Friday April 26, 2024
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4.3.1 Tangible Personal Property Deductions
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What is Tangible Personal Property?
Tangible personal property (TPP) is a physical item that can ordinarily be moved. Collections of jewelry, stamps, coins, art, crops and vehicles are the most common kinds of TPP.
There is one exception for coins that are deemed currency by a country. Krugerrands and Canadian Maple Leaf gold coins are deemed currency in South Africa and Canada, respectively. Because they have no numismatic value, these items may be given to charity and treated the same as cash. See PLR 9225036 or Rev. Rul. 69-63, 1969-1 C.B.63. However, a gift of gold coins other than these two types would normally be an appreciated property charitable gift. For example, a gift of precious metals is typically treated as TPP. The deduction amount is the fair market value of the coins for related use. Otherwise, the deduction for unrelated use is reduced to cost basis.
TPP normally falls into one of three categories. If the TPP is a long-term capital gain asset, it may be transferred for a related use or an unrelated use. Alternatively, some items, such as inventory, are ordinary income assets. Usually, TPP will generate a cost basis charitable deduction for the donor. The charitable deduction for TPP will be limited to the lesser of the cost basis or the fair market value.
Long-term gain TPP may include coins, art or other items that have been held for over a year for investment purposes. If the taxpayer is a dealer of the type of property or engages in an active trade or business that involves that type of asset, then it is likely an ordinary gain asset. If instead, a taxpayer is an investor and sold long term gain TPP, it would generate capital gains on the sale.
Related Use Tangible Personal Property Gifts
Generally, a donor of TPP may deduct only his or her cost basis in the donated property. However, TPP may be transferred to a charity that uses the property in a manner related to its exempt purpose. In this case, the donor will be able to deduct the fair market value of the property. Gifts to charitable remainder unitrusts (CRUTs) will not qualify for related use deduction values because CRUTs are tax-exempt trusts, not charitable organizations.
In addition to the receipt for a related use gift, a charity must provide the donor with a letter indicating that the charity will make a related use of the particular property. This letter must also state that there is a "substantial" related use. If such a gift is over $5,000, the donor will also be required to substantiate the value of the property by providing an appraisal by an independent appraiser. A penalty of $10,000 can be imposed for misrepresentations of related use under Sec. 6702B.
At one time, it was permissible to take a related use deduction for a gift to a charity if the donor had a "reasonable anticipation" that the gift will be used for an exempt purpose. However, actual use is now required. Reg. 1.170A-4(b)(3)(ii).
Example 4.3.1A Related Use Deduction
Clark Collector owns a collection of 1880s music boxes in exquisite condition. He gives them to the American History Museum. The American History Museum then creates a display and exhibits the music boxes. Clark would qualify for a related use deduction. Assume the cost basis of the music boxes is $50,000 and the fair market value is appraised at $80,000. Clark receives an appreciated-property-type deduction for the fair market value of $80,000.
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 its 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).
Unrelated Use Tangible Personal Property Gifts
If a donor transfers to charity TPP that is not the type of property ordinarily used by the charity, and is immediately sold, there is an unrelated use. Typical unrelated uses involve gifts to charity auctions or other items expected to be sold. Unrelated use gifts of TPP are deductible at cost basis only. If cost basis is greater than fair market value, the lower fair market value is the deductible amount.
Example 4.3.1B Unrelated Use TPP Gift
Clark Collector owns a collection of 1880s music boxes in exquisite condition. Stricken with grief and sympathy at the sight of a starving homeless person, he gives them to the local food bank. Assume the cost basis of the music boxes is $50,000 and the fair market value is appraised at $80,000. Since the TPP is sold, this is an unrelated use gift. Clark receives a charitable deduction for the $50,000 cost basis and a very heartwarming thank you letter. Since this is a deduction for cost basis, it would be a 50% type gift and deductible up to that percentage of Clark's adjusted gross income.
Ordinary Income Gift
Works of art created by an artist, farm products raised by a farmer and most cattle owned by a rancher would generate ordinary income upon a sale. These assets would be considered inventory assets, which generate ordinary income when sold by the taxpayer and is not deductible. See Sec. 170(e). In many cases, the donor has fully depreciated the ordinary gain asset, meaning the cost basis is $0 at the time of the charitable contribution.
Example 4.3.1C Gift of Crops
John Farmer is a cash basis wheat farmer. He has deducted all of his expenses on the crops he just harvested. If he transfers 1,000 bushels of wheat to his favorite charity, he may take a deduction equal to his cost basis, which is zero. John receives a very nice thank you letter and has the satisfaction of making a gift. He receives no deduction, but also avoids selling the wheat and including the value of the 1,000 bushels in his ordinary income.
The category of inventory may also apply to certain earmarked gifts. If a donor acquires large numbers of books, artwork, gemstones or other items at bargain prices and holds them for one year to obtain long-term capital gains status, followed by an immediate gift to charity, then the Service may consider the individual a dealer. Rev. Rul. 79-256, 1979-2 C. B. 105, Rev. Rul. 80-233, 1980-2 C. B. 69 and Rev. Rul. 80-329, 1980-2 C. B. 70.
The determination of dealer status is a question of fact. If the donor can show that he or she was truly an investor based on the factual circumstances, the deduction could be for fair market value, provided there is a related use charitable gift. See GiftLaw Pro 4.5.4 for additional discussion about dealer status.
Loans and Partial Interest Gifts
Loans of TPP do not give rise to a charitable deduction. For this reason, a loan of art or a collection will not be deductible.
It is, however, possible to receive a deduction for gift of a fractional interest. This is different from a partial interest gift, which is not deductible. A gift of a fractional interest in TPP may include a calendar period division. The property could be owned by the charity for part of the year and by the donor for the balance of the year. See PLR 9303007.
If a donor does make a fractional year transfer, then it is important for the charity to take possession for a period of time each year. The period of possession is useful in proving that the actual ownership by the charity for the fractional period does exist. See Winokur v. Commissioner, 90 T. C. 733 (1988), acq. 1989-1 C. B. 1.
Example 4.3.1D Partial Year Gift
Clark Collector has a collection of 1880s music boxes. He transfers the right to display the music boxes to the American Museum of History for seven months of the year. Clark retains the right to possess the music boxes for the balance of the year. The American Museum does display the music boxes from January to August of each year. Clark will receive a charitable deduction that reflects the value of the seven months' ownership by the American Museum.
Restrictions and Reversions
Gifts may not be deductible if there is a significant possibility that the donor may reacquire the gift. Rev. Rul. 67-178, 1967-1 C. B. 64. However, if the probability that the gift will return to the donor or return to another private party is so remote as to be negligible, a charitable deduction is permitted. Reg. 1.170A-1(e).
Example 4.3.1E Possible Reversion
Clark Collector has a collection of 1880s music boxes. He transfers the right to display the music boxes to the American Museum of History with the expectation that the museum will display the boxes. The American Museum has agreed to create the display and has a similar display of other 1880s musical instruments. Clark Collector specifies that if the American Museum of History shall ever decline to display the collection, then it shall revert to his heirs. Since the probability that the American Museum of History will not display the collection is remote, the deduction is permitted.
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Case Studies on Tangible Personal Property Deductions
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 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.
Wild Bill Russell Donates to the Cowboy Museum:
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. But Wild Bill was an artist at heart and soon decided to move on to his artistic pursuits. He traveled throughout America and Europe and studied all of the great modern and classical artists.
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Private Letter Rulings
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.
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