Friday April 19, 2024
|
|
|
|
|
1.1.4 Gift Reduction Rules
|
|
|
Permanent Charitable Tax Extenders
In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.
The four permanent charitable provisions include the following:
1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.
2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.
3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.
4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.
Property Deductible at Reduced Value
Gifts of cash are deductible at face value. Most gifts of appreciated property are deductible at fair market value. Value is usually defined as the price that a willing buyer would pay to a willing seller. Reg. 1.170A-1(c)(1). However, some types of property gifts are not deductible at fair market value. For specific policy reasons, these gifts will be reduced in value for deduction purposes.
The basic reduction rule is that gifts of ordinary income property are deductible only at cost basis. Sec. 170(e)(1). Therefore, gifts of property such as inventory or other ordinary income assets are deductible at cost basis. In any event, gifts of service and gifts of the use of property are not deductible. Reg. 1.170A-1(g), 1.170A-7(a).
Inventory
Businesses produce various products and services. Products held for sale to customers are termed "inventory." A gift of personal services or time is not a deductible gift under Sec. 170. The business has a cost of producing the inventory and then sells that inventory to customers at the market price.
If a business could give inventory to charity and take a deduction at fair market value, there would be both non-recognition of the ordinary income element and a full deduction. This double benefit is not permitted. Reg. 1.170A-1(c)(4). Thus, the deduction for inventory is usually limited to cost basis.
Corporate Inventory to Assist the Ill, Needy or Infants
An exception to the inventory rule applies to C corporations that make gifts for the benefit of the ill, the needy or infants. This type of gift entitles the C corporation to a deduction for the lesser of twice the cost basis of the property or the basis plus one half of the appreciation. Reg. 1.170A-4(c)(1). This exception was created to encourage corporations to give to relief organizations. It also may permit gifts of inventory by corporations to many educational institutions. For the enhanced deduction, the charity must actually use the gifted property to benefit the ill, the needy or infants.
A similar exception for C corporations also applies to depreciable property and real estate used in the trade or business of the corporation. Sec. 170(e)(3)(A). The property must be described in Sec. 1221(a)(1) or (2).
Gifts of Food Inventory
C corporations making gifts of inventory to the ill, needy or infants qualify for an enhanced deduction. The amount equals the lesser of cost basis plus one-half the item's appreciation or twice the basis. Sec. 170 (e)(3)(c). In general, a C corporation's charitable contribution deductions for a year may not exceed 10% of the corporation's taxable income. Sec. 170(b)(2). To be eligible for the enhanced deduction, the contributed property generally must be inventory of the taxpayer, contributed to a charitable organization described in Sec. 501(c)(3) (except for private nonoperating foundations) and the donee must (1) use the property consistent with the donee's exempt purpose solely for the care of the ill, the needy or infants, (2) not transfer the property in exchange for money, other property or services, and (3) provide the taxpayer a written statement that the donee's use of the property will be consistent with such requirements.
Any taxpayer, whether or not a C corporation, engaged in a trade or business is eligible to claim the enhanced deduction up to 10% of entity net income for contributions of "apparently wholesome food." "Apparently wholesome food" is defined as food intended for human consumption that meets all quality and labeling standards imposed by law and regulations even though the food may not be readily marketable. Sec. 170(e)(3)(C).
Farmers and ranchers are an exception to the 10% deduction limit rule. If a qualified farmer or rancher (50% or more of income from farming or ranching) makes gifts of "apparently wholesome food," up to 100% of adjusted gross income may be offset by the value of these food gifts.
Other Ordinary Income Property
There are a number of other types of ordinary income property in the tax code. Various types of retirement and pension plans are ordinary income. Many accounts and notes receivable in the course of business constitute ordinary income. Art created by the artist, government publications held by government officers or business interests with accounts receivable may also constitute ordinary income. Gifts of any of these types of assets to charity produce a deduction only for the cost basis. The ordinary income element is not deductible.
Example, 1.1.4A: Gift of an Airplane
Corporation ABC purchased an airplane for $1,000,000 and then depreciated it to $200,000. The corporation then gave the airplane to an aeronautical museum. Even though the airplane is now worth $500,000 and there is a related use, the deduction is limited to the corporation's depreciated cost basis of $200,000. If the corporation were to sell the airplane for $500,000, there would be a $200,000 recovery of basis and $300,000 recaptured as ordinary income. The ordinary income is not deductible and the corporation receives a deduction for $200,000.
