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Didn't have your trilobites in a row? That's when the audit comes

A few years ago, a veterinarian and fossil enthusiast decided to donate some of his prized collection of trilobites to the California Academy of Sciences. They were apparently worth quite a bit of money -- he valued the four he donated in 2006 at $136,500, and eight more, which he gave the group in 2007, at $109,800.

Since the value of the trilobites had appreciated over time, donating them seemed a great way to avoid the capital gains taxes he might have owed had he sold them. Plus, as a qualified taxable donation, he could deduct their full market value on his return.

Yes, yes, capital gains, charitable deductions -- but what's a trilobite?

Trilobites are a group of extinct marine arthropods that roamed Earth's oceans for 270 million years between the Early Cambrian and Permian periods. In other words, the good veterinarian was donating the fossilized remains of giant prehistoric bugs, which died out in a mass-extinction event.

Now that you're not distracted by trilobites, consider what's required in order to take a large charitable deduction ($5,000 or more) on your federal tax return:

  • A contemporaneous, written acknowledgement from the charity stating that no goods or services were given in return for the donation
  • Reliable, written records demonstrating your ownership and the items' value
  • A qualified appraisal of the items, along with an appraisal summary on IRS Form 8283

The gentleman was audited, of course. The audit led to a hearing before the U.S. Tax Court, which ruled that the fossil enthusiast had failed to meet these three requirements -- and not meeting even one dooms the deduction.

As it turns out, the vet did submit valuations by a qualified expert, but that appraiser testified he had no memory of having performed the work. He recognized his own signature on several documents, but he simply had no recollection of these particular trilobites.

Moreover, the vet did submit written acknowledgments of the donations from the California Academy of Sciences, but the letters didn't' contain the required language saying he hadn't received anything in return.

So remember, you may know your trilobites, but you probably don't know tax law. If you're making a substantial donation, get a tax lawyer involved early to ensure you've met all of the requirements and have the documentation to back it all up.

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