Encourage But Verify
“It is more blessed to give than to receive.”[i]
Undoubtedly, you’re familiar with the foregoing proverb that seeks to encourage “charitable behavior” among the members of society, and to dissuade them from pursuing only their innately selfish proclivities.[ii]
The Code recognizes the conflict that an individual taxpayer may experience in the course of deciding whether to make a charitable contribution of a property, or to retain such property (or the proceeds from its sale) for the individual’s own use.
Charitable Contribution Deduction
To encourage gifts of property to qualifying charitable organizations, the Code permits the transferor-taxpayer – subject to certain limitations that depend (among other things) on the type of property contributed and the nature of the recipient organization[iii] – (i) to claim an itemized deduction, for purposes of determining their federal income tax liability, of an amount equal to the fair market value of the property, (ii) without requiring the taxpayer to recognize as taxable gain the unrealized appreciation in the value of the property.[iv]
Unfortunately, there are times when certain taxpayers are consumed by a desire to claim a substantial tax deduction.[v] It is sometimes the case that such a taxpayer cares little for any charitable beneficiary or its mission,[vi] but is acutely aware of the “economic return” to be derived by claiming the substantial tax deduction they may have been promised by the promoter of a too-good-to-be-true scheme.[vii]
Substantiation
How can the IRS identify such taxpayers, considering the U.S. income tax system is built on the concept of voluntary compliance, meaning that taxpayers are responsible for honestly and properly reporting all of their income and deductions on a tax return, calculating their tax liability correctly, and filing the tax return on time?
First, the IRS is empowered to review a taxpayer’s return to ensure that the reported information is accurate and that the tax shown thereon as owing was calculated correctly.
Second, the taxpayer must be able to support and substantiate the entries and related statements made on their tax return.[viii] In connection with this obligation, the taxpayer is required to keep such records and other documentary evidence as are sufficient to establish the amount of gross income, deductions, credits, or other items required to be shown on their return.[ix] What’s more, these records must be available at all times for inspection by the IRS.[x]
Supporting a Charitable Deduction
To assist the IRS with (a) identifying any problematic or questionable charitable contribution deductions claimed by a taxpayer, (b) promoting the accuracy of the amount reported as having been contributed, and (c) ensuring that the contribution for which the deduction is being claimed was actually made to the qualifying charity identified on the taxpayer’s return, the Code and the Regulations promulgated thereunder require the taxpayer to provide specific information to the IRS.
Together, these substantiation requirements are intended to promote honest reporting by individual taxpayers who claim a deduction for the transfer of money or other property to a charity, and to foster compliance with the applicable tax rules. A taxpayer who fails to satisfy these requirements may not only be denied the claimed deduction but may also be subjected to penalties.
Some of these requirements, which relate to the nature and value of the property transferred, may be described as “substantive.”[xi]
Others, however, may be described, in an understated way, as simply “ministerial,” yet a taxpayer’s failure to satisfy even these requirements may cost them dearly, as one well-meaning taxpayer (“Taxpayer”) recently experienced.[xii]
Before discussing this individual’s unfortunate outcome, let’s review those provisions of the Code and Regulations most relevant to Taxpayer’s case.
The CWA
A donor cannot claim a federal income tax deduction for any single contribution valued at $250 or more unless the donor obtains a contemporaneous[xiii] written acknowledgment (“CWA”) of the contribution from the donee charitable organization. [xiv] The CWA must contain the following:
- the name of the charitable donee-organization;
- the amount of cash and a description (but not the fair market value) of any property other than cash contributed by the taxpayer;
- a statement that no goods or services were provided by the organization in exchange for the contribution, if that was the case; and
- a description, and good faith estimate of the fair market value, of any goods or services provided by the donee in consideration for the donated property.[xv]
Even if an acknowledgment satisfies the above conditions, unless a taxpayer obtains it prior to the filing date or due date of the taxpayer’s return, the donation is not eligible for the charitable contribution deduction, notwithstanding that the contribution was actually made and can otherwise be substantiated.
Because there are no IRS forms for the CWA, the acknowledgment may take the form of a letter, postcard, or computer-generated form with the above information.[xvi]
Seems Pretty Straightforward
Based on the foregoing description of the CWA requirement, you’d probably conclude that the satisfaction of this requirement should not present a challenge to any taxpayer who wants to claim a charitable contribution deduction.
Unfortunately, you’d be wrong.
Incredible, right? How can something so simple be so “fatal” to a deduction in respect of a bona fide transfer that has otherwise complied with other, more challenging, substantiation requirements?
The answer provided by the following poem[xvii] – with which many, if not most of you are probably familiar – may suffice:
“For want of a nail the shoe was lost,
For want of a shoe the horse was lost,
For want of a horse the rider was lost,
For want of a rider the message was lost,
For want of a message the battle was lost,
For want of a battle the kingdom was lost,
And all for the want of a horseshoe nail!”
