Paul L. Caron

Friday, March 9, 2007

Tax Court: Goldman Sachs Investment Banker With $115k Salary Can't Take $55k Deduction for Charitable Donation of Used Clothing

Tax_court_38 The Tax Court yesterday held that an investment banker with Goldman Sachs in New York City who earned $115,000 could not deduct $55,000 in claimed charitable contributions for used clothing donated to a thrift store.  Stamoulis v. Commissioner, T.C. Summ. Op. 2007-38 (3/8/07):

Petitioner describes herself as an “impulsive buyer” whose annual expenditures for clothing and shoes might be deemed by some to be rather extravagant.[Fn 2] Furthermore, it appears that her wardrobe is constantly changing. According to petitioner, she routinely purchases designer clothing and shoes, wears the items once or twice, and then donates them to an upscale thrift shop in New York. ...

Fn 2:  For example, petitioner’s 2003 Federal income tax return shows adjusted gross income of $192,535 and property gifts to charities of $133,202.

A great majority of petitioner’s property contributions were made to Housing Works, a “high-end” thrift store located in New York, New York, that sells donated items to its customers....

In the notice of deficiency, respondent disallowed, for lack of substantiation and other reasons, the entire charitable contribution deduction (i.e., $55,764) claimed on petitioner’s 2002 return and imposed a $2,930 accuracy-related penalty. ...

[G]iven petitioner’s valuation methods, we have severe reservations regarding the fair market values that petitioner assigned to those items. We recognize that the determination of the fair market value of an item involves an approximation, and is, at best, an inexact science. However, we cannot ignore that, more often than not, personal items, like used clothing and household items, will be worth far less than their original purchase price immediately after they are purchased. Furthermore, as best we can determine from petitioner’s testimony, the original costs of the donated items shown on the Forms 8283 are themselves not actual costs, but only estimates based upon petitioner’s optimistic estimates of the items’ fair market values.[Fn 14] ...

Fn 14: Petitioner testified that she first determined the fair market value of an item and then assumed that the cost of the item was at least twice as much.

[W]e are satisfied that petitioner made property contributions as shown on her return, the fair market values of which would exceed the amount now allowed by respondent. After careful consideration of the evidence, taking into account respondent’s concession, and measuring petitioner’s claimed deduction against the average for similarly situated taxpayers, we find that petitioner is entitled to a charitable contribution deduction for property contributions in the total amount of $8,949. ...

In light of the circumstances presented in this case, we are not persuaded that petitioner’s overly optimistic valuation estimates of many items of donated property constitutes “negligence” within the meaning of § 6662(b)(1). Accordingly, petitioner is not liable for the § 6662(a) accuracy-related penalty with respect to the portion of the underpayment of her 2002 tax that is attributable to her overstatement of the fair market values of the donated property.

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Amazing that the Tax Court relieved a Goldman Sachs investment banker -- someone whose living depends heavily on asset valuation, unlike a pipe fitter or a carpenter (not to disparage those trades at all) -- of a negligence penalty for valuing the donated clothing at roughly six times the real value found by the Court.

Posted by: Jake | Mar 9, 2007 5:45:26 PM