Short-Term Capital Gain Property
Capital assets held less than a year and a day are short-term capital gain assets. Gifts of short-term capital gain assets are deductible at cost basis. Sec. 170(e)(1)(A).
Appreciated Property to Private Foundations
Gifts of appreciated real estate and privately-held stock to a private foundation are subject to a limited deduction. Sec. 170 (e)(1)(B)(ii) indicates that the deduction for a gift of appreciated property to a private foundation is limited to the donor's cost basis.
However, Sec. 170(e)(5)(A) states that "qualified appreciated stock" gifts will be deductible at fair market value. The deduction is permitted for gifts of stock that are traded on an "established securities market" such as the New York Stock Exchange or NASDAQ. There is also a maximum deduction limitation under Sec. 170(e)(5)(C)(i) to 10% of all the outstanding stock of the corporation. The 10% number includes gifts made by Sec. 267(c)(4) family members. This fair market value deduction for qualified public stock is a major consideration for many private foundation donors.
In PLR 200702031 the prospective donor requested clarification from Treasury on a gift of publicly-traded stock to a private foundation. The stock was not traded on the NYSE or NASDAQ, but rather was regularly traded on the over-the-counter bulletin board exchange (OTCBB). OTCBB was created in June of 1990 by the SEC. The securities traded on OTCBB are handled by "Market Makers" who enter quotes and execute trades. The SEC exercises oversight responsibility with respect to OTCBB.
The donor proposed transferring stock in a financial services company that is traded on OTCBB to a private foundation. Treasury noted that "qualified appreciated stock must conform to three requirements." First, the stock must be "regularly traded." Second, there must be "public quotations" for the stock. Third, there must be an "established securities market."
Treasury observed that the proposed gift stock was regularly traded over a one-year period, that quotations were published daily on the Internet for the high, low and mean values and the OTCBB is a regularly-operated market. As a result, the deduction at fair market value as "qualified appreciated stock" would be permitted up to 10% of the value of stock in the corporation. The donor was required to print out and retain current and historical market quotations.
Tangible Personal Property
Tangible personal property (TPP) is any moveable asset such as art, vehicles, collectibles, boats and similar items. If the TPP is transferred to a charity that will not use the property in furtherance of its exempt purpose, the deduction is reduced to cost basis. Reg. 1.170A-4(b)(3)(ii).
Treasury has been reasonable in determining related use. For example, an educational organization may use gifts of art or various types of collections in any of its educational programs. Vehicles and boats may be put to any reasonable use by charitable organizations. Since the Form 8282 reporting requirement for sale of an asset within three years of the gift was created, the more flagrant abuses have been less frequent and there should be flexibility to allow fair market value deductions for most related use gifts.
However, the charity does need to actually plan to use the item and must inform the donor in writing that a substantial related use will be created.
There is also a rule whereby conversion to unrelated use within three years may trigger a "recapture" of the deduction. This takes the form of reporting as income the extent to which the deduction was increased by the initial related use deduction. Recapture potentially applies to donations in excess of $5,000 fair market value, but may be avoided if the charity certifies that continued related use is not possible or not feasible. Sec. 170 (e)(1)(B), Sec. 170 (e)(7).
Clothing and Household Items Deductible if in "Good Used Condition or Better"
Charitable contributions of clothing and household items are subject to the tangible personal property deduction rule. Gifts of appreciated tangible personal property for related use may be deductible at fair market value. In general, the value of clothing and household items is less than the taxpayer's basis in such property. Many taxpayers therefore deduct the fair market value of such contributions, regardless of whether the property is used for exempt or unrelated purposes by the donee.
A donor who claims a deduction for a charitable contribution must generally maintain reliable written records regarding the contribution, regardless of the value or amount of such contribution. For a contribution of clothing and household items, the donor generally must maintain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a detailed description (but not the value) of the property. However, if circumstances make obtaining a receipt impracticable, the donor must maintain reliable written records regarding the contribution. The required content of such a record varies depending upon factors such as the type and value of the property contributed. Reg. 1.170A-13(a).
For clothing or household items, no deduction is allowed unless the clothing or household item is in good used condition or better. The IRS may deny a deduction for any contribution of clothing or a household item that has minimal monetary value, such as used socks and used undergarments.
