It's Simple: No Deduction if You Don't Follow the Rules

A tax deduction for a charitable donation is only allowable if a taxpayer follows the rules for substantiating the donation, regardless of taxpayer donative intent or actually making the donation.

We have written about the charitable donation substantiation requirements before, but a recent Tax Court case offers some additional insight indicating there is no "middle ground," no "partial deduction opportunity" when the rules are not followed.

Case Study

Kenneth James Kunkel appears to be a generous giving individual, donating property, which he valued around $37,000, to four charitable organizations, primarily through leaving donations at unattended donation centers.

Even the Tax Court said they had no doubt Mr. Kunkel donated the property he claimed as a deduction to the four charitable organizations. But the court then followed that with saying none of the $37,315 worth of donations were deductible.

Why no deduction? Mr. Kunkel failed to substantiate the charitable donations.

Adding to Mr. Kunkel's problems, and costing more money, the Tax Court found Mr. Kunkel was liable for a 20 percent return accuracy penalty. Why? As you probably guessed, because he didn't follow the donation substantiation rules, officially termed "negligence or disregard of rules."

Mr. Kunkel, in an attempt to justify the lack of written support for his donations, reported to the Tax Court that he was very careful to batch items donated so that each time he donated, the value would be less than $250, believing that it would eliminate the need for receipts. This was a nice try by Mr. Kunkel, because the theory he expressed is somewhat correct.

However, the Tax Court didn't think Mr. Kunkel was giving them creditable facts. When they considered the items he donated, they found it difficult to batch all of the items in less than $250 amounts, and if by chance Mr. Kunkel were correct in the batching, it would have taken him 149 trips to the donation centers to accomplish his total donation of $37,315. That would be a donation trip, on average, every two and one half days during the tax year, and the Tax Court didn't buy that story.

It's like any other game, if you don't follow the rules, you get penalized.

Keep Reliable Records

If you don't care about the tax deduction and don't follow the rules, that's fine, just don't try claiming the deduction on a tax return. But, most taxpayers, even those with a heavy donative intent and charitable desire for making a donation, want a tax deduction, which requires following the rules and keeping reliable written records of charitable donations. The harsh reality is if a charitable donation is not properly documented, it is treated like the donation was never made. It really is that simple.

For a prior article providing a review of the charitable donation substantiation rules, click here.

Please contact your Eide Bailly service provider with questions and/or for additional information.