Why Recognition as a Donor Doesn’t Guarantee a Deduction

If you’re a frequent donor to charitable organizations, you may enjoy special recognition, such as exclusive membership levels. However, being acknowledged as a donor doesn’t automatically qualify you for a charitable deduction. In a recent case (Aulisio v. Commissioner, TC Memo 2024-29, March 13, 2024), a CPA learned this the hard way when the Tax Court denied his charitable deduction for a gift to the Los Angeles Philharmonic.

Understanding the proper substantiation rules for charitable deductions is essential to avoid similar pitfalls and maintain IRS compliance.

The IRS Rules for Charitable Contributions

To qualify for a charitable deduction, you must adhere to IRS substantiation requirements. The documentation needed depends on the type and size of your donation:

Donations Under $250

1. Obtain a receipt from the organization or keep reliable records if a receipt isn’t feasible.
2. Include the organization’s name, donation date, location, and a description of the property.

Donations of $250 or More

1. Obtain a contemporaneous written acknowledgment (CWA) from the charity.
2. This letter must include:
   1. The amount or description of the gift.
   2. A statement indicating whether you received any goods or services in exchange.
   3. A good-faith estimate of the value of those goods or services, if applicable.

Failure to meet these documentation requirements can result in the IRS disallowing your deduction.

Case Highlights: CPA Misses Key Documentation

In Aulisio, the taxpayer, a California CPA, claimed a $500 charitable deduction for a donation to the Friends of the Los Angeles Philharmonic. While he initially failed to claim the deduction on his 2015 return, he later asserted that it should be allowed during pre-trial proceedings.

To substantiate the contribution, he presented a letter from the organization that read:

“Thank you for your gift! Your membership has been upgraded. You are now at the Rhapsody ($500) membership level.”

Unfortunately, this letter fell short of IRS requirements in several critical ways:

1. No Specific Amount: The letter did not confirm the amount of the alleged cash contribution.
2. No Contribution Type: It failed to specify whether the donation was cash or property.
3. Lack of Exchange Information: There was no statement about whether goods or services were provided in exchange for the gift.
4. No Value Estimate: The letter omitted an estimate of the value of any benefits received.

Why the Deduction Was Denied

The Tax Court upheld the IRS’s decision to deny the deduction. Simply being recognized as a donor or attaining membership status does not satisfy IRS substantiation requirements. Charitable deductions must be backed by detailed, contemporaneous documentation that leaves no ambiguity about the gift’s nature or value.

The CPA’s failure to provide proper documentation led the court to rule against him, emphasizing the importance of adhering to IRS guidelines when claiming charitable deductions.

Key Lessons for Donors

1. Always Request a Proper Acknowledgment: Ensure that charities provide a detailed acknowledgment letter that meets IRS requirements.
2. Verify the Letter Contents: Check that the acknowledgment includes the donation amount, type, and information about any goods or services received.
3. Keep Records for Larger Donations: Maintain thorough documentation for all contributions, especially those exceeding $250.

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