Keep It Believable

Our protagonists this time are the Ohdes from West Virginia. The issue concerns charitable contributions. The Ohdes claimed they made dozens of trips to Frederick, Maryland and donated over 20,000 distinct items in 2011.

Half of this would have been clothing. There was furniture. There also were over 3,000 books.

They did at least get that minimalist Goodwill receipt that says:

Goodwill does not return goods or services in exchange for donations of property.”

The receipt doesn’t provide detail of the items, their count or their condition, but at least it is a start.

At the end of the year they entered this information into TurboTax.

And according to TurboTax they donated over $146,000.

You know what else?

They should have expected the almost-certain notice from the IRS. Donate a piece of real estate and a $100,000-plus donation makes sense. Donate 20,000-plus items of men’s and women’s clothing – and not so much.

There are rules for noncash donations. The IRS knows the scam. The rules tighten-up as the donations get more expensive.

If you donate property worth $250 or more, you have to get “contemporaneous written acknowledgement” (CWA). This does not mean the same day, but it does mean within a reasonable time. The CWA must include a description of the property.  That Goodwill receipt should be adequate here, as it has pre-printed categories for

·      Clothing

·      Shoes

·      Media

·      Furniture

·      Household items

Go over $500 and there are more requirements. In addition to a description of the property, you also have to provide:

·      How you acquired it

·      When you acquired it

·      How much you paid for it

That Goodwill receipt is no longer enough. You are going to have to supplement it somehow. Some tax practitioners advise taking photographs and including them with the tax records for the year.

Go over $5,000 and you get into appraisal territory, unless you donated publicly-traded stocks.

Where were the Ohdes on this spectrum? Their lowest donation was $830; their highest was $14,999.

They were therefore dealing with the $500 and $5,000 rules.

What did they have?

They had that lean and skinny receipt from Goodwill. You know, the receipt that is good enough for $250 donations.

But they had no $250 donations.

They had a problem. Their paperwork was inadequate. It would help to have a sympathetic Court.

Here is the Court:

Petitioners claimed large deductions for charitable contributions of property, not only for 2011 but also for years before and after 2011.”

Where was the Court going with this?

 For 2007—2010 they claimed deductions in the aggregate amount of $292,143 for noncash charitable contributions."

Are you hearing skepticism?

For 2012-2013 they claimed deductions in the amount of $104,970 for noncash charitable contributions.”

Yep, skepticism.

The Court had a whole range of options to bounce the deduction.

Petitioners did not maintain contemporaneous records establishing any of these facts.”     

That is one option.

Stay within the lines and the Court might cut you some slack.  Deduct half a million dollars over a few years and …. Let’s just say you had better make a lot of money to even get to the realm of possible.

Many of those aggregate dollar figures are suspect on their face.”

The Court spotted them a $250 deduction.

Leaving approximately $33 grand in tax and over $6 grand in penalties.

Keep it believable, folks.

Taxing A Corvette

I came across an old case recently. It made me smile, as it reminded me of earlier – and skinnier – times.

Let’s set this up.

There are, broadly speaking, two accounting methods when deciding whether you have reportable income for a period: the cash method and the accrual method. There are a variety of sub, sorta- and who-actually-understands-this methods, but cash and accrual are enough for right now.

The cash method is easy: if you can deposit it at the bank you have income.  Maybe you decide not to deposit at the bank until next week, but it is still income today. Why? Because you can deposit it. The definition is “can” not “did.”

Accrual is trickier. Generally it means that you sent an invoice to someone. The act of invoicing means you have income, as someone owes you. What if you delay invoicing for a week or two? Well, then you have a variation on the above cash-basis reasoning: you could have but didn’t. Again, it is the “could,” not the “did,” that drives the test.

What if you are on the cash method and somebody pays you with property instead of cash? You have income. It makes sense when you remember that cash is a form of property. We have just gotten so used to it that we don’t think of cash that way. For tax purposes, though, someone paying you in asiago cheese and gluten-free crackers still represents income. Granted, we have to translate cheese-and-crackers into dollars, but income it is.

Let’s say that you played football. Not just any football, however. You were Vince Lombardi’s running back. It is December 31, and you and Lombardi and the Green Bay Packers are playing the New York Giants in the National Football League Championship.

COMMENT: NFL historians will immediately recognize that this was before the Super Bowl era. There was no game called the Super Bowl until the two leagues – the National Football League and the American Football League – merged in 1966. The first two Super Bowls were won tidily by Lombardi and the Packers. In Super Bowl 3 Joe Namath famously led the New York Jets over the Baltimore Colts.

So it is the championship game. You are the running back. It is December 31 and you are playing outside in Green Bay. I presume you are freezing. You run wild and score 19 points, establishing a league record. You are selected after the game by Sport Magazine as the most valuable player, which comes with the prize of a new Corvette. 

Sweet.

By the way, your Corvette is waiting for you in New York. It is now the evening of December 31, 1961.