If an item of clothing or household item is valued at over $500 and the donor attaches a qualified appraisal to his or her tax return, the deduction is permissible without meeting the "good used condition" standard. Household items include furniture, furnishings, electronics, appliances, linens and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the provision.
Charities that receive clothing and household gifts are not required to place a value on the items. Most donee charities will issue receipts for qualified clothing and household donations that include the descriptive statement "good used condition or better."
Charitable Gifts of Taxidermy
Hunters and fishermen may obtain and stuff or mount various animals, which are defined as taxidermy property. Gifts of taxidermy property by the taxidermist or the person who paid the taxidermist are deductible at the lesser of cost basis or fair market value, even if the charitable donee will use the gift in a manner related to its exempt purpose. Sec. 170(e)(1)(B)(iv).
For a gift of taxidermy property to charity, the taxpayer's basis will include only the direct cost for preparing and mounting the item. Indirect costs such as the hunting expedition costs (including the cost of equipment and the costs of preparing an animal carcass for taxidermy) are not deductible. Taxidermy property is defined as any work of art that is the reproduction or preservation of an animal that is prepared, stuffed or mounted. Sec. 170(f)(15)(A).
Gifts of Fractional Interests in Art
Gifts of fractional interests in art and other tangible personal property are generally deductible at fair market value. Reg. 1.170A-5(a)(2). If a fractional gift of tangible personal property is made and subsequent fractional gifts are made, then the future deductions will be based on the lesser of the initial asset value or the value at the time of the future fractional gift. Sec. 170(o)(2)(A). This valuation method applies to income, gift and estate taxes.
If the art has increased in value and the donor passes away prior to completing the gift, the balance of the fractional art gift will be testamentary. Initially, some tax advisors were concerned that the art might appreciate in value and a donor would pass away, leaving the remaining fraction to the charity as a bequest in his or her will. If the art were included on Form 706 at fair market value but the charitable estate deduction was limited, there could be estate tax on phantom value. However, the issue was resolved in the Tax Technical Corrections Act of 2007. If a donor passes away and bequeaths the balance of a fractional gift to a qualified exempt charity, the estate will receive a full estate tax charitable deduction.
Initially, property subject to the fractional gift rules must be fully owned by the donor, or donor and donee charity. All fractional gifts must be completed within ten years or before the donor's death, whichever is earlier. Sec. 170(o)(3)(A)(i). The charity must take substantial physical possession or make use of the property for an exempt purpose. If these tests are not met, charitable income and gift tax deductions for all previous contributions of interests in the item will be recaptured (plus interest). Recapture also includes an added penalty tax of 10% of the recapture amount.
For example, an art museum described in Sec. 501(c)(3) is the recipient of a fractional interest in a painting. The art museum includes the painting in an art exhibit and therefore satisfies the related-use requirement.
If there are two or more owners of tangible personal property, then gifts of fractional interests are permitted if all owners give the same fractional percentages. Sec. 170(o)(1)(B). For example, if a painting is owned 60% by A and 40% by B, then both could make fractional gifts of 50% of their respective interest. They would need to coordinate future gifts to continue to give the same percentages and presumably must die together to qualify for an estate tax deduction. Given the restrictions, there may be a limited number of fractional gifts by multiple owners.
Planning Pointer - Fractional Art Gifts. If a donor still intends to make a fractional art gift, counsel may take steps to minimize the probability of estate tax problems. First, with a married couple transfer the art to the spouse with the best health to avoid the joint ownership issues and reduce the health risks. Second, plan to complete the fractional gift in a reasonably short time period, such as three or four years. Third, create a durable special power of attorney that enables the holder to complete the gift at any time during the life of the donor. While there may be a small risk of an immediate donor demise during the selected term of years for the gift, the probability that either the donor or the holder of the special power will be able to complete the gift while donor is alive is greatly increased by these steps.
Recapture of Tangible Personal Property Charitable Deductions If No Related Use
Gifts of tangible personal property to a charity qualify for a fair market value deduction if there is a related use by the charity. Charities must provide written confirmation to donors of appreciated related use property gifts that describes the intended use and its relationship to the nonprofit's exempt purpose. However, some tangible personal property may be transferred to charity and the charity will subsequently sell the property rather than using it in furtherance of its exempt purpose.
