All may be fair in love and war, but that’s not necessarily true in taxes.
In TC Memo 2018-117 (Grainger), the taxpayer made noncash charitable donations and claimed a deduction for what she believed was the fair market value of the items donated.
Almost all of the items donated were clothes. The taxpayer purchased the clothes from a retailer during out of season sales at a steep discount and also applied loyalty discounts the retailer gave her. The taxpayer immediately donated the clothes to charity and claimed a deduction on her tax return for the retailer’s original price of the clothes (before mark-down and loyalty discounts).
In 2012, the taxpayer paid cash of $2,520 for the clothes she donated during the year and used $3,527 of discounts provided by the retailer. She included six Forms 8283, Noncash Charitable Contributions, with her return, and claimed a deduction of $34,401 (the original price of the clothes before discounts). On the forms, she described her donations as “dresses,” “jackets,” and other items of clothing, she listed the donees as various donation centers, and she described her valuation method as “FMV,” for fair market value.
The IRS said the actual fair market value of the donations was the amount the taxpayer paid.
The tax court agreed with the IRS. In addition to not properly substantiating her deduction, the tax court said the taxpayer had not used a legitimate method to determine the fair market value of the donated clothing. The court said the discounted value the taxpayer paid was the true fair market value, because no rational buyer would have paid more.
To substantiate her $34,401 deduction, the taxpayer produced receipts from the retailer, marked-down price tags of purchased items, and receipts from the charity. On each of the receipts from the charity, an employee of the charity had marked the date and location of the donation, the general types of items donated (e.g., clothing), and the employee’s signature.
Here are the substantiation rules:
From treasury regulation 1.170A-13(b)(2)(ii)(A) through(C): For all contributions of property (other than money), the taxpayer must maintain reliable written records that include the name and address of the donee, the date and location of the contribution, and a description of the property “in detail reasonable under the circumstances.”
From treasury regulation 1.170A-13(b)(2)(ii)(D): The taxpayer must also maintain records to establish the fair market value of the property at the time the contribution was made and the method utilized in determining the fair market value.
From treasury regulation 1.170A-13(c)(2)(i)(B) and (c)(7)(iii): The term “similar items of property” is defined to mean “property of the same generic category or type,” such as clothing or toys. The taxpayer must also attach to the return a fully completed appraisal summary.
From internal revenue code section 170(f)(8): For all contributions valued at $250 or more, the taxpayer must obtain a contemporaneous written acknowledgment from the donee. The acknowledgment must include (among other things) a description of any property other than cash contributed.
From internal revenue code section 170(f)(11)(C): 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. In determining whether donations of property exceed these thresholds, “similar items of property” (other than cash and publicly traded securities) must be aggregated. If property or similar items of property are valued in excess of $5,000, the taxpayer must substantiate the value of the property with a qualified appraisal of such property.
Suppose the taxpayer had presented the required substantiation and had been able to convince the court that the fair market value of her donation was greater than her acquisition cost.
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The taxpayer has fallen far short of substantiating noncash charitable contributions. Because all of the donations were of similar items of property (clothing), they must be grouped together for purposes of determining whether the $5,000 substantiation threshold has been reached.
The taxpayer claimed that the value of this clothing was $34,401, but she did not obtain a qualified appraisal.
Although the taxpayer attached several Forms 8283 to her return, they were not executed by an official of the donee organization, as Form 8283 explicitly requires.
The taxpayer likewise failed to secure a valid contemporaneous written acknowledgment as required. The receipts from the charity merely state that she donated clothing; they do not indicate what specific items of clothing she donated or the number of items she donated on any particular visit.
Even if the taxpayer could establish that the fair market value of the donated clothing exceeded her acquisition cost, she would have no right to a greater charitable contribution deduction.
Internal revenue code section 170(e)(1)(A) reduces the allowable deduction by “the amount of gain which would not have been long-term capital gain * * * if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).”
Since the taxpayer donated all or most of the items shortly after purchasing them, she would have realized short-term capital gain if she had sold them instead.