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Sunday, April 28, 2024
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Case Studies |
The Gas Guzzler's Deduction, Part 4
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Case:
Brandon Bigtop loves his truck, which he affectionately named "the Beast." It was a gift for Brandon's eighteenth birthday. It is painted bright red and is two tons of metal, muscle and noise. Indeed, many neighbors would grumble as Brandon drove by because the rumbling engine could be heard three blocks away. As you can imagine, 18-year old Brandon was in truck heaven.
Brandon is now 40 years older and a university professor, but he never could part with his beloved truck. So, the Beast now sits quietly in the driveway collecting dust and serving as merely an "eyesore," according to his wife. Every once in a while, Brandon will take the truck out for a spin but the nine-miles-per-gallon truck makes it a costly joyride. Plus, Brandon still gets glares from neighbors as he passes through the neighborhood, something he no longer relishes.
After much deliberation regarding what to do with the Beast, Brandon decides that it is time to part ways with his old companion. Before deciding to contribute the truck to charity, Brandon checks with his tax advisor regarding the tax benefits of his gift and how he should structure the gift. To his surprise, Brandon's tax advisor suggests contributing the truck to Brandon's existing $100,000 charitable remainder unitrust (CRUT). While there will be no capital gain bypass benefit, there still should be a charitable income tax deduction and increased CRUT income.
Question:
Can a truck or other tangible personal property be contributed to a CRUT? Of what rules, if any, should Brandon be aware of?
Solution:
Tangible personal property (TPP) may be transferred to a CRUT. However, there are two rules that require close attention. First, there is no charitable deduction for a future interest in TPP. The deduction applies only after all "intervening interests" have expired. See Sec. 170(a)(3).
Thus, there is no charitable deduction for Brandon when he initially transfers his truck into a CRUT. Instead, the charitable deduction is delayed until the CRUT actually sells the truck. At that time, the "intervening interest" in the TPP has expired and a charitable deduction is allowable. This means that Brandon's contribution will not qualify for the current tax year unless the CRUT sells the truck by December 31.
The second rule relates to "cost basis deductions" for gifts of TPP for an unrelated use. As of January 31, 2005, gifts of vehicles produce a charitable deduction equal to the gross proceeds of the vehicle sale.
Brandon likes the idea of receiving a greater income from his CRUT. He also likes the charitable deduction, whether it falls in the current year or the following year. Consequently, Brandon decides to contribute his truck to the CRUT. In the end, Brandon's dearly departed truck provided nice tax savings, an eventual charitable gift and great memories to last a lifetime.
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