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Now that the Budget Sequester brouhaha is behind us, Congress and President Obama are rattling their tax reform sabers. And, if that is not enough to get the attention of taxpayers, the U.S. Tax Court recently issued two decisions in favor of the IRS's denial of a federal income tax charitable deduction solely because of a charity's failure to technically comply with the requirements on substantiating a charitable contribution. These developments and more are summarized below.

1. Failure of a Charity to Attend to Technicalities of the Internal Revenue Code ("IRC") Costs Generous Contributors the Ability to Deduct Their Charitable Contributions – IRC Section 170(f)(8) requires that those taxpayers making a contribution of $250 of more must receive a “contemporaneous” (i.e., by the earlier of the due date of the tax return or the date the tax return is filed) written acknowledgment from the charity that includes the information set out in IRC Section 170(f)(8)(B). The required information is:

a. The amount of cash and a description of any non-cash property contributed;

b. Whether the charity provided any goods or services in consideration for the contribution; and

c. If any such goods or services were received, a good faith estimate of their value

Based on the recent Tax Court decisions in David P. Durden, et ux. v. Commissioner and Jolene M. Villareale v. Commissioner, the failure of the Taxpayers to obtain a contemporaneous written acknowledgment that included a statement that the charity did not provide “any goods or services in consideration for the contribution” resulted in their losing the ability to deduct each of their charitable contributions which amounted to $250 or more. In both cases, the Tax Court agreed that the claimed contribution amounts had in fact been made. Nevertheless, in the Durden case, the taxpayers were unable to deduct more than $20,000 in cash contributed over the year to their church even though the church eventually issued the required acknowledgment but only after the IRS first questioned the absence of the acknowledgment. And, in the Villareale case, the taxpayer was unable to deduct more than $7,000 in cash which she contributed to an animal rescue charity that she had co-founded and of which she was the president during the tax year in question. LESSON TO BE LEARNED: In situations involving charitable contributions, “form” (i.e., strict compliance with the express provisions of the IRC) can prevail over “substance”.

2. Former CBO Director Weighs In On Fundamental Tax Reform – In testifying before the Senate Finance Committee on February 26, 2013, former Congressional Budget Director Douglas Holtz-Eakin stated that federal taxes would have to be nearly doubled to cut $4 trillion in federal debt over the next 10 years by raising tax revenues alone. In other words, according to Mr. Holtz-Eakin, the weighted average income tax rate for Americans would have to increase to 40% from the present level of 25%. He opined that the U.S. should be aiming for a budget plan that includes tax reform to create a more efficient tax code while also concentrating on spending reforms. In his view, a new federal budget plan should focus on entitlement programs by ending fee-for-service payments, and putting the government's entitlement programs on statutorily imposed budgets.

3. House of Representatives Asks For Public Input on Tax Reform – The Ways and Means Committee of the House of Representatives announced in a press release on March 1 that it has established a new email address that the public can use to offer their own thoughts to the Committee on comprehensive reform of the Internal Revenue Code. The address is Public comments can be made through April 15, 2013 and any comments received will be posted on the Committee’s website. As of March 18, 2013, 30 comments have been posted ranging from crop-based energy tax credits to corporate taxes on foreign cruise ships.

4. House Republican Budget Resolution for 2014 Fiscal Year – According to the Republican leadership in the House of Representatives, the federal tax proposals contained in the House Republican Budget resolution for the 2014 fiscal year (i.e., the fiscal year ending September 30, 2014) will improve economic growth and cut the federal deficit. While light on specifics, the resolution includes no new tax increases and calls for (1) reducing individual and corporate tax rates, (2) simplifying the tax code, (3) lowering the number of tax brackets for individuals, (4) repealing the alternative minimum tax, and (5) transitioning to a territorial system of taxation for businesses with international operation.

5. After Meeting With Republicans, President Obama Now OK with Revenue-Neutral Corporate Tax Reform? – In a statement issued on March 14, 2013. by Senate Minority Leader Mitch McConnell (R-Ky.), President Obama appears ready to agree to legislation that will lower the marginal corporate tax rates in a revenue-neutral overhaul of the corporate tax code, although he may not yet be on-board with the broad outlines of individual tax reform as articulated by the Republicans. In offering his own views on tax reform, Senate Finance Committee Chairman Max Baucus (D-Mont.) has indicated that he also prefers a revenue-neutral approach to corporate tax reform, but that he is not necessarily against raising revenue through reform of the individual tax code. On the other hand, House Ways and Means Committee Chairman Dave Camp (R-Mich.) has taken the position that all (i.e., corporate and individual) tax reform should be revenue neutral.

6. Small Merchants Increasingly Likely to Receive Notices From the IRS – Recently, the IRS announced that it would begin questioning businesses that reported smaller-than-expected gross income, based on the IRS's analysis of the IRS Form 1099-K receipts reported to the IRS by credit card companies and third-party settlement companies. The IRS will soon begin sending “soft” letters of inquiry to those merchants whose Forms 1099-K show an unusually large portion of their gross receipts from credit card purchases and other reportable transactions. The IRS concern is with merchants who have not been fully reporting their income from occasional or other non-credit card sales.

For additional information regarding this topic, please contact your local UHY LLP professional.