The Fine Print Cost a Widow a $464,000 Tax Deduction

 

Charitable donors, beware: A widow has lost a $464,000 tax deduction for a gift to a museum because her tax paperwork lacked a few key words.

The recent Tax Court decision in Albrecht v. Commissioner is a fresh reminder of how rigid the standards for charitable deductions often are.

“The rules have become stricter because of abuses, and the IRS is aggressive in enforcing them,” says Lawrence Katzenstein, an attorney with Thompson Coburn in St. Louis who often advises on charitable planning.

Here are the facts in the case. Over the years Martha Albrecht and her husband amassed a large collection of Native American jewelry and artifacts. In late 2014 Ms. Albrecht, by then a widow, donated about 120 items to the Wheelwright Museum of the American Indian in Santa Fe, N.M., a well-known institution.

On her 2014 tax return, Ms. Albrecht claimed a charitable-donation deduction of $463,676 for her gift. Although her income wasn’t large enough to take the entire deduction for 2014, the law allowed her to carry over and use the remainder for five more years. Attached to her return was a five-page Deed of Gift detailing the donation.

Among other things, the deed said the gift was irrevocable and unconditional. However, Ms. Albrecht didn’t have what the law calls a “contemporaneous written acknowledgment” from the museum explicitly saying whether or not she received goods or services in return for her donation.

Bryan Camp, a professor at Texas Tech University’s law school and a noted tax blogger, calls this “the magic language requirement,” although the wording can vary. Even if no goods or services were provided to Ms. Albrecht by the Wheelwright, she needed this statement in hand before filing her tax return to be eligible for a deduction. This requirement has been in the law since 1994, after Congress enacted it to crack down on padded and dubious deductions.

Not having this statement cost Ms. Albrecht her entire deduction, even though the museum later clarified that it provided no goods or services in return for her donation. In his opinion, Court Judge Travis Greaves said he appreciated her good-faith effort to comply, but it didn’t satisfy the law’s strict requirement.

Ms. Albrecht’s attorney, Gregory MacNabb of Plattner, Schneidman, Schneider & Jeffries, said his client declined to comment on the decision and is considering an appeal. Although Mr. MacNabb argued the case in court, he didn’t help plan the donation.

A spokeswoman for the Wheelwright said the museum’s policy is not to discuss matters concerning its private donors.

The bottom line: With charitable deductions, especially large ones, it’s crucial to obey the letter of the law as well as its spirit. The rules are complex because of changes piled on by Congress and the IRS, but the IRS will be looking for missteps and often there’s little room for error.

Here are highlights of current rules. For details, see IRS Publications 526 and 561 on charitable donations.

Cash donations

For donations below $250, the donor can satisfy the rules by having a bank or similar record giving the charity’s name, the date of the gift, and the amount—and a canceled check counts. If the donor has such a record, a receipt from the charity isn’t required, but it’s a good idea.

These donations aren’t subject to “aggregation” rules. So if someone writes a $50 check each week to his church and gives $1,000 annually, this donor typically doesn’t need a receipt from the church to take a deduction—although it will help with an audit.

Cash donations of $250 or more have tighter requirements. The donor needs a statement from the charity giving the amount of the donation and whether the donor received goods or services in return. The charity’s statement must also give the value of the goods or services other than token items that don’t count (like a mug). The donor can only deduct amounts above that.