ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – LOSING A BIG CHARITABLE CONTRIBUTION DEDUCTION – ONE SMALL SLIP FOR MANKIND – THE KRAUSS CASE
By Robert S. Schriebman
Both the Internal Revenue Code (IRC) and the California Revenue and Taxation Code (R&TC) allow charitable contribution deductions for money and property donated to a legally recognized charity. It is not enough to simply write a check to a charity and take a deduction on your tax return(s). The charity must also send you a written acknowledgement that the organization did not provide the donor with any goods or services in consideration, in whole or in part, in receiving the donation. This simple acknowledgement is very important, and it must be made contemporaneously upon receipt of the gift. This requirement is mandatory (Campbell v. Commissioner, TC Memo 2020-41). Indeed, the specific statement is necessary for the allowance of a charitable contribution deduction (Durden v. Commissioner, TC memo 2012-140).
Mr. and Mrs. Krauss had to learn the hard way because they lost a big deduction of over $1.5 million. The Office of Tax Appeals (OTA) denied the deduction.
The Krauss Case
In the Matter of the Appeal of M. Krauss and I. Krauss, OTA Case No 18011166 (May 2023).
Mr. and Mrs. Krauss donated over $5 million to the Krauss Charitable Foundation (Foundation). This is a tax-exempt private foundation under IRC § 501(c)(3). The contribution was in two stages. The first was a cash contribution of over $3.5 million made by withdrawals from the Krauss’ bank accounts and deposited into the Foundation’s bank accounts. Both the IRS and the FTB totally allowed this deduction. The problem occurred with the second donation of $1.5 million to the same Foundation. This was a donation of an investment instead of a direct cash contribution. The Krauss’ produced a letter from JBS Financial Services, LLC stating that Mr. Krauss instructed them to transfer an investment on their books to the Foundation and stating that the investment had a fair market value as of the date of transfer of $1.5 million.
The Problem: The Foundation never submitted what is known as “CWA” or a “Contemporaneous Written Acknowledgement” for purposes of IRC § 170(f)(8), and thus no deduction was allowed.
The OTA Ruling
Tax deductions are a matter of legislative grace, meaning that a taxpayer must show that he/she clearly meets all the statutory requirements for the deduction or credit. A taxpayer must point to the statute in issue and show by credible evidence that he/she comes within its terms. R&TC § 17201 adopts IRC § 170 relating to deductions for charitable contributions. IRC § 170 is long and complex piece of legislation. IRC § 170(f)(8) provides that no deduction shall be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a CWA by the donee organization that meets a specific requirement – that a CWA is required to include a written statement clearly stating whether the donee organization provided any goods or services in consideration, in whole or in part to the donor. This requirement is mandatory. The Krauss’ argued that the acknowledgement letter by JBS Financial Services to the Foundation constituted the requisite CWA requirement. The OTA responded that the acknowledgement letter contains no statement about whether the Foundation provided any goods or services to the Krauss’ in exchange for their contribution. Therefore, the acknowledgement letter is not a valid CWA that meets the requirements of the statute. The judge admitted that the OTA ruling is harsh, but the law in the statute is clear that the CWA must be issued concurrently with the acknowledgement of the receipt of the gift.
The bottom line: the absence of these few words cost the Krauss’ the lost of $1.5 million in charitable deductions! The first deduction of $3.5 million was cash – no problem. However, the second donation of $1.5 was a property donation.
The Krauss case seems very harsh. Why didn’t the OTA judge grant the Krauss’ leave to produce the all-important CWA statement? This bothered me very much and my initial impression was to look unkindly at the judge. On retrospect, the judge had no power to ask the Krauss’ to produce the CWA statement. That acknowledgement cannot be declared later by the charity. It has to be a contemporaneous acknowledgement written at the time the charity acknowledges receipt of the donation. Obtaining the CWA at a latter date violates the tax law. The whole thing reminded me of Shakespeare’s Richard III where the rider of the horse was thrown because one hoof had no shoe because of the missing horseshoe nail. So, to paraphrase, “for want of a few words, a big deduction was lost.”
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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