Tax Court: No Clothing Deduction for Ralph Lauren Employeeby
The US Tax Court has held that a salesman for Ralph Lauren who was required to wear the designer’s apparel while representing the company couldn’t deduct the cost of such clothing as unreimbursed employee expenses.
The court found that the clothing was clearly suitable for regular wear and upheld the IRS’s imposition of an accuracy-related penalty with respect to the related portion of the underpayment. The court also concluded that the employee and his wife weren’t entitled to noncash charitable contribution deductions in excess of the amounts the IRS allows, but found that they acted reasonably and in good faith, and so were excused from the accuracy-related penalty associated with their excess deductions.
Under Code Section 262, a taxpayer generally cannot deduct personal, living, or family expenses. Section 162(a), however, allows as a deduction all ordinary and necessary expenses paid or incurred in carrying on any activity that constitutes a trade or business, which may include the trade or business of being an employee (O’Malley, (1988) 91 TC 35291 TC 352).
Expenditures for the purchase and maintenance of clothing are generally nondeductible expenses under Section 262, even though the clothing is worn by the taxpayer in connection with his trade or business, unless: (1) the clothing is required or essential in the taxpayer’s employment, (2) the clothing is not suitable for general or personal wear, and (3) the clothing is not so worn (Hynes, (1980) 74 TC 126674 TC 1266).
Section 170(a)(1) allows a deduction for any charitable contribution made within the tax year. If a taxpayer makes a charitable contribution of property other than money, the amount of the contribution is generally equal to the fair market value of the property at the time of the contribution (Reg. § 1.170A-1(c)(1)). However, certain statutory and regulatory substantiation requirements must be met in order to deduct charitable contributions (Section 170(a)(1), Reg. § 1.170A-13).
Under Reg. § 1.170A-13(b)(1), a taxpayer is generally required to maintain for each noncash contribution a receipt from the donee organization that contains:
- The name of the donee organization.
- The date and location of the contribution.
- A description of the property in detail reasonably sufficient under the circumstances.
A taxpayer who lacks a donee receipt is required to keep reliable written records that contain the foregoing information, as well as the fair market value of the property at the time the contribution was made and the method used to determine that value (Van Dusen, (2011) 136 TC 515136 TC 515).
A 20 percent accuracy-related penalty applies under Section 6662(a) where there is an underpayment attributable to negligence, disregard of rules or regulations (Section 6662(b)(1)). Under Section 6664(c)(1), the penalty will not apply to any portion of an underpayment if it is shown that there was reasonable cause for that portion and that the taxpayer acted in good faith.
In 2010, Terrence Barnes began working as a salesman for Ralph Lauren – designer of, among other things, men’s apparel – which required all employees who worked in corporate sales positions to wear Ralph Lauren apparel while representing the company. Consequently, Barnes purchased Ralph Lauren shirts, pants, ties, and suits – the costs of which he deducted as unreimbursed employee expenses on Schedule A, Itemized Deductions, of his jointly filed 2010 and 2011 federal income tax returns.
Also in 2010, Barnes and his wife moved from New Jersey to a smaller space in New York City. They donated clothing and household items they no longer needed to the Salvation Army, totaling four separate noncash contributions in 2010 and four more in 2011. On each occasion, they obtained a donation receipt. The donation receipts listed the contributed items generally and without details or fair market values at the time of donation (i.e., “box of clothes,” “electronics,” “kitchen supplies”).
At trial, Barnes presented summary sheets purporting to list the donated items, their purchase prices, and their values at the time of donation. Some of the items on the summary sheets referred to specific items, like a microwave, while others were grouped into a single general category, like “designer clothing.” However, many of the items listed on the summary sheets didn’t appear on the Salvation Army donation receipts, including a living room set and a refrigerator.
Barnes testified that they used the Salvation Army’s “Donation Value Guide” to determine the values of some of the items at the time of donation and relied on their own experience to determine the resale value of the clothing. Although the summary sheets list the total fair market values of all noncash items allegedly donated as $5,030 and $4,230 for 2010 and 2011, respectively, Barnes and his wife claimed noncash charitable contribution deductions in significantly lower amounts ($2,122 for 2010 and $2,510 for 2011).
The IRS issued a Notice of Deficiency determining that:
- Barnes was not entitled to deduct as an unreimbursed employee expense the cost of purchasing and maintaining Ralph Lauren apparel.
- Barnes and his wife were not entitled to a charitable contribution deduction in excess of $1,000 for 2010 or 2011.
- They were liable for accuracy-related penalties under Section 6662 due to negligence for both years.
Court Largely Sides with the IRS
Although Barnes was required to wear Ralph Lauren clothing while representing the company, the Tax Court easily denied the deduction because Ralph Lauren clothing is suitable for general or personal wear.
The court also upheld the IRS’s limited allowance of a $1,000 noncash charitable contribution for each year at issue. It noted that, while the donation receipts established that Barnes and his wife made noncash charitable contributions to the Salvation Army in both 2010 and 2011, they failed to provide the court with adequate documentation to establish entitlement to a higher amount. Specifically, they were unable to match many of the items listed on their summary sheets to items listed on the donation receipts. In addition, the court noted the discrepancy between their summary sheets, which reflected noncash charitable contributions of $5,030 for 2010 and $4,230 for 2011, and their reported noncash charitable contributions of $2,122 for 2010 and $2,510 for 2011.
With respect to penalties, the court upheld the IRS’s imposition of accuracy-related penalties under Section 6662(a) in regard to the portion of the underpayment relating to the deduction for Barnes’ clothing, but not the portion relating to the charitable contribution deductions.
The court noted that it has consistently applied the three-part test described above to determine whether the cost of clothing is a deductible expense, and Ralph Lauren clothing clearly fails the test. However, it found that Barnes and his wife exercised ordinary business care and prudence when determining the amounts of their contributions. The court found that, although there wasn’t a perfect correlation between their summary sheets and the Salvation Army donation receipts, the facts showed that the couple honestly believed they were legally entitled to deductions in the amounts reported.
Catherine E. Murray is a senior tax analyst with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters. Catherine is a federal tax generalist who focuses primarily on writing current awareness tax news...