John Bullis: Proving non-cash contributions tax deduction
April 27, 2015
In 2011, Mr. Kenneth J. Kunkel claimed charitable contributions deductions of $37,315 for non-cash contributions. IRS denied the deductions for lack of substantiation and assessed a tax deficiency of $12,338 and also a $2,468 accuracy-related penalty. He and his wife represented themselves in the U.S. Tax Court. They did not introduce evidence, nor did they show compliance with the tax regulations. I think they would have understood they would lose the argument or case if they talked with a CPA or an attorney before the IRS audit.
They claimed $5,140 of "cash" (check) contributions, but could only prove $4,840. IRS disallowed the remaining $300, and the taxpayers did not object to the disallowance.
IRS disallowed the entire $37,315 of non-cash contributions and the Tax Court agreed that no deduction was allowable since the taxpayers failed to observe the various substantiation rules. IRS publication 526 could have helped them understand what kind of records and receipts are important and necessary.
They did not produce a receipt or acknowledgment from the church even though the church was able to provide receipts. They claimed to have a receipt from the church but could not produce it. They had no evidence of what was given such as photographs and no proof the items were actually delivered to the church. The church did not inform the taxpayers if any of the items allegedly contributed were sold or at what price. The $13,115 "church contributions" were completely disallowed.
They claimed non-cash contributions to Goodwill and other charities of clothing they valued at $20,920, furniture valued at $2,680, etc. They did not produce any documentary evidence as to which items were donated to which charity. During the IRS audit, they produced a spreadsheet for clothing with estimated amounts for the fair market value. They usually dropped off items for Goodwill in the early morning or evening when Goodwill was closed. They testified that they left large items, like furniture outside the warehouse door of the charity. They said they created index cards of items they delivered to the charities but did not introduce into evidence the index cards. They supplied no evidence concerning the cost or how they figured values.
The court decision noted that no deduction is allowed for contributions of clothing or household items unless the items are "… in good used condition or better …"
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For the two categories of non-cash gifts that were claimed to be worth more than $5,000, they did not have appraisals or reliable books and records of the gifts. Their testimony to the court was not found to be credible. They did not assign any values until he was preparing the 2011 income tax return. No records equals no deduction.
Did you hear? "Humility leads to strength and not weakness. It is the highest form of self-respect to admit mistakes and to make amends for them." — John J. McCloy.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
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