Gibson v. Commissioner

Cyclists Hit a Wall: Court Denies $188,000 Gear Deduction

A hefty $188,563 deduction claimed for donations of high-end cycling gear has been disallowed by the Tax Court. In Gibson v. Commissioner (T.C. Sum. Op. 2026-1), the taxpayers learned a harsh lesson about strict substantiation rules for noncash charitable contributions. The court, in this Summary Opinion, sided with the IRS, finding that the taxpayers failed to meet the stringent requirements for documenting the basis of the donated items and obtaining a qualified appraisal. As a result, the deduction was denied in full.

A Garage Full of Gifts and a Rejected Amendment

The taxpayers' saga began with their 2019 tax return, on which they claimed a hefty $194,273 in noncash charitable contributions. This figure reflected donations other than by cash or check, as detailed on Schedule A, Itemized Deductions. The lion's share of this deduction, $188,563, was attributed to "high end cycling EQ apparel," reported on Form 8283, Noncash Charitable Contributions. The taxpayers stated that they acquired the cycling gear by gift and estimated the "Donor's cost or adjusted basis" at $251,417. They also listed smaller donations of "paintball guns ammo masks" and "appliances baby furn equi 3 yds decompressed granite misc," with claimed costs or adjusted bases of $10,220 and $3,500, respectively.

While the taxpayers indicated on Form 8283 that the fair market value of the cycling apparel was determined by "Appraisal," they notably did not include any appraisal with their original tax return. As for the paintball and household items, they indicated "Thrift Shop Value" as the method for determining fair market value.

During an IRS examination in May 2022, the taxpayers attempted to amend their return by submitting Form 1040X, Amended U.S. Individual Income Tax Return, which included a revised Form 8283. Attached to this amended return was a receipt from Hiway 80 Rescue Mission Ministry, the charitable organization that received the donated property, dated March 26, 2019, listing the donated items. The IRS, however, did not accept the amended return.

The amended Form 8283 included Part III, Declaration of Appraiser, signed by Eugene H. Ruelle and dated July 1, 2019. Mr. Ruelle also provided a report, dated March 26, 2019, stating that he determined the fair market value of the donated items to be $188,562.50 as of the donation date. Critically, the report did not specify Luke Gibson's basis in the donated property at the time he acquired it. Following the examination, the IRS issued the taxpayers a Notice of Deficiency dated July 18, 2023.

The Conflict: Missing Basis and the 'Impossible' Defense

The central dispute revolved around the $188,563 deduction for donated cycling gear. The IRS, in its Notice of Deficiency, argued that the deduction should be disallowed. Citing Section 170 of the Internal Revenue Code, which governs charitable contribution deductions, the IRS noted that while a deduction is generally measured by the fair market value of the donated property, an exception exists for inventory items. The Notice stated, "Since the donated property consisted of inventory items, the deduction is limited to your cost." Furthermore, the IRS pointed to the lack of substantiation, stating that Luke Gibson failed to adequately substantiate his basis in the donated items. The IRS thus adjusted the deduction to zero, except for the $5,710 already conceded.

In response, Luke Gibson testified that determining the basis of the donated items was "impossible." He explained that the cycling equipment and apparel were gifts, and he had no records of the original purchase prices or dates of acquisition. He argued that the fair market value, as determined by the appraiser, should be the basis for the deduction, given the unique circumstances of the donations.

The Analysis: Failing the Strict Substantiation Tests

The Tax Court found that the Gibsons failed to meet the strict substantiation requirements for noncash charitable contributions. The court noted that while Section 170(a)(1) allows deductions for charitable contributions, those deductions are contingent on meeting specific statutory and regulatory requirements.

The court then laid out a roadmap of those requirements. For noncash contributions, Treasury Regulations Section 1.170A-13(b)(1) mandates a receipt from the donee organization, including the donee's name, the contribution's date and location, and a detailed property description. While the Gibsons provided a receipt from Hiway 80 Rescue Mission Ministry, satisfying the basic requirements for contributions of $250 or more under Section 170(f)(8), the deduction at issue was far greater, triggering additional scrutiny.

Specifically, the court focused on Section 170(f)(11), which imposes tiered substantiation rules based on the value of the donated property. For donations exceeding $500, Section 170(f)(11)(A)(i) and (B) require taxpayers to maintain written records establishing how the property was acquired, the approximate date of acquisition, and the property's cost or other basis, adjusted as provided by Section 1016. Section 1016 provides the rules for determining "adjusted basis," which starts with the original cost or purchase price and adjusts it upward for capital improvements and downward for depreciation. The Court emphasized that the Gibsons failed to provide this information for the over 4,000 donated items.

Furthermore, because the claimed deduction exceeded $5,000, Section 170(f)(11)(C) requires a "qualified appraisal" of the property. To be "qualified" the appraisal must meet a host of requirements. As outlined in Treasury Regulation § 1.170A-13(c), a qualified appraisal requires, among other items, a description of the property, the date of contribution, the appraiser's qualifications, and the valuation method. The court found that the Gibsons failed to prove that Mr. Ruelle was a qualified appraiser under these standards, thus invalidating the appraisal.

The court rejected Luke Gibson's argument that determining the basis of the donated items was "impossible." The court underscored that the law requires detailed substantiation of the property's basis and acquisition date when claiming a deduction for property exceeding $500. The court noted Gibson's confusing testimony and lack of support for his assertion that the deduction could be based on a discounted fair market value. Consequently, the Tax Court sided with the IRS, denying the $188,563 deduction.

Impact: Documentation is Non-Negotiable

The Gibson case serves as a stark reminder that meticulous documentation is non-negotiable when claiming deductions for noncash charitable contributions. High-value donations, like the cycling gear in this case, are audit magnets, attracting heightened scrutiny from the IRS. Taxpayers should be aware of the stringent substantiation requirements outlined in Section 170(f)(11), which establishes a tiered system for noncash donations. For donations exceeding $5,000, a "qualified appraisal," as defined in Treasury Regulation § 1.170A-13(c), is mandatory. This appraisal must be timely, prepared by a qualified professional, and include specific details about the property, valuation methods, and the appraiser's qualifications. Furthermore, taxpayers should remember the importance of accurately determining and substantiating the basis of donated property, as required by Section 1016, which governs how the original basis of property is adjusted. The court rejected Luke Gibson's argument that determining the basis of the donated items was "impossible." The Tax Court has made it clear: "impossible" is not a valid legal excuse for failing to meet these requirements.