Tax-deductible charitable contributions are the lifeblood of theological schools and other nonprofit organizations.

So a shudder went through the nonprofit world in May 2012 when a U.S. tax court ruling denied the deductibility of more than $25,000 in contributions from a Texas couple to their local congregation. The couple had copies of their checks for the contributions and an acknowledgment from the church that the contributions had been received.

But some magic words were missing from the receipt. The church didn’t include language that no goods or services were provided in consideration for the contributions.

When the church attempted to rectify that omission, it issued a second acknowledgment, accompanied by the required language—but it was after the deadline specified in tax law. So the Internal Revenue Service and the tax court disallowed the deductions.

Trustees of theological schools are well advised to make sure the institutions they govern don’t put their contributors in a similar circumstance. First, acknowledgment of any contribution of $250 or more should contain language such as “No goods or services were provided in connection with these contributions other than intangible religious benefits.” While many acknowledgments from nonprofits state that no goods or services “were received,” some tax experts are saying that a nit-picking court could rule that to be insufficient, and they recommend use of “were provided,” which is the language in the tax code. It’s good practice for receipts or acknowledgments of donations of any amount to contain that language.

Second, the acknowledgment must be “contemporaneous,” which according to tax law means it must be dated prior to the filing deadline for the donor’s federal tax return (including extensions for filing the return).

Tax lawyers and accountants have argued that the couple had substantially complied with the tax regulations, but the IRS and the tax court didn’t agree. It was an expensive lesson.  

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