There is a recapture of tax benefits if a charitable organization disposes of related-use tangible personal property within three years of the gift. Recapture applies to related-use appreciated tangible personal property for which a deduction of more than $5,000 is claimed. In effect, there is a three year holding period for tangible personal property valued over $5,000 that is claimed to be used for a related use. If the property is sold in the first year, the charitable deduction is reduced to basis. Sec. 170 (e)(1)(B)(i). If the property is sold after the first year and within three years of the gift date, the donor will include in taxable income the difference between the basis and the claimed deduction. Sec. 170 (e)(7)(A).
There is an exception that allows the charity to make a statement under penalty of perjury that the related use has become impossible and therefore the tangible personal property had to be sold. The statement must either describe how the property was used in a manner related to exempt purpose or state the intended related use at the time of the contribution and certify that such use became impossible or infeasible to implement. The organization must furnish a copy of the certification to the donor (for example, as part of Form 8282, a copy of which is supplied to the donor). Sec. 170 (e)(7)(D).
The Form 8282 requirement of reporting the sales of Form 8283 property applies to sales within three years of the gift date. The donee organization must also provide a description of the donee's use of the property, a statement of whether use of the property was related to the purpose or function constituting the basis for the donee's exemption and, if applicable, a certification of any such use (described above).
A penalty of $10,000 applies to a person who identifies tangible personal property as having a use that is related to a purpose or function constituting the basis for the donee's exemption knowing that it is not intended for such a use. Sec. 6720B.
Recapture of Depreciation
TPP that is depreciated in a business use is subject to recapture of depreciation as ordinary income upon sale of the asset. Sec. 1245(a). If real estate has been subject to accelerated depreciation, the excess of accelerated over straight-line depreciation may also be recaptured as ordinary income. Sec. 1250(a). If either TPP subject to recapture or real estate subject to recapture is transferred to charity, there will be a reduction in the deduction for the ordinary income portion due to the recapture.
Example 1.1.4B: Gift of Apartment Building
Donor purchased an apartment building for $1,000,000. The apartment building was depreciated to $400,000 using an accelerated depreciation method. If a straight-line depreciation method had been used, the depreciation would have been $500,000 and the basis would be $500,000. The difference between the $500,000 basis for straight-line depreciation and $400,000 basis with the accelerated depreciation means that $100,000 could be recaptured as ordinary income if the building were sold.
If the asset is given to charity and the current fair market value remains at $1,000,000, then there will be an appreciated-type deduction in the amount of $900,000. The $1,000,000 in value is reduced by the $100,000 potentially recaptured as ordinary income, and the charitable deduction is $900,000.
Instead of giving the building outright, the donor may prefer to establish a unitrust. If the building is transferred to a charitable remainder trust, then the charitable deduction equals the remainder factor times $900,000. For example, if the remainder factor is .50, then the charitable deduction will be $450,000.
|
Case Studies on Gift Reduction Rules
Get a Life (Insurance Policy) and Give it Away:
Dr. Eleanor Crane, 55, has been director of research at a local hospital for the past 16 years. She is the first woman director in the hospital's history and was honored several times by her colleagues for outstanding medical research. During her tenure as director, she and her spouse, August, raised two wonderful daughters, Denise and Laura. In fact, both of her daughters are medical students and wish to follow in the prestigious steps of Dr. Crane (a.k.a. Mom).
Gift of Art to Museum Paints Donor into a Corner:
Michael Prawn, 45, is an avid art collector. He specializes in fine paintings and frequently travels around the world looking for new pieces. Michael is famous for finding 'great deals' in small towns no one had ever heard of. For instance, in 1992, while Michael was vacationing in Romania, he got completely lost during a countryside excursion. He ended up in this small village, Losov, that had no electricity or telephones. While looking for someone to guide him back to civilization, he came across an out-of-the-way shop with an original painting, circa 1820, by Paul Rothschild, hanging on a wall. Amazed, Michael quickly bought the piece for $10,000. Today, a Rothschild typically sells at auction for $200,000. Obviously, Michael lived up to his reputation as a 'great deals' collector with that find.
The Dirtiest CRT Ever Created, Part 1 of 2:
Sam Morello, 50, has been in the mining business for some 30 years. His company, Hard Hat Drillers, a sole proprietorship, owns and operates several mines in the northeast part of the country. The company's sole source of revenue is from its mining efforts. However, a national landscaping company has made Sam an offer to buy his entire surplus of dirt for $100,000. There has not yet been any contract or other formal agreement between the two parties. In total, Sam estimates that he has about 12,000 tons of dirt.
