Valuing charitable gifts of property

1. Valuing Gifts of Property Russell James, J.D., Ph.D., CFP® Professor Texