Written by Roberta Mann

Professor Roberta Mann teaches tax, property, and tax policy at the University of Oregon School of Law. Professor Mann came to the UO from Widener University School of Law, where she had been teaching since 1998. Mann earned her M.B.A. and J.D. cum laude from Arizona State University, where she also served as assistant editor of the Arizona State University Law Journal. In 1995, she received her LL.M. in taxation from Georgetown University Law Center.

Professor Mann practiced in the Office of Chief Counsel of the Internal Revenue Service, concentrating primarily on the areas of partnerships, corporate, estate and gift, and natural resources. She also served on the Staff of the Joint Committee on Taxation in U.S. Congress.

Sarah Palin has always been an attractive person: at one time she was a beauty pageant contestant. Still, when Senator John McCain tapped the governor of Alaska to be his partner in a different kind of contest, the Republican National Committee (RNC) went shopping. And shopping. And shopping. Over the last two months, the RNC has dropped over $150,000 to spruce up the Palin family’s wardrobe and accessories.

This spending frenzy raises a number of disturbing questions: What were they thinking? Will Joe the Plumber like this? Do suits from Neiman Marcus fit in with the governor’s “hockey mom” image? And, most importantly from the tax attorney’s perspective, are the Palins required to treat the wardrobe enhancements as taxable income?

Give and Take

Section 61 of the Internal Revenue Code provides that gross income includes “income from whatever source derived.” The Code also provides a number of exclusions from gross income. For example, a taxpayer may exclude the value of items received as gifts from gross income. However, the Code does not define “gift.” As all good tax students know, the seminal case on the issue is Commissioner v. Duberstein, which holds that the donor’s intent determines whether a transfer is treated as a gift for tax purposes.

To make a non-taxable gift, the donor must be motivated by a “detached and disinterested generosity” or donate “out of affection, respect, admiration, charity, or like impulses.” The RNC may admire Sarah Palin, but the obvious reason for the purchases was to assist in projecting an image of readiness for the Republican vice-presidential candidate. Since the stated mission of the RNC is to help Republican candidates to win elections, it seems unlikely that the act of buying clothes for one of those candidates was “detached or disinterested generosity.” The transaction does not look like a gift.

Dress For the Job You Want, Not The Job You Have

Appropriate clothing is required for many jobs, but unfortunately for those of us who spend our lives wearing suits and ties to work, tax law draws a line between uniforms and other appropriate clothing. The cost of uniforms is usually deductible. Most of the time, the cost of other appropriate clothing is not. Work-appropriate clothing that is not a uniform may be used for other purposes, like going out to dinner and a movie. Uniforms generally cannot be worn outside of the workplace without appearing odd.

This distinction is consistent with the tax rule that personal expenses are not deductible. In 1980, a Fifth Circuit decision set out a three part test for determining deductibility of the cost of clothing: 1) the clothing must be of a type specifically required for employment; 2) it must not be adaptable to general usage as ordinary clothing, and 3) the taxpayer must not wear the items as ordinary clothing. As many clothes can be worn for personal reasons as well as work, the cost of clothing is rarely deductible.

If an employer purchases something of value for the benefit of an employee, taxable income results. In the case of an employer buying clothes for an employee, the tax consequences depend on the circumstances. The employer may own the clothes and require that the employee wear them at work and leave them at work, like a football player’s uniform. In that case, the employer still retains possession of the clothes, and the use of the clothes is at the employer’s direction.

The employer could pay for the clothes, and allow the employee to take them home to care for them. Then, if the clothes are a uniform, the employee would not have net income. Income that results from the receipt of such clothing is offset by a deduction, because if the employee had paid for the uniforms himself, he could deduct the cost. Usually the employee need not report the income at all. If the clothes are not a uniform, but rather garments suitable for ordinary wear, the employee could not have taken a deduction if he had paid for them. Thus, the income from receipt of the clothes must be included in the employee’s gross income.

What if the recipient of the clothing is not an employee? Governor Palin is not an employee of the RNC. Unfortunately, gifts of tangible personal property to non-employees may still count as income to the recipients. In 2004, Oprah Winfrey gave automobiles to her studio audience– people who were clearly not her employees. However, audience members who received cars had to include them in gross income.

Playing for Keeps?

After the cost of Governor Palin’s wardrobe became widely known, the RNC stated that the clothes would be given to charity once the campaign is over. Can the governor avoid paying tax on the value of the clothes if she gives the clothing away? Contributions to charity may be deducted from taxable income, but the amount deducted may be limited, subject to a set of rather complex rules. If a taxpayer donates property, the amount of the deduction cannot exceed the fair market value of the property, even if the cost to acquire the property was much higher. Unfortunately, wearing designer clothes is unlikely to increase their fair market value. Although the gown which Marilyn Monroe wore when she sang “Happy Birthday” to President John F. Kennedy sold for $1.15 million in 1999, Governor Palin is more likely to find herself in the same spot as one New York stockbroker with a penchant for fashion. She tried to deduct half the cost of the designer duds she donated to a local charity, but the Tax Court allowed her to deduct only about 20 percent.

“Wait a second,” you say. How can the fair market value of the clothing be $150,000 when Sarah receives it, and only $30,000 when she donates it? Again, the case law tells the story. In Rooney v. Commissioner, a group of certified public accountants accepted goods and services from some of their clients who couldn’t come up with the cash to pay their bills. The CPAs, reasoning that they wouldn’t have patronized these businesses if they could have gotten their fees any other way, reported income from the services they received, but at a discounted price. The Tax Court disagreed, requiring an objective valuation of the goods and services, at their retail price.

Governor Palin claims that the RNC is still the owner of the clothing, so one might say she is just modeling it. However, Nancy Reagan notoriously wore borrowed designer gowns to White House functions, and was investigated by the I.R.S. No public settlement was ever disclosed. It’s unclear whether Governor Palin can escape taxation even if she is simply borrowing the outfits, but that fact might reduce her taxable income to the rental value of the clothes.

Only Two Things In Life Are Certain- One Of Them Is Taxes

So what does all of this mean for the Palin family tax return? It seems likely that the I.R.S. would rule that the transfer of clothing and accessories would result in income to the governor. Since the clothing at issue is less like a uniform, and more like business-appropriate attire, it is unlikely that the Palins can take a deduction for its purchase. And even if the governor donates the clothes to charity after the campaign is done, the I.R.S. would likely allow her to deduct only a fraction of its purchase price. Even the governor’s most recent claims that she is merely borrowing the clothes are unlikely to allow her to avoid tax liability entirely. But in the end, what’s the big deal? It’s just a tax bill, one that isn’t even overdue.

The big deal is this: at the same time that the RNC and the Republican candidates are struggling to defend their sartorial choices, Senator Obama is making his closing arguments to the voters. With some poll-watchers predicting that the Obama/Biden ticket could win more than 350 electoral votes, it’s hard not to suggest that the RNC has bigger problems than deciding what their veep should wear. Whatever happens, at least Governor Palin has the comfort of knowing that she looked good. Isn’t that knowledge worth paying a little tax?

Article Editors

Steve Glista, Mary Anne Nash, Darci G. Van Duzer