Charitable Contribution Deductions to a Church Started by the Taxpayer Not Deductible

Posted on July 20, 2018

In a recent case, the United States Tax Court held against the taxpayers and disallowed a charitable contribution deduction they made to a church that they started. The taxpayers founded a church in 1994 in their home and registered as a non-profit corporation in Florida. Bernard Davis, the husband, was the church’s President and senior minister. The church collected money and clothing to donate to the poor and held weekly services until the economic crisis forced Mr. Davis to seek employment outside of Florida in 2008. By 2012, the church no longer held weekly services and had no bank accounts. On their joint tax return for 2012, the taxpayers reported a charitable contribution deduction to their own church which was disallowed by the IRS. The taxpayers filed a Petition in the United States Tax Court challenging, in part, the IRS’ disallowance of their charitable contribution deduction for 2012. As proof of the contribution, they submitted a letter on church letterhead signed by Mr. Davis as the President and senior minister of the church. Deductions on one’s tax returns are a matter of legislative grace and, as such, a taxpayer must prove his or her entitlement to those deductions to the IRS with underlying substantiation. A taxpayer can donate money or non-cash contributions and can generally deduct those items on their tax returns. For monetary contributions, a taxpayer must provide proof such as cancelled checks, receipts from the recipient organization or other reliable records. For non-cash contributions, such as clothing and household items, the amount of the deduction is generally equal to the fair market value of the property at the time of the contribution. In order to claim a non-cash contribution, a taxpayer must provide a receipt showing the name of the donating organization, the date and location of the contribution and the description of the property in detail reasonably sufficient under the circumstances. It is also helpful if the receipt was issued at the same time as the non-cash contribution was made. Further, the item donated must be in good used condition or better. In this case, the taxpayers’ only proof was a letter from their own church signed by the taxpayer himself as the church’s President and senior minister. Further, the letter was not written at the same time as the contributions were made. The Tax Court ultimately denied the deduction and stated that the taxpayers may have used their inactive church to try and deduct gifts they made to their friends. Have you made a charitable contribution that is now being questioned by the IRS? Call us, we can help.