The Dirtiest CRT Ever Created, Part 2 of 2:
Sam Morello, 50, has been in the mining business for many years and his company, Hard Hat Drillers, a sole proprietorship, owns and operates several mines in the northeast part of the country. The company's sole source of revenue is from its mining efforts. However, a national landscaping company has recently expressed an interest in purchasing the rights to extract dirt from Hard Hat Drillers' Pennsylvania mine. It is estimated that 12,000 tons of dirt could be extracted from the site. There has not yet been any contract or other formal agreement between the two parties.
The Philandering Philanthropist, Part 3 of 4:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
Planning Gifts of Life Insurance: Current, Deferred, Contingent & Split Interest, Part 1 of 6:
Many years ago, when Dr. Mimms was just a budding young surgeon and father, he decided to purchase a life insurance policy on his life "just in case."
Planning Gifts of Life Insurance: Current, Deferred, Contingent & Split Interest, Part 2 of 6:
Many years ago when Dr. Mimms was just a budding young surgeon and father, he decided to purchase a life insurance policy on his life "just in case."
Getting Back to the "Art of the Matter," Part 1:
Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied.
Getting Back to the "Art of the Matter," Part 2:
Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied.
Getting Back to the "Art of the Matter," Part 3:
Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied.
Getting Back to the "Art of the Matter," Part 4:
Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied.
Not All Tax-Exempt Organizations Are Treated Equally [Under the Code], Part 1 - Pet Lover Receives Charitable Deduction:
PetCare is a private foundation (PF) whose primary purpose is the prevention of cruelty to animals. PetCare was organized in 1980 and is exempt from federal income taxes under Sec. 501(c)(3) of the Code. PetCare receives most of its financial support from its founders; however, it does do some public fundraising. Specifically, PetCare raises awareness during local social functions by setting up booths and displays. The booths and displays educate and motivate citizens to support PetCare.
Not All Tax-Exempt Organizations Are Treated Equally [Under the Code], Part 2 - New Dog Park Unleashes Little Deduction:
Pet Care is a private foundation (PF) whose primary purpose is the prevention of cruelty to animals. Pet Care was organized in 1980 and is exempt from federal income taxes under Sec. 501(c)(3) of the Code. Pet Care receives most of its financial support from its founders; however, it does do some public fundraising. Specifically, Pet Care raises awareness during local social functions by setting up booths and displays. The booths and displays educate and motivate citizens to support Pet Care.
Not All Tax-Exempt Organizations Are Treated Equally [Under the Code], Part 3 - Bank President Finds Little Return in Stock Gift to Foundation:
PetCare is a private foundation (PF) whose primary purpose is the prevention of cruelty to animals. PetCare was organized in 1980 and is exempt from federal income taxes under Sec. 501(c)(3) of the Code. PetCare receives most of its financial support from its founders; however, it does do some public fundraising. Specifically, PetCare raises awareness during local social functions by setting up booths and displays. The booths and displays educate and motivate citizens to support PetCare.
Exit Strategies for Real Estate Investors, Part 1:
Karl was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl’s passion was real estate and he was very successful in his investments.
Karl continued to buy and sell real estate at the age of 85. About three months ago, Karl discovered a great investment property. It was a “fixer-upper” commercial building in a great area. While other buildings nearby sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.
The condition of the building turned many buyers away. It was being sold as is, but Karl was not deterred. He could see great potential with the building and knew it would not take much work to get it into market condition. Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.
After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building, bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building – a $2 million interest! This was no surprise to Karl as he knew the building was a great buy.
There was one downside, however, to the idea of selling. Karl held the property only four months, which meant the gain from the sale would be short-term capital gain. In other words, the applicable tax rate would be 40.8%, not 23.8%. Karl cringed at the thought of paying much of his gain to the government. At the same time, Karl knew the real estate market could change directions in the next year. Although Karl wanted the 23.8% tax rate, he did not want to risk holding the property another eight months.
Can Karl sell the building and bypass the tax on the sale of the property? Karl wants to reinvest the full sale proceeds in an income-producing investment. Is this possible?
Exit Strategies for Real Estate Investors, Part 2:
Karl was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate and he was very successful in his investments.
Karl continued to buy and sell real estate at the age of 85. His latest venture led him to a great investment property. It was a "fixer-upper" commercial building in a great area. While other buildings nearby sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.
The condition of the building turned many buyers away. It was being sold as is, but Karl was not deterred. He could see great potential with the building and knew it would not take much work to get it into market condition. Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.
