement, it is essential to obtain a copy of the document acknowledged by the charity. Remember to always include the donor’s tax identification number on every document that documents the gift.