Interesting recent decision out of the U.S. Tax Court:

Estelle Grainger created what she called her "personal tax shelter" by buying clothes at a retail store at steep discounts, contributing them to Goodwill, and claiming charitable deductions for the original retail price. She even accumulated loyalty points and dividends at the retail store where she shopped, allowing her to reduce her purchase prices even further. She deducted $18,288, $32,672, and $34,410 in 2010, 2011, and 2012 respectively. Her 2012 gift items cost her only $2,520 in cash and $3,527 in loyalty points.

The IRS reduced her deduction to her cash outlay, saying she had not used a qualified method of establishing fair market value. To substantiate her deductions, Grainger produced store receipts, marked-down price tags, and receipts from Goodwill. The Court said Grainger fell far short of substantiating her gifts, noting that because the donations were of similar items, they needed to be grouped together. Since the value of the similar items exceeded the $5,000 substantiation threshold, a qualified appraisal was required. (I.R.C. sec. 170(f)(11)(C))

Grainger failed to obtain a contemporaneous written acknowledgement of the gifts (I.R.C. sec. 170(f)(8)(B)) and the receipts did not specify the nature of the clothing or the number of items donated. The Court added that even if she had satisfied the substantiation requirements, the deductions would still be disallowed because she failed to use a "legitimate methodology" for determining fair market value. Grainger v. Commissioner, T.C. Memo. 2018-117.

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