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Recent Commentary

Visual Planned Giving - Chapter 5 - Valuing Charitable Gifts of Property

Wednesday, January 23, 2019

In the fifth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, Russell James emphasizes the distinction between cash and noncash gift of property. Cash gifts are simple to make and value, compared to noncash gifts of property. Charitable gifts of property can be valued at their cost (or adjusted basis), their fair market value, or nothing. Some of these complex rules are reactions to real or perceived abuses, making them more of a mix, and less of a coherent set. Advisors must understand these rules to avoid damaging the expectations of donors who expect to receive a deduction for the property's fair market value.

One common method for valuing donated property is to use the cost basis, which is usually the amount the donor paid for the asset. Cost basis is not used to value property if the property's basis exceeds its fair market value; the donor must use the lower of basis or FMV. Cost basis is reduced by depreciation deductions (creating a so-called "adjusted basis"), and this fact makes calculating a property's basis more difficult. If a donor makes a gift of depreciated property, the charitable deduction may be reduced by any depreciation deductions taken. For example, when a sale of the property donated to charity would have been ordinary income if the donor had sold it, rather than making a gift, the donor can only deduct the cost basis (adjusted for depreciation taken). The cost basis valuation also applies to any property held for one year or less. If this property was sold for a profit, it would be short-term capital gain. The only type of noncash property which can be deducted at fair market value is long-term capital gain property. Still, several circumstances exist where long-term capital gain will be valued at cost basis. Gifts of appreciated property to private foundations, unless they are "qualified stock," are valued at cost basis. In addition, gifts of tangible personal property, receive cost basis treatment, unless the charity will use the property for its exempt purposes. A gift of artwork, for example, will be valued at cost basis, unless the recipient charity is an art museum or otherwise displays the art (rather than selling and liquidating it).

Due to abuses, Congress has, from time to time, changed these rules for certain types of property. Gifts of clothing and household items can only be deducted if they are in good condition or better. If a donor gifts a vehicle, including a boat or plane, he or she cannot deduct more than the charity's sale price (unless of course the car is used in furtherance of the charity's exempt purposes). The Code limits deductions of taxidermy property to the costs of stuffing the animal. Congress allows taxpayers to deduct their cost basis in gifts of intellectual property, plus a share of the income over the next twelve years. Thus, the donor receives an immediate deduction, and then a deduction equal to a share of the income going to charity for the next twelve years.

The Code imposes severe penalties for taxpayer who overstate the value of charitable gifts of property. A 20% penalty applies for property valued 50% higher than its true value. This escalates to 40% for property valued more than twice as high as the true value, and 75% when there is a gross misstatement resulting from fraud. If the valuation was based on a qualified appraisal, the donor made a good-faith investigation, and the over-valuation was not more than twice the value, there is no taxpayer penalty. Appraisers also face penalties for overvaluing charitable gifts. If the valuation was more than 50% greater than the true value, the appraiser's penalty will be the greater of $1,000, or 10% of the tax underpayment, but no more than 125% of the appraisal fee.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 5 and the entire book.

IRS Releases $3 Billion IT Modernization Plan

Monday, April 22, 2019
IRS

In FS-2019-9, the Service published the IRS Integrated Modernization Business Plan ("Plan") to improve taxpayer service and enforcement activities over the next 6 years. The Plan will be implemented in two-phases beginning Fiscal Year 2019, and is estimated to cost upwards of $3 billion by 2026.

May Rate for Charitable Calculations Slides to 2.8%

Thursday, April 18, 2019
Rates / Tables / Statistics

In Rev. Rul. 2019-12, the Service announced the Section 7520 rate for May dropped to 2.8%, down 20 basis points from April. With the exception of March (when rates stayed the same), the Section 7520 rates have consistently dropped 20 basis points since December's 3.6% rate, reversing the upward streak in 2018.

House Clears The Taxpayer First Act of 2019

Thursday, April 18, 2019
Legislative

On April 9, the House passed The Taxpayer First Act of 2019 - H.R. 1957 ("Bill"), which redesigns the Service's organizational structure, customer service, enforcement procedures, management of information technology, and use of electronic systems.