Now let’s turn to Taxpayer’s regrettable, because easily avoidable, mistake.
Taxpayer’s Blunder
About two years after having purchased the Property, Taxpayer offered to donate it to the City. The report prepared by the City Council for the meeting at which the City agreed to accept the donation (the “Report”) stated “[t]here will be no expenditure to [City] to accept the donation.”
Shortly afterward, in a letter agreement executed by Taxpayer and the City (the “Letter”), it was stated that Taxpayer offered “a donation of land” for “[t]he purpose of . . . a conservation contribution” and with the intent for the City “to maintain th[e] property in perpetuity as preserved open space.” The Letter went on to state that the Property “will be donated” with “all taxes paid and current through the end of” the year, and “all costs associated with said donation . . . paid by the donors.”
Less than a week later, Taxpayer signed a warranty deed conveying the Property to the City, which was recorded with the Letter (the “Deed”).
The Deed stated that the Property was being conveyed “for and in consideration of the sum of Ten and no/100 Dollars ($10.00), and other good and valuable consideration in hand paid by” the City.[xviii]
Reporting
The Property was appraised, IRS Form 8283, Noncash Charitable Contributions[xix] – to which the appraisal was attached – was prepared and executed by Taxpayer, the City, and the appraiser. This form would have identified the City as the done, would have included a description of the Property, and would have indicated whether Taxpayer received any consideration for its transfer to the City (i.e., a bargain sale) and the amount thereof.
Taxpayer reported the donation of the Property to the City on their federal income tax return (together with the Form 8283) and claimed a charitable contribution deduction therefor.
The IRS issued a notice of deficiency (the “90-day letter”) in which the charitable contribution deduction was disallowed. According to the agency, the Taxpayer’s contribution failed certain requirements, including the failure to obtain a CWA.
Tax Court
Taxpayer timely petitioned the U.S. Tax Court to dispute the notice of deficiency.
Taxpayer argued that the Form 8283, the Letter, the Deed, and the Report together (the “Documents”) constituted the CWA.
The question before the Court was whether the Documents satisfied what the Court described as “the strict statutory requirement” of the CWA.
The Court’s “Analysis”
The Court began its discussion by noting that, although a “CWA does not have to take a particular form and may be made up of a series of documents,” the “doctrine of substantial compliance does not apply to excuse the failure to obtain a CWA meeting the statutory requirements.”
Description of the Property
The Court stated that (a) the Letter identified the Property by parcel number, acreage, and description, and (b) the Deed contained the legal description of the Property.
The Court concluded that these documents satisfied the requirement for a description of any property other than cash contributed to the charity.
No Consideration
As to the requirement that the CWA state whether the donee provided consideration for the contribution, the Court observed that it has always required an “affirmative statement” by the charitable donee that none was provided, even if that was in fact the case.
The Court then examined the Form 8283, the Letter, the Deed, and the Report, each in turn.
According to the Court, the Form 8283 failed to satisfy the above-described affirmative statement requirement because it did not include a statement that the donee provided no consideration for the donation, even though the information shown on the Form would have confirmed this fact.[xx]
The Letter, the Court continued, stated that the Property was a “donation” and a “gift” for the City to maintain “in perpetuity as preserved open space,” contributed “with all taxes paid and current through” 2018, and that Taxpayer would pay “all costs associated with said donation.” While the Letter described what Taxpayer contributed (the Property), it did not state explicitly that the City provided no consideration for the Property, and it was silent as to what obligations, if any, the City undertook to “maintain” the property.
The Court explained that the “express terms of the statute require an affirmative statement,” but the Letter did not state affirmatively that the City did not provide goods or services in exchange for the Property. The fact that the Letter included “words such as ‘donation’ or ‘gift’ [did] not overcome this defect.”
Next, the Court evaluated whether the Deed qualified as a CWA, and again it applied the “affirmative statement requirement.” The Court pointed out that the Deed did not include a merger (or integration) clause; i.e., a clause that declared the Deed (together with the earlier dated Letter that was attached to the Deed and with which it was recorded) was the complete and final agreement between Taxpayer and the City.
In the absence of a merger clause, the Court stated, the Deed did not satisfy the affirmative statement requirement. The Court refused to read a merger clause into the Deed for the purpose of satisfying the Code, which, on its face, required that a donor-taxpayer obtain a “written” acknowledgment. The Court then added that the “only operative statement” in the Deed was that the City provided $10 “and other good and valuable consideration” for the Property. The Court warned that by ignoring or reworking statements in deeds to create a valid CWA risked “introducing the doctrine of substantial compliance into a statute where it” did not belong.
