Is that basement full of clothes really a gold mine? Gold, if you believe the values a Maryland man used for donations of old clothes to charity. Unfortunately for him, the Tax Court yesterday ruled that sometimes all you get for your donation is a clean basement.
Many taxpayers use donations of clothing and household items as a gimme deduction. They always write “$500 to Goodwill” on their tax information — or sometimes, a lot more. While you can deduct the value of used clothes, the tax law imposes some limits, as Judge Lauber explains (citations omitted, emphasis added):
The nature of the required substantiation depends on the size of the contribution and on whether it is a gift of cash or property. For all contributions of $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the donee. Additional substantiation requirements are imposed for contributions of property with a claimed value exceeding $500. Still more rigorous substantiation requirements are imposed for contributions of property with a claimed value exceeding $5,000.
Section 170(f)(8)(A) provides that an individual may deduct a gift of $250 or more only if he substantiates the deduction with “a contemporaneous written acknowledgment of the contribution by the donee organization.” This acknowledgment must: (1) include “a description (but not value) of any property other than cash contributed”; (2) state whether the donee provided any goods or services in exchange for the gift; and (3) if the donee did provide goods or services, include a description and good-faith estimate of their value. . The acknowledgment is “contemporaneous” if the taxpayer obtains it from the donee on or before the earlier of: (1) the date the taxpayer files a return for the year of contribution; or (2) the due date, including extensions, for filing that return. Petitioner obtained blank signed forms from AMVETS and later filled them out himself by inserting supposed donation values. Because these forms were signed before the property was allegedly donated, we question whether they constitute an “acknowledgment” by AMVETS that it received anything.
The Marylander had cleaned out the house of his deceased mother, and he had a lot to give away:
These items allegedly included seven sofas, four televisions, five bedroom sets, six mattresses, a kitchen set, a dining room set, a china cabinet, and three rugs. For charitable contribution purposes, petitioner placed a value of $11,730 on these items.
Petitioner testified that he also donated to AMVETS during 2009 numerous items of clothing belonging to him and his children. These items allegedly included 180 shirts, 63 pairs of slacks, 153 pairs of jeans, 173 pairs of shoes, 51 dresses, 35 sweaters, nine overcoats, and seven suits. For charitable contribution purposes, petitioner placed a value of $14,487 on these items.
While no individual item exceeded $5,000, the appraisal rule still applied:
For contributions exceeding $500, “similar items of property” are aggregated in making this determination. Sec. 170(f)(11)(F) (“For purposes of determining thresholds under this paragraph, property and all similar items of property donated to 1 or more donees shall be treated as 1 property.”); . The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing, jewelry, furniture, electronic equipment, household appliances, or kitchenware.
Because the value of the claimed contribution exceeds $500, we must aggregate “similar items of property” to determine what substantiation was required. Petitioner’s self-created spreadsheet shows three categories of similar items: clothing with an alleged value of $14,487; household furniture with an alleged value of $11,730; and electronic equipment with an alleged value of $1,550.
That knocked out the clothes and furniture right there, because there was no appraisal. It would be interesting to see if you could even find an appraiser to value old clothes like that. If you could, though, the appraisal expense would be a miscellaneous itemized deduction.
Who was the preparer? One odd twist is that the clothing deductions were claimed on an amended return prepared by a third party, after the IRS had already examined the taxpayer and assessed tax for unsubstantiated itemized deductions. I hope he didn’t pay that preparer too much.
When you have make a clothing donation (or any donation, for that matter) over $250, you need to get a written receipt meeting IRS rules to support your donation — a cancelled check or blank slip with detail of donation doesn’t cut it. If your donation goes over $5,000, and it’s not a traded security, you must have a qualified appraisal. No appraisal, no deduction.
Oh, and the deduction for used clothing isn’t really just an additional standard deduction by another name.
Cite: Smith, T.C. Memo 2014-203.
Robert D. Flach has fresh Friday Buzz, including what he promises is a final reference to the Jersey Shore guy’s tax problems.
TaxGrrrl, Updated: ‘Real Housewives’ Reality Stars Joe & Teresa Giudice Sentenced To Jail. “Joe Giudice has been sentenced to 41 months in federal prison for financial and tax fraud. His wife, Teresa, will serve 15 months.”
William Perez, How to Calculate the Premium Assistance Tax Credit (With an Example). This will be a big deal on 2014 returns.
Jason Dinesen, Using a Line of Credit to Purchase Investments
Kay Bell, Tax moves to make during October 2014
Annette Nellen, Logical sales tax ruling on a web-based business
Howard Gleckman, Pass-Through Firms Report $800 Billion in Net Income, Can’t Be Ignored in Business Tax Reform (TaxVox). “These firms have engaged in self-help tax reform by avoiding double taxation with the stroke of a pen.” You’re welcome.
Jack Townsend, Penalties and Corporate America’s Shenanigans. “Instead of focusing the fire where far more revenue is involved and apply penalties in a way that will discourage misbehavior, the IRS goes after the small fish when there are bigger fish to fry.”
TaxProf, The IRS Scandal, Day 512
Steve Warnhoff, Former CBO Director Holtz-Eakin on Dynamic Scoring: Revenue Estimating Is Already a Big Guessing Game So Why Stop Now? (Tax Justice Bl0g).
Career Corner. It’s Not All About the Big 4 (No Further Proc, a presumably pseudynomous Going Concern contributor). “So at your next recruiting event, when you witness the hordes amassing at the B4 tables, take a minute and visit other firms for a chat.”
Darn straight. Especially check out the Roth and Company table.
The one-time economic development director for the City of Columbia was arrested on multiple counts of income and property tax evasion.
Wayne Emerson Gregory, Jr. was arrested by investigators from the SC Department of Revenue on 3 counts of income tax evasion and 14 counts of property tax evasion.
Previously, Gregory was arrested in April of this year on embezzlement charges stemming from his time as Georgetown County’s Director of Economic Development from 2005 until September of 2013.
Silly rabbit. When you’re an economic development director, you help other people loot the government.