Donors Denied Millions in Charitable Deductions for Failure to Meet Substantiation Requirements

Two recent cases have come down from the Tax Court denying taxpayers deductions for their charitable donations – again emphasizing that there is zero wiggle room in meeting the substantiation requirements under Section 170(f) of the Internal Revenue Code.

Background. Section 170(f) lays out specific requirements that must be met in order for a donor to claim a charitable deduction for donations of cash and property to a tax-exempt organization. This has been one of our favorite blog topics over the years because these cautionary tales of taxpayers running afoul of the rules and losing their tax benefits are particularly heartbreaking. Click here and here to see our previous posts that give an overview of the substantiation requirements for charitable donations.

New Cases. In Estate of Hoensheid, TC Memo 2023-34, the contribution of $3 million of closely-held stock to a donor-advised fund prior to a change in control of the company was at issue. Because the donor had already engaged a company to provide valuation services pursuant to the sale of the closely-held business, the donor decided against paying third party accountants to provide a separate appraisal of the shares for charitable deduction substantiation purposes. This choice proved fatal to the donor’s charitable deduction due to the fact that the company valuation did not meet the requirements of Section 170(f) as a “qualified appraisal.” Specifically, the company valuation was not a qualified appraisal because the person valuing the company did not perform these valuations professionally and had no professional certifications as such. Thus, he was not qualified as an appraiser and his valuation was deemed unreliable despite his familiarity with valuing companies as an investment banker.

In Brooks v. Commissioner, TC Memo 2022-122, taxpayers did obtain a qualified appraisal for their donation of a conservation easement valued at $5.1 million. The taxpayers were denied their charitable deduction in this case due to defects in the contemporaneous written acknowledgement. Specifically their acknowledgement, in the form of the deed used to transfer the property interest, failed to contain the required language that no goods or services were received in exchange for the donation. Despite the fact that the taxpayers proved that no goods or services were in fact provided for the donation, the Tax Court held that was not enough. The lack of the required language in the deed meant that Section 170(f) had not been strictly complied with, and thus the entire deduction must be disallowed as a matter of law.   

The upshot of the two cases is that taxpayers must dot their “i”s and cross their “t”s when it comes to the Section 170 substantiation requirements for charitable donations of property, as failure to do so can be extremely painful. As always, we recommend donors consult their tax advisors before filing their annual return in order to ensure that these requirements have been met and they will be entitled to take their charitable deductions.

For more information about substantiating charitable donations see Publication 526.

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