Therefore, the Court determined that the Deed failed to satisfy the affirmative statement requirement.
Finally, the Court considered the Report, and the City’s statement therein that “[t]here will be no expenditure to [the] City to accept the donation.” Taxpayer claimed that the foregoing satisfied the affirmative statement requirement because the Report preceded the City Council’s vote to accept the donation.
The Court disagreed, and declined to conclude that the City provided a CWA for something it had yet to accept.
In then added that the statement in the Report could not overcome the statement in the Deed indicating that the City provided “other good and valuable consideration” for the Property.
With that, the Court determined that the Documents, as a whole, did not state that the City provided no consideration for the Property and, thus, did not satisfy that requirement for the CWA.
Therefore, the Court concluded that Taxpayer did not substantiate the contribution of the Property to the City, and that “the plain words” of the Documents did not constitute a valid CWA. Failure to comply strictly with the requirements for a CWA, the Court stated, results in the disallowance of the entire deduction.
Consequently, the entire charitable contribution deduction claimed by Taxpayer, as it related to the Property, was disallowed.
Does It Make Sense?
Absolutely not. The Court’s application of a strict CWA requirement harms charitably-inclined taxpayers – like Taxpayer – who are trying to do the right thing. It also harms the tax-exempt charitable organizations that such taxpayers are trying to help.
This outcome is especially unfortunate, and unfair,[xxi] where the evidence conclusively demonstrates that a bona fide charitable contribution was made and no consideration was provided to the donor by the charitable recipient.
In response to decisions similar to the one described in this post – of which there have been too many – some tax advisers, and even Treasury officials, have suggested that the “contemporaneous written acknowledgment” requirement be replaced with one that requires “substantial compliance.”
It’s time Congress acted.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
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[i] Acts 20:35.
[ii] At its core, the proverb hopes to establish such behavior as an aspirational principle of society.
[iii] See, generally, IRC Sec. 170(b), 170(e).
[iv] See, generally, IRC Sec. 170(a), 170(c), 170(e).
For example, an individual taxpayer who makes a charitable contribution to a public charity of real property with a FMV of $100 and an adjusted basis of $30, may claim an itemized deduction of $100 without recognizing the $70 of gain inherent in the property.
[v] Anything to reduce their liability you might say.
[vi] The same rule applies to charitable giving as to serving on the board of a charity: don’t do it merely for the tax benefit or for the opportunity to meet people or make connections.
[vii] Witness the abundance of cases involving the overvaluation of charitable easements that have clogged the audit pipeline at the IRS and the docket at the Tax Court over the last few years.
[viii] The taxpayer has the burden of proof.
[ix] IRC Sec. 6001; Reg. Sec. 1.6001-1.
[x] The records must be retained so long as their contents may become material in the administration of the taxes imposed by the Code.
[xi] See IRC 170(f)(11) and Reg. Sec. 1.170A-13.
[xii] Martin v. Comm’r, T.C. Memo 2026-39 and T.C. Memo 2026-40.
[xiii] An acknowledgment is considered to be “contemporaneous” if the taxpayer obtains the acknowledgment on or before the earlier of: (i) the date on which the taxpayer files a return for the taxable year in which the contribution was made, or (ii) the due date (including extensions) for filing such return.
[xiv] IRC Sec. 170(f)(8). It isn’t necessary to include either the donor’s Social Security number or other tax identification number on the CWA.
It should be noted that a charitable organization that does not acknowledge a contribution incurs no penalty; but, without a CWA, the donor cannot claim the tax deduction. Although it’s a donor’s responsibility to obtain a CWA, a charitable organization must assist a donor by providing the required statement.
[xv] If the organization only provided “intangible religious benefits” in return for the contribution, a statement so providing.
[xvi] The CWA may be provided as a paper copy or electronically (such as via an email addressed to the donor). A donor shouldn’t attach the acknowledgment to their individual tax return, but they must retain it to substantiate the contribution.
[xvii] The poem, which is attributed to an anonymous author of the 13th century, appeared in slightly different versions over the years in German, French, and English texts, and may have inspired other writers including, maybe, Shakespeare: “A horse! a horse! my kingdom for a horse!(Richard III, Act V, Scene IV). It was published in the States in 1758 by Benjamin Franklin (of course), in Poor Richard’s Almanack.
[xviii] Query why this statement of consideration was included. I’ll defer to the real estate folks, but my recollection from law school is that such nominal consideration may be a local law requirement, to ensure the “validity” of the transfer.
[xix] https://www.irs.gov/pub/irs-pdf/f8283.pdf .
[xx] See Form 8283, Section B, Part I, Line 3, Column (g).
[xxi] Yes, I admit I am not fond of that overused, and often misused, word.