The tax law requires a written receipt for every charitable contribution of $250 or more whether the charity is in California or elsewhere. You must obtain from the organization to which you made a contribution “a contemporaneous written acknowledgment.” Follow this simple rule and avoid an unnecessary tax controversy.
At one time a canceled check was enough evidence for a charitable contribution deduction, but this is no longer the case since the 2006 Pension Protection Act tightened the requirements for smaller contributions.
The need for a receipt is less obvious in the case of a family foundation, and as a result the family and its California tax attorney must be very careful not to overlook this requirement. Briefly, a Californa family foundation is a fully qualified charitable organization and any transfer of money or property to the foundation must follow all of the rules governing charitable contributions, including the requirement of a contemporaneous written acknowledgment.
A person making a contribution to his or her own California family foundation might think that the actual charitable transfer will occur later when the foundation makes its grants to other entities located in different California counties such as Los Angeles County, Orange County, Ventura County or Santa Barbara County. Unfortunately, for tax purposes that is not the case.
This may seem like a pointless requirement. After all, when you make a contribution to your own family foundation you may be on both sides of the matter. You are the donor making the contribution and, as an officer of the foundation, you are also in a sense the donee.
Congress might logically have provided an exception for California family foundation contributions. But it didn’t! As a result, however unnecessary it might seem, you must have the requisite receipt.
What happens if the receipt cannot be produced in timely fashion?
For the foundation, there is no problem. Even though the Internal Revenue Code has a lot of penalties for foundation missteps, it does not impose a penalty for this one.
For you as the donor, however, the problem can be serious. Your deduction for the contribution may be disallowed. The Tax Court has upheld loss of a deduction on this basis, and I am aware of an audit situation in which a million-dollar contribution was disallowed for lack of a receipt.
The receipt itself can be a simple letter or memorandum stating the amount of cash (and a description, but not necessarily the value, of any property other than cash) contributed, and a statement that the California donee foundation did not provide any goods or services in exchange for the contribution.
You, as the donor, should not attach the acknowledgment to your federal or California state income tax return, but rather retain it to substantiate the contribution if and when the IRS comes calling.
The Internal Revenue Code requires that the acknowledgement be provided to you as the donor on a “contemporaneous” basis. This normally means before you file your income tax return for the year of the contribution.
For most people the outside date for compliance would be April 17, 2007, or later if you obtain an extension of the filing date.
Warning: You as a California donor should be careful not to file the federal or California state income tax return early if receipts have not yet been received for all 2006 charitable contributions.
Substantiation of a foundation charitable contribution can be even easier than sending yourself a letter. IRS Publication 1771, “Charitable Contributions Substantiation and Disclosure Requirements,” advises that your California based donee charity may provide the required acknowledgment electronically, such as via an e-mail addressed to the donor.
This makes it easier than ever for a family foundation or other charity to provide the necessary receipts.
Warning: The California family foundation should not forget to send those receipts and do so before the donor’s Form 1040 for 2006 is filed.
To discuss this further with a California tax lawyer, Mitchell A. Port can be reached at 310.559.5259.