Philanthropy
Navigating Charitable Deduction Minefield: Insights From IQ Holdings Cases
One of this publication's regular writers, and editorial board member, delves into the implications of an important legal case and the lessons it brings about charitable deductions as they operate in the US.
The following article comes from regular FWR contributor and editorial board member, Matthew Erskine, who is also managing partner of law firm Erskine & Erskine. He discusses a recent court case in the US and its implications for charities and the tax deductions that arise.
As always, we urge readers to use these articles as stimulus for a conversation, so please comment if you have thoughts. The usual editorial disclaimers apply. Thanks to Matthew Erskine for this important contribution. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com
The recent IQ Holdings v. Commissioner decision (T.C. Memo. 2024-104) (1) serves as a cautionary tale for corporations and high net worth individuals attempting to leverage charitable deductions for tax benefits. The case underscores the critical importance of complying with IRS regulations to substantiate deductions and avoid substantial tax penalties.
Background of the IQ Holdings case
In this case, IQ Holdings, Inc (IQH) found itself in hot
water with the IRS after claiming substantial deductions on its
2014 tax return. The IRS disallowed deductions for damaged
inventory, charitable contributions, and net operating loss (NOL)
carryforwards, resulting in a deficiency determination of nearly
$2.9 million and a $622,061 accuracy-related penalty under
Section 6662(a) of the Internal Revenue Code.
Charitable contribution deductions: IQH faced scrutiny for its claimed charitable deductions of equipment, property, and cash valued at over $2.9 million, donated to its affiliated non-profit, IQ Life Sciences Corp (IQLS). The IRS disallowed these deductions due to non-compliance with statutory requirements for acknowledgment and appraisal, which the court ultimately upheld.
Charitable deductions: The IRS requirements
The IQ Holdings case highlights several critical requirements
that taxpayers must meet to successfully claim charitable
deductions under Section 170 of the Internal Revenue Code:
1. Contemporaneous written
acknowledgment:
-- For contributions of $250 or more, a donor must obtain a
written acknowledgment from the charity by the earlier of the
filing date or the due date of the tax return. This
acknowledgment must include:
-- The amount of any cash contribution;
-- A description (but not the value) of any non-cash
property contributed; and
-- A statement on whether the charity provided any goods or
services in return for the donation, and a good faith estimate of
their value if applicable.
2. Qualified appraisal for non-cash
contributions:
-- For non-cash contributions exceeding $5,000, a taxpayer
must obtain a qualified appraisal and attach a summary to their
tax return. If the donation exceeds $500,000, a full copy of the
appraisal must be submitted.
-- IQ Holdings failed to meet these requirements, as the
acknowledgment letter it received from IQLS lacked the necessary
details regarding whether goods or services were provided in
exchange. Additionally, IQH did not secure a qualified appraisal
for property and equipment donations, which ultimately
disqualified these deductions.
3. Substantial compliance doctrine:
-- IQH attempted to argue that it substantially complied
with the acknowledgment requirements, contending that using the
term "donation" implied that no goods or services were exchanged.
However, the court rejected this argument, emphasizing that
substantial compliance does not apply to statutory requirements
where explicit documentation is mandated.
The takeaway for taxpayers
The IQ Holdings decision serves as a stark reminder that the IRS
maintains strict standards for charitable contribution
deductions. Even minor lapses in substantiation can lead to
disallowance of deductions and significant tax penalties.
Here are some practical steps to ensure
compliance:
-- Secure proper acknowledgments: Ensure that all charitable
contributions over $250 are documented with a contemporaneous
written acknowledgment that includes all required details. The
acknowledgment should explicitly confirm whether any goods or
services were received in exchange.
-- Obtain qualified appraisals: For non-cash contributions
over $5,000, engage a qualified appraiser and include the
necessary appraisal summary with your tax return. Contributions
exceeding $500,000 require the submission of the full appraisal
report.
-- Document loans and forgiveness clearly: If charitable
deductions involve debt forgiveness or property transfers, retain
clear documentation, including loan agreements and forgiveness
terms, to substantiate the gift's completion and tax
deductibility.
-- Consult with professionals: Engaging tax professionals
for advice and ensuring compliance with IRS regulations can serve
as a defense against penalties if reasonable reliance on
professional advice is demonstrated.
As the landscape of charitable giving and tax planning becomes increasingly complex, adherence to IRS requirements is not just a recommendation but a necessity to safeguard against penalties and maximize tax benefits.
Footnotes
IQ Holdings, Inc. v. Comm'r, T.C. Memo. 2024-104 (Nov. 7,
2024)