Tax issue: Do you have income (the value of that Corvette) in 1961?

The IRS said you did.

But you throw the IRS a loop: the car is not income. No, siree. It was a gift. Alternatively, it is nontaxable to you as a prize or award.

I give you kudos, but the concept of a gift requires the presence of detached and disinterested generosity. While a creative argument, it could not be reasonably argued that a for-profit magazine was awarding an expensive car to the most valuable player of a televised sporting event out of a detached and disinterested generosity. It was much more likely that both Sport Magazine and General Motors were expecting publicity, advertising and social buzz from the award.

You still have your second argument, though.

Problem is, the prize or award exception requires you to receive it for an educational, artistic, scientific or civic achievement.

You argue your point: being a star football player “calls for a degree of artistry” requiring techniques based on “scientific” principles.

Seriously.

The Court decides:

We believe that petitioner should be caught behind the line of scrimmage on this particular offensive maneuver.”

You have income. And the Court gave us a great quote.

But when do you have income: 1961 or 1962?

The Court reasons through the obvious. You are in Green Bay. The car is in New York. You cannot get to that car - much less title it - unless you had Star Trek technology. However, it is 1961 and Star Trek is not on television yet. You have income in 1962, the following day.

Your tax case is seminal in developing the tax doctrine of constructive receipt. Normally constructive receipt accelerates when you have income, but it did not in your case.You could not have made it to the bank even if you wanted to.

So why did the IRS push the issue of 1961 versus 1962? They didn’t. Remember that you were arguing that the Corvette wasn’t taxable. The IRS had to fight back on that issue. The 1961 thing was a sidebar, albeit that is what the case is remembered for all these years later.

By the way, do you know which football player we have been talking about?

A Church Contribution Story: Durden

Our next two blogs discuss tax fails involving charitable contributions.

What each has in common is congressional resolve to address an area considered subject to tax abuse. How so? How many times has someone overvalued a Goodwill clothing donation, for example? Congress therefore placed restrictions – primarily documentation requirements – on one’s ability to deduct contributions. The general tax rule is simple: no documentation equals no deduction.  The key is to understand what Congress considers documentation, as your understanding may be different from theirs.

Let’s talk about Durden.

David and Veronda Durden contributed $25,171 in 2007 to the Nevertheless Community Church. With the exception of five checks (totaling $317), all checks were over $250.

FIRST RULE: Under Code Section 170(f)(8)(A), no deduction is allowed for any contribution of $250 or more unless taxpayer has contemporaneous written acknowledgment of the contribution by the charity organization that meets specified requirements.

The Durdens cleared the first rule, as they had a letter from the church dated January 10, 2008.

SECOND RULE: Under Code Section 170(f)(8)(B), the charity must state in the acknowledgment whether it provided any goods or services as consideration for the contributed property or cash. If so, it must include a description and good faith estimate of the value of any goods or services provided.

There is a problem: the church did not include language “no goods and services have been provided” in their letter.

The Durdens obtained a second letter dated June 21, 2009 containing the same information found in the first letter, plus a statement that no goods or services were provided in exchange for the contributions.

THIRD RULE: Code Section 170(f)(8)(C) considers the acknowledgment as contemporaneous if obtained on or before the earlier when the tax return is due or the actual filing date.

The IRS disallowed all but $317 of the charitable deduction for insufficient documentation. The Durdens go to Tax Court. Their argument is reasonable: we substantially complied with the spirit of the law. We had a letter. It might not be exactly the letter the IRS wanted, but we had a letter. When the IRS wanted more, we got them more. The IRS went too far in disallowing the deduction when everyone knows we gave to the church. We even showed them cancelled checks.  The wording in Code Section 170(f)(8)(C) is only one way – a safe harbor maybe – of meeting the “contemporaneous” standard.

The Tax Court disagreed. It noted that Congress intended to tighten the rules in this area and placed specific language in the Code requiring and defining “contemporaneous.” This was not the IRS’ doing; it was Congress’ doing.  The Court in the past had been lenient in cases involving substantial procedural compliance. This was not procedure. This was legislative compliance, and the matter was outside the Court’s hands.

The Durdens did not have the correct letter when they filed their return. That is the last possible date according to the law. There is no deduction. The Court did let them deduct $317, however. Since those individual contributions were under $250, those didn’t require a letter.

MY TAKE: I can understand Congress passing near-incomprehensible tax law to address complex and sophisticated tax issues. Those taxpayers are likely to have expert tax advisors and planners. This is not one of those issues. This is someone donating to a church. I strongly disapprove of routine activities triggering tax rules that make no sense to an average person.  

Congress should have included a “sanity” clause in this statute. They could have given the IRS discretion to accept “other but equal” documentation. True, the IRS could refuse to do so, but at least there would be a chance that the IRS – or a court reviewing the IRS – could blunt the capriciously sharp edge of this tax law.

Next time we will talk about Mohamed.