After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building, bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building – a $2 million interest! This was no surprise to Karl as he knew the building was a great buy.
There was one downside, however, to the idea of selling. Karl held the property only four months, which meant the gain from the sale would be short-term capital gain. In other words, the applicable tax rate would be 40.8%, not 23.8%. Karl cringed at the thought of paying much of his gain to the government. At the same time, Karl knew the real estate market could change directions in the next year. Although Karl wanted the 23.8% tax rate, he did not want to risk holding the property another eight months.
After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. It looked like the perfect solution. However, there were still two potential downsides to this plan.
What are the charitable income tax deduction rules for gifts of short-term capital gain property? If Karl moves forward with this plan, how would the FLIP CRUT payouts be taxed?
Exit Strategies for Real Estate Investors, Part 6:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Exit Strategies for Real Estate Investors, Part 10:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
The Gas Guzzler's Deduction, Part 1:
Brandon Bigtop loves his truck, which he nicknamed "the Beast." It was a gift for Brandon's 18th birthday. It is painted bright red and is two tons of metal, muscle and noise.
The Gas Guzzler's Deduction, Part 2:
Brandon Bigtop loves his truck, which he nicknamed "the Beast." It was a gift for Brandon's 18th birthday. It is painted bright red and is two tons of metal, muscle and noise.
The Gas Guzzler's Deduction, Part 3:
Brandon Bigtop loves his truck, which he affectionately named "the Beast." It was a gift for Brandon's 18th 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 20 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 "eye sore" according to his wife. Every once in a while, Brandon will take the truck out for a spin but its low gas mileage makes it a costly joy ride. Plus, Brandon still receives glares from neighbors as he passes through the neighborhood, something he does not relish anymore.
After much deliberation, Brandon decides to donate his truck to a local charity. It is time to part ways with his old companion. Before deciding to contribute the truck to charity, Brandon checked with his tax advisor regarding the tax benefits of his gift and how to structure his donation. To his surprise, Brandon's tax advisor suggested contributing the truck into Brandon's existing $100,000 charitable remainder unitrust (CRUT). While there would be no capital gains bypass benefit, there still should be a charitable income tax deduction and increased CRUT income.
Can a truck or other tangible personal property be contributed to a CRUT? Are there any rules of which Brandon should be aware?
The Gas Guzzler's Deduction, Part 4:
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.
Baroness Edna and the Depreciation Dilemma, Part 1:
Will Rogers has been credited with saying "Buy land. They ain't making any more of the stuff." These words were not lost on Edna Appleby. Edna began purchasing parcels of land around her southern California home many years ago. She purchased only investment properties and these properties have paid off handsomely over the years. It was not long before Edna became known in her community as "Baroness Edna."
Baroness Edna and the Depreciation Dilemma, Part 2:
Will Rogers has been credited with saying "Buy land. They ain't making any more of the stuff." These words were not lost on Edna Appleby. Edna began purchasing parcels of land around her southern California home many years ago. She purchased only investment properties and these properties have paid off handsomely over the years. It was not long before Edna became known in her community as "Baroness Edna."
Baroness Edna and the Depreciation Dilemma, Part 3:
Will Rogers has been credited with saying, "Buy land. They ain't making any more of the stuff." These words were not lost on Edna Appleby. Edna began purchasing parcels of land around her Southern California home many years ago.
Wild Bill Russell Donates A Stuffed Elk:
Bill Russell grew up on the Great Plains. During his youth, he was a rodeo bull rider and gained fame as “Wild Bill” for his daring exploits. After a major injury, he married his sweetheart Glenda and moved to ranching country in Montana.
|
Private Letter Rulings
PLR
122293-98 Taxpayer Touchdown on Skybox:
Gifts to universities with a benefit of preferential seating at football games have been a contentious issue over the years. In order to resolve the issue, Congress passed Sec. 170(l) and allowed a deduction of 80% of the amount contributed where preferential seating at football games or other sports events results from the gift. The deduction is calculated by first subtracting the value of tickets and then multiplying the net amount by 80%.
PLR
200112022 Previous and Future Stock Contributions to PF Counted Toward 10% Limit Despite Corporate Merger:
Over a period of years, Taxpayers - who are all family members under I.R.C. Sec. 267 - made charitable contributions of Corporation B stock to Private Foundation. In addition, when Taxpayer X died, her estate donated B stock to Private Foundation.
