TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, December 17, 2008

The $712 Question

Every now and then you read a tax case and wonder:  what was the IRS thinking?  Check out Nicholas v. Commissioner, T.C. Summ. Op. 2008-155 (Dec. 15, 2008):

Petitioners are married and resided in Arizona at the time that their petition was filed. Mr. Nicholas is retired, and Mrs. Nicholas is a kindergarten teacher. Petitioners were very active in their church and involved in charitable activities, and they are generous contributors. Although their AGI from all sources was $89,092, on their original return they reported $43,637 in charitable contributions. Petitioners' pattern of charitable giving and the relatively large amount of contributions reported compared to their income have been their established long-term practice.

With respect to the 2005 tax year, Mrs. Nicholas, as she had in prior years, totaled the cash and noncash contributions for the year and provided her return preparer with the total amount of $37,6252 for the year.  [Fn.:  The total contribution for 2005 was $43,637, which comprised the $37,625 for 2005 and a $6,012 carryover from prior years.] ...

Respondent reviewed petitioners' documentation for the $32,875 in cash contributions and allowed deduction of the entire amount that petitioners had claimed on their amended 2005 return. Respondent, after reviewing petitioners' documentation and considering Mrs. Nicholas's oral statements, disallowed the entire $4,906 of noncash contributions claimed on the 2005 return.

For the 2005 tax year Mrs. Nicholas maintained notes on envelopes and on other documents recording the types of asset, names of charitable recipients, costs, and estimated values of petitioners' noncash contributions. In substantially all instances petitioners had a receipt and/or letter from the charitable recipient.

As is typical with contributions of assets valued under $500, the charitable organization left it to the donor to fill out the items and values, which Mrs. Nicholas did. Although Mrs. Nicholas did not have receipts to substantiate the original cost of each item, she had been the purchaser and had recollection of the amounts. More critically, Mrs. Nicholas frequented garage sales and flea markets and had a keen sense of the value of her contributed items. The items contributed included books, CDs, used furniture and lamps, and similar types of items. Petitioners were avid readers and accumulated large volumes of books which they stored in their home. Many of the books concerned religious topics, and some were children's books that petitioners regularly purchased for their children. On regular occasions, as books and other items accumulated, Mrs. Nicholas would make a trip to the Salvation Army or some other charitable organization and make a donation. ...

We begin our analysis by noting that Mrs. Nicholas's testimony was consistent and forthright even though it was subjected to extensive and vigorous cross-examination [emphasis added]. She adequately explained why petitioners' original return did not separate out the noncash contribution deductions. Mrs. Nicholas explained her approach to recollecting the cost of the contributed assets; but more significantly, she explained how she was able to place a reasonable current value on the assets. Petitioners' evidence supporting their noncash contributions was less precise than the evidence of their cash contributions, but the Court was persuaded that the assets were contributed and values were appropriately derived.

The Court was persuaded by Mrs. Nicholas's forthright testimony and the documentary evidence petitioners provided. In addition, we are cognizant that petitioners are extremely generous in their charitable giving as reflected by their cash contributions, which approximated one-half of their income. Respondent was fully satisfied with petitioners' proof of $32,875 of cash contributions, and that amount of verified cash contributions represents almost 90% of the total amount of 2005 contributions. The income tax deficiency attributable to the disallowance of the noncash contribution deductions was only $712, and petitioners pursued this matter, with representation, as a matter of principle [empasis added].

Ultimately, the Court believes Mrs. Nicholas's testimony and accepts her documentation, and we hold that petitioners are entitled to deduct $4,906 in noncash contributions for their 2005 tax year.

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