T.C. Summary Opinion 2007-38
UNITED STATES TAX COURT
CHRISTIANA STAMOULIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18151-04S. Filed March 8, 2007.
Ronny Buni, for petitioner.
Parker F. Taylor, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for 2002, and Rule references are to the
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Tax Court Rules of Practice and Procedure. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
Petitioner, whose adjusted gross income for 2002 was less
than $115,000, claimed a $55,764 charitable contribution
deduction on her 2002 Federal income tax return. As a result of
the disallowance of that deduction, respondent determined a
$14,6491 deficiency in petitioner’s 2002 Federal income tax and
imposed a $2,930 accuracy-related penalty pursuant to section
6662(a).
The issues in dispute are as follows: (1) Whether
petitioner is entitled to a charitable contribution deduction in
excess of the amount now allowed by respondent and (2) whether
the underpayment of tax required to be shown on petitioner’s 2002
Federal income tax return is due to negligence or intentional
disregard of rules or regulations.
Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioner resided in New York,
New York.
1
Dollar amounts are rounded.
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Starting in June 2000, and at all relevant times, petitioner
was employed as an investment banker with Goldman Sachs in New
York, New York. Petitioner’s 2002 return shows her adjusted
gross income as $114,819. According to petitioner, her income
for that year represented a temporary, albeit significant drop in
her usual annual income due to the status of the economy at the
time.2
Petitioner describes herself as an “impulsive buyer” whose
annual expenditures for clothing and shoes might be deemed by
some to be rather extravagant.3 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, New York. Despite the fact that her 2002 income was
substantially less than usual, petitioner claims not to have
modified that routine during that year.
Petitioner’s timely filed 2002 Federal income tax return
includes a Schedule A, Itemized Deductions, on which a $55,764
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.
3
On the basis of her credit card charges, petitioner estimates
that she spent $53,916 on clothing and $9,253 on shoes during the
year in issue.
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deduction for charitable contributions is claimed. This amount
consists of $5,917 in cash contributions, $48,954 in property
contributions, and an $893 carryover from a prior taxable year.
On several Forms 8283, Noncash Charitable Contributions,
which were also included with her 2002 return, petitioner shows
property donations to various organizations, including Housing
Works Thrift Shops and Used Book Café (Housing Works),4 the
Metropolitan Opera at Lincoln Center,5 the Lazaretto Orthodox
Church of Ithaki,6 and the Hellenic Redcross.7 Depending on the
items donated and the donee, the “method used to determine the
fair market value” of the items is shown on the Forms 8283 as
either “actual value” or “straight line depreciation”.
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.
4
These were donations of clothing, shoes, rags, furniture,
jewelry, books, CDS, DVDs, tapes, a cellular phone, “kitchen
accessories/appliances” and “other accessories”, “household
goods”, antiques (e.g., vases, sculptures, and other “decorative
items”), and electronic devices.
5
This was a donation of a “performance ticket”.
6
This was a donation of “Church restoration materials”,
flowers, plants, and “church decorations”.
7
This was a donation of food.
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Housing Works provides the donors with a “Donation Inventory
List” form that is completed by the donor (the inventory list).
The inventory list invites the donor to make entries showing:
(1) The item(s) donated, whether specifically or by generic
category (e.g., clothing, furniture, housewares, etc.); (2) the
number of items donated; and (3) the value(s) of the donated
item(s). Property descriptions and values are provided by the
donor, and Housing Works does not verify the accuracy of the
information reported on the inventory list.
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.
According to respondent, the underpayment of tax required to be
shown on petitioner’s 2002 return is due to negligence or
intentional disregard of rules or regulations.
Discussion
Respondent now agrees that petitioner in entitled to a
charitable contribution deduction totaling $4,652.8 Petitioner
now concedes that the charitable contribution deduction claimed
8
This amount consists of $1,053 in cash contributions and
$3,599 in property contributions.
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on her return was excessive to the extent of $6,629.9 We proceed
to determine whether petitioner is entitled to a charitable
contribution deduction in an amount that lies somewhere in
between the parameters set by the parties, and we begin by noting
several fundamental and familiar principles of Federal income
taxation.
Deductions are a matter of legislative grace, and taxpayers
who claim deductions must establish entitlement to them.10 Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Furthermore, a taxpayer is required to maintain records that are
sufficient to enable the Commissioner to determine the taxpayer’s
correct tax liability. See sec. 6001; sec. 1.6001-1(a), Income
Tax Regs. The taxpayer bears the burden of substantiating the
amount and purpose of the claimed deduction. See Hradesky v.
Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821
(5th Cir. 1976).
The issues in this case arise as a result of the charitable
contribution deduction claimed on petitioner’s 2002 return.
Generally speaking, a taxpayer is allowed to deduct any
9
This amount consists of $1,160 in cash contributions and
$5,469 in property contributions.
10
Neither party suggests that sec. 7491(a) requires departure
from this general rule.
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contributions or gifts made to qualifying organizations.
See sec. 170(a). Subject to various exceptions, if property
other than money is donated, then “the amount of the contribution
is the fair market value of the property at the time of the
contribution”. Sec. 1.170A-1(c)(1), Income Tax Regs. The term
“fair market value” is defined as “the price at which the
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and
both having reasonable knowledge of relevant facts.” Sec.
1.170A-1(c)(2), Income Tax Regs.
A charitable contribution deduction, whether made by cash or
otherwise, must be substantiated by at least one of the
following: (1) A canceled check; (2) a receipt from the donee
charitable organization showing the name of the donee, the date
of the contribution, and the amount of the contribution;11 or (3)
in the absence of a canceled check or receipt from the donee
charitable organization, other reliable written records showing
the name of the donee, the date of contribution, and the amount
of the contribution. Sec. 1.170A-13(a)(1), Income Tax Regs. The
reliability of the records is determined on the basis of all of
11
A letter or other communication from the donee charitable
organization acknowledging receipt of the contribution and
showing the date and amount of the contribution constitutes a
“receipt”.