TAM
200119005 Corporate Gift of Film Library to Charity Reduced to Zero under Sec. 170:
B was a broadcasting company and maintained a film library, which consisted of footage from local news stories produced by B's employees. The film library was not held for sale to customers nor included as part of B's inventory. Moreover, because B had expensed the costs associated with the film library, the company's basis in the property was zero.
PLR
200209020 Gift of Life Insurance Policy Produces Deduction Equal to Premium Paid:
Taxpayer intends to buy a single premium whole life insurance policy from Company. At the time of purchase, Taxpayer will designate Charity as the irrevocable beneficiary of the policy and will transfer to Charity any and all privileges in the policy. Charity has an insurable interest in Taxpayer's life under state law and is an organization described in Sec. 170(c) of the Code.
PLR
200230005 Charity Partners with For-Profit LLC to Generate Donations of Automobiles:
Charity is a 501(c)(3) organization whose primary purpose is to find a cure for certain illnesses. LLC is a for-profit business and registered charitable fundraiser. Specifically, LLC is in the business of buying, storing, dismantling and selling used motor vehicles, vessels and other personal property.
PLR
200702031 Warren Buffet and Public Stock Gifts to Private Foundations:
Legendary investor Warren Buffet created headlines in national publications by deciding to make gifts of the majority of his wealth to charity. During 2006 he pledged multiyear gifts of over $36 billion of Berkshire-Hathaway stock to several private foundations. The largest pledge is a $30 billion gift to the Bill and Melinda Gates Foundation.
PLR
9452026 Tangible Personal Property to Unitrust:
In PLR 9452026 the Service allowed the transfer of TPP to a charitable remainder annuity trust. While the intervening interest rule of Sec. 170(a)(3) precludes a current deduction, "an income tax deduction would be allowed under Sec. 170(a)(3) when the trustee sells a musical instrument." The deduction would be determined by multiplying the basis in the TPP, in this case a musical instrument, times the appropriate remainder factor. Because the deduction has been reduced to basis times the factor, this would be a 50% type deduction if the reminder recipient is a public charity.
|
|
|
|
Related Topics on Gift Reduction Rules
1.1.1
Gift or No Gift?:
Gifts to charities are deductible because they serve the public interest. A gift to a friend or family member is not deemed to serve the public interest and thus is not deductible. However, gifts for helping with relief efforts, education, medical services for the needy, social services or religious organizations are deemed to benefit the greater public interest and are therefore deductible for income, gift or estate tax purposes.
4.3.2
Tangible Personal Property Gift Methods:
State law governs transfer of ownership of art, crops, vehicles, collections or other tangible personal property. This state law determines whether or not a specific title or registration document is required for the assets. If there is a state document of title, it is preferable to transfer the asset using that document. For assets that do not have state title documents, such as crops or collections, a deed of gift or letter indicating the description of the asset, the date and the intent to make an irrevocable transfer to charity would be appropriate.
4.3.4
Tangible Personal Property Valuation:
Gifts valued between $250 and $5,000 will require a receipt but not an appraisal. In addition, the taxpayer is required to state the general description of the property. The taxpayer also should record the method used to determine value.
Shackleford:
In 1987, retired Air Force officer Thomas J. Shackleford won the $10 million California Lotto. He received three $508,000 payments and then passed away in 1990. California law at that time prohibited the transfer or alienation of the 17-year remaining annuity stream of payments.
Arbini:
In Gerald E. Arbini, et ux. v. Commissioner; T. C. Memo. 2001-141, No. 11324-98 (15 Jun 2001), Taxpayers had purchased volumes of Montana newspapers for $1,750. Taxpayers then sought to locate a charity to donate the newspapers and contacted the San Francisco Academy of Comic Art (SFACA). The SFACA determined that it would be willing to receive a contribution, but sought instead other newspapers.
Todd:
In John C. Todd, et ux. v. Commissioner; 118 T.C. No. 19; No. 17046-99 (19 Apr 2002), the Tax Court denied a fair market value charitable deduction for a gift of stock valued at $553,847.
Donovan:
In Estate of John R. Donovan, Jr. v. United States; No. 04-10594-DPW (26 Apr 2005), the Massachusetts District Court determined that it was appropriate to use the Sec. 7520 tables and methods to value a lottery annuity.
|
|
|
|
|
|
© Copyright 1999-2024 Crescendo Interactive, Inc.
|
|
