Church contributions, taxes a different bird with IRS

There was an expression in London that "The King is always right." Here we have the IRS that says almost the same thing. You may feel that you a have a bonafide case, but that is not always the way it turns out. Here is the sad story of a couple filing jointly and taking a tax deduction of over $25,000 in charitable contributions on their tax return. The majority of these payments were made by check to their church. The IRS sent them a letter of deficiency denying them this deduction. They bundled copies of these checks along with a statement from their church to support their claim. But the IRS did not accept this positive assertion from the church because it did not include the wording that "no goods or services" were provided for these contributions.

So the taxpayers requested the church officials to complete another acknowledgment of the contributions and indicate that there were no "goods or services" granted. After receipt, they forwarded this letter to the IRS and they were denied the deduction again. This time the refusal was centered on the fact it was not "contemporaneous" based on the Internal Revenue Code (section 170(f)(8)(A). That states that "no deduction shall be allowed for any contribution of $250. or more unless the taxpayer substantiates the donation by receiving written acceptance stating that the taxpayer did not receive any goods or services". This written acknowledgment meets the contemporaneous definition if it had been received before the taxpayer files the original return for the year of the contribution by the due date or a later date that includes extensions.

In this case the IRS claims the first acknowledgement from the church did not include the language "no goods or services" were provided for the contribution and the second letter failed the contemporaneous requirement.

The taxpayers took this case to tax court and conceded that they did not strictly comply with the statute. But they also claimed that they did substantially comply with statute. The court disagreed with the couple and stated that there is nothing in the statute that requires the IRS to look beyond the written acknowledgement when on the face of the letter the information was not properly presented. The decision rested on the premise that the requirements of this regulation was not clearly substantiated. This raises a question. What if there had been a letter received from the church before the original filing of the return was lost? Or misplaced? Would the IRS accept a letter from the church upon audit? After each donation of more than $250 would there have to be a letter received? Or can a year end all inclusive acknowledgment be acceptable?

Court dealings with IRS regulation

These kinds of decisions are causing much grief and consternation to tax practitioners with respect to dealing with the IRS. Many question what gives the IRS the power to interpret what the statutory language devised by Congress meant at the time of the legislation. Is it also allowed to have these regulations determined to be retroactive? The Supreme Court in an earlier case asked the following two questions regarding statutory language. Is it ambiguous, and if so is the regulation a reasonable interpretation of the law? If both questions can be answered with a yes, then the regulation will stand. Had a enough of regulations?

Observation: It is a mistake to believe that shorter hours and less work will produce a higher standard of living.

Edward J. Loughrey, CFE, EA, LPA can be reached at ejltaxes@gmail.com or at 843-705-7258.