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the relevant facts and circumstances. See sec. 1.170A-13(a)(2),
Income Tax Regs.
If the donation is a small amount, any written or other
evidence from the donee charitable organization acknowledging
receipt is generally sufficient. See sec. 1.170A-13(a)(2)(i)(C),
Income Tax Regs. On the other hand, with respect to a deduction
exceeding $500 for a charitable contribution of property,
additional information is required to support such a deduction.
Specifically, the taxpayer must also maintain written records
establishing: (1) The item’s manner of acquisition as well as
either the item’s approximate date of acquisition or the
approximate date the property was substantially completed and (2)
the cost or other basis, adjusted as provided by section 1016, of
property donated by the taxpayer during the taxable year. Sec.
1.170A-13(b)(3)(i)(A) and (B), Income Tax Regs.
Set against these standards, we first consider petitioner’s
claim with regard to cash donations. As noted above, respondent
now agrees that, during the year in issue, petitioner made cash
donations totaling $1,053. Petitioner has failed to produce
substantiating evidence that would allow for a greater amount.
Consequently, the portion of petitioner’s allowable charitable
contribution deduction for 2002 that is attributable to cash
donations is limited to the amount allowed by respondent.
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In support of her donations of property to Housing Works,
petitioner produced several of the inventory list forms described
above. We are satisfied that, for the most part and at least as
to form, the inventory lists conform to the requirements of the
above-cited regulations. According to petitioner, she estimated
the fair market values of the donated items shown on the
inventory lists. The actual costs of those items are not taken
into account in petitioner’s estimates, and petitioner did not
provide the prices at which the donated items, or items similar
to the donated items, were ultimately sold by Housing Works.12
The resale prices of the donated items, or similar items, would
certainly be relevant and persuasive evidence of the fair market
values of various items of property that petitioner donated to
Housing Works.13
We are satisfied that the inventory list forms present a
fairly accurate description of the items donated. Nevertheless,
given petitioner’s valuation methods, we have severe reservations
regarding the fair market values that petitioner assigned to
12
According to petitioner, she checked the accuracy of her fair
market value estimates regarding various donated items through
Internet research that she performed in preparation for trial.
13
Petitioner acknowledges the value of this information, as she
claims that she unsuccessfully attempted to determine the sale
prices set by Housing Works for the various items that she
donated.
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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. Stanley Works v. Commissioner, 87 T.C.
389, 407-408 (1986); see Colonial Fabrics v. Commissioner, 202
F.2d 105, 107 (2d Cir. 1953); Goldstein v. Commissioner, 89 T.C.
535, 544 (1987); Skripak v. Commissioner, 84 T.C. 285, 320
(1985); Zmuda v. Commissioner, 79 T.C. 714, 726 (1982), affd. 731
F.2d 1417 (9th Cir. 1984); Estate of DeBie v. Commissioner, 56
T.C. 876, 894 (1971); see also Cooley v. Commissioner, 33 T.C.
223, 225 (1959), affd. 283 F.2d 945 (2d Cir. 1960). 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.14
We cannot accept petitioner’s fair market value estimates of
the property that form the basis for a portion of the charitable
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.
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contribution deduction here in dispute. On the other hand, we
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 $8,949.15
As previously noted, respondent imposed a section 6662(a)
accuracy-related penalty. According to respondent, the
underpayment of tax required to be shown on petitioner’s 2002
return is due to either negligence or intentional disregard of
rules or regulations. See sec. 6662(b)(1). The burden of
production with respect to the imposition of this penalty is upon
respondent. Sec. 7491(c).
The term “negligence” includes “any failure to make a
reasonable attempt to comply with the provisions of the internal
revenue laws or to exercise ordinary and reasonable care in the
15
Accordingly, petitioner’s charitable contribution deduction
for 2002 totals $10,002. This amount takes into account cash
donations of $1,053 and property donations of $8,949. Nothing in
the record supports the allowance of a carryover from a prior
year.
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preparation of a tax return.” Sec. 1.6662-3(b)(1), Income Tax
Regs.; see sec. 6662(c). Furthermore, “any failure by the
taxpayer to keep adequate books and records or to substantiate
items properly” also constitutes “negligence”. Sec. 1.6662-
3(b)(1), Income Tax Regs. The section 6662(a) accuracy-related
penalty does not apply if the taxpayer demonstrates that there
was a reasonable cause for the underpayment and that the taxpayer
acted in good faith with regard to the underpayment. Sec.
6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. The applicability
of this exception is made on a case-by-case basis and depends
upon all of the pertinent facts and circumstances, such as
whether the taxpayer made efforts to assess his proper tax
liability and whether there was an honest misunderstanding of
fact or law that is reasonable in light of the experience,
knowledge, and education of the taxpayer. Higbee v.
Commissioner, 116 T.C. 438, 448 (2001); sec. 1.6664-4(b)(1),
Income Tax Regs.
The charitable contribution deduction claimed on
petitioner’s return consists of the following three components:
(1) Cash donations, (2) donations of property, and (3) a
carryover from a prior year. Petitioner failed to produce
sufficient substantiating evidence to support the amount claimed
for cash contributions and produced nothing with respect to the
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carryover. Therefore, petitioner is subject to the section
6662(a) accuracy-related penalty with respect to the portions of
the underpayment that are attributable to her overstatements of
these items.
As previously noted, the determination of the fair market
values of personal items is less than an exact science. 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 section 6662(b)(1). Accordingly, petitioner is not
liable for the section 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.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.