IRS Tax Audit – No Good Deed Goes Unpunished: California Tax Attorney

by

California Tax Attorney:

Here is a quick summary of a recent US TAX COURT case against the Internal Revenue Service to challenge the taxpayer’s right to deduct donations to a Catholic Church. The case involves a married couple who got audited by the Internal Revenue Service concerning donations they deducted on their Internal Revenue Service Form 1040 tax return.

Anonymous U.S. Tax Petitioners v. COMMISSIONER OF Internal Revenue Service
Docket No. 6851-08. Filed May 2010.

Tax Problem
Can an American taxpayer deduct as charitable contributions of $25,050 in wire transfers to his wife’s relative who distributed the money for the benefit of the Catholic Church of a foreign country on their Internal Revenue Service Form 1040?

Can a taxpayer deduct the airfare expense incurred while rendering services for a Catholic church in a foreign country on their Internal Revenue Service Form 1040?

APPLICABLE TAX CODE SECTION

Internal Revenue Code §170 allows taxpayers to claim a deduction for a charitable contribution if the contribution is made to or for the use of a qualified organization.

Internal Revenue Code §170 (c)(2) identifies an eligible recipient of a charitable deduction as “a corporation, trust, or community chest, fund, or foundation created or organized in the United States or under the law of the United States”.

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CAN YOU DEDUCT DONATIONS MADE TO CHARITABLE ORGANIZATIONS IN A FOREIGN COUNTRY?

Taxpayers claimed the charitable contribution deductions on their joint IRS Form 1040 Income Tax Return. Taxpayers also claimed a charitable contribution deduction for the airplane ticket taxpayer wife purchased to travel to her native country and provide services to Catholic churches of that foreign country. The IRS issued a notice of deficiency disallowing certain charitable contribution deductions. Most of the disallowed deductions originated from taxpayer wife’s donations and charity work for the benefit of Catholic churches in a foreign country. Taxpayers filed a tax court petition appealing the report issued by the IRS Audit with the US Tax Court .

Taxpayer’s wife was born in a foreign country. Her parents were devout Catholics. Her father served as an officer in that country’s army during the conflict with the guerilla forces. Taxpayer wife was a young girl when the guerrilla forces initiated a military campaign. Taxpayer wife’s uncle was a Catholic priest in her hometown. When the guerrilla forces seized her hometown, taxpayer wife witnessed over 400 of her fellow Catholics, including her uncle and other citizens of her hometown, being buried alive. The guerrilla forces destroyed much of her hometown, including the Catholic Church. The foreign country’s government eventually fell. Taxpayer wife and her family later escaped from their country to the United States. Taxpayer wife later married U.S. taxpayer. She is a member of a church that belongs to the local Catholic diocese near her home in Texas.

Taxpayer’s wife completed her college education and was hired as an engineer at an international corporation. After completing college she returned to her native country and witnessed extreme poverty. Her experience motivated her to contribute money and services to help rebuild Catholic churches in that country. These Catholic churches provide food, education, and shelter to the poor. During one of her trips to her native country, the local police detained and interrogated taxpayer’s wife about her activities in her hometown.. The police also informed taxpayer’s wife that they had been monitoring her whereabouts in the country and were aware of her family’s support for the former government.

Fearing for her life, taxpayer’s wife devised a plan to disguise her contributions to Catholic churches in her native country. She would wire the money to the personal bank account of her mother’s cousin (cousin) who lived in taxpayer wife’s original hometown. The cousin then transferred the money to selected Catholic churches in that country.

UNITED STATES TAX COURT DID NOT ALLOW TAXPAYERS TO DEDUCT DONATIONS TO A FOREIGN CHARITABLE ORGANIZATION
Taxpayers argue that the ultimate beneficiary of the wire transfers was the Roman Catholic Church, a qualified donee under Internal Revenue Code §170(c)(2), and that taxpayer wife thus made the wire transfers to or for the use of a qualified organization.

Taxpayers claim that the Catholic Church is a universal organization, and therefore Catholic churches in taxpayer wife’s native country are qualified as donees under Internal Revenue Code §170. The Tax Court found no basis as to if the Catholic churches in that foreign country to which taxpayer wife’s wire transfers were distributed were created or organized in the United States or under the laws of the United States in compliance with Internal Revenue Code . The language of Internal Revenue Code §170(c)(2) is explicit, and the Tax Court must follow such plain language.

Regarding the airfare expense deducted on the IRS Form 1040 Income Tax Return for Individuals , taxpayers assert that the unreimbursed expenditure incident to taxpayer wife’s services should be deductible under Internal Revenue Code §170 because petitioner wife worked on behalf of several qualified organizations.

Nonetheless, taxpayers have failed to show that any of the Catholic churches in the foreign country to which taxpayer wife’s rendered services is a qualified organization within the meaning of Internal Revenue Code § 170(c)(2). Taxpayer wife did not render services in the foreign country under the direction of, or to or for the use of her local church or the local diocese. The record shows only that her priest at her local church had some awareness of her work in her native country. Nor is there any evidence that petitioner wife provided those services.

US Tax Court found taxpayer wife’s testimony to be sincere. However, taxpayers have failed to prove that they contributed to a qualified organization under Internal Revenue Code §170 . Tax Court has held in favor of the Internal Revenue Service .