Verifying tax-deductible contributions – don’t screw it up!

Did you know that communion wine qualifies as “goods or services received” as far as the IRS is concerned? What about “admission to a religious ceremony?”

A really big thank you to Michael Wayland, of Sumption and Wyland, for bringing this to our attention. In a recent news brief in Nonprofit Quarterly, Michael alerted us to a Tax Court ruling that had us running to reread the IRS regulations.

The IRS ruled, and the Tax Court upheld, that about $25,000 of contributions a Texas couple made to their church were not tax deductible because their written acknowledgement was missing the “no goods and services received” language.

You’ll find the requirements in IRS Publication 1771.

Pub 1771 says that for any gift over $250, the giver must have written documentation of the gift. That written documentation, according to the Tax Court, must comply with the requirements outlined in Pub 1771:

1. It must include the name of the organization and the amount of the donation.
2. If the gift is non-cash, it must include a description of the gift (but not its value).
3. The verification must be contemporaneous, that is, received before the donor files their income tax for the year or before the date the tax filing is due.
4. It must state that “no goods or services were received” for the donation, if that is the case.
5. If goods or services were received , it must state the value of those goods and services.
6. If the gift was to a religious organization, it must carry the language that “only intangible religious benefits were received,” if that is the case.

Now, I’m sure you are thinking, what’s the big deal, I already do all of this?

A few things:

• You can’t go back and fix it if your donor runs into a challenge by the IRS, because the new acknowledgement wouldn’t be “contemporaneous.” So you have to get it right the first time.
• Don’t get creative with this particular language. The Tax Court was looking for the exact words described in the IRS code as outlined in Publication 1771.
• If you are a religious 501(c)(3), the IRS considers admission to a religious ceremony or the receiving of wine or bread in the religious ceremony to be a good or service received. That was news to me! Fortunately, receipt of only “intangible religious benefits” doesn’t reduce the amount of the gift that is tax deductible. But, the acknowledgement must include the words that “only intangible religious benefits were received” or it invalidates the tax deductible nature of the gift. (You don’t have to describe what those intangible religious benefits were).

The Texas couple was required to pay over $9,000 in back taxes and penalties. Ugh.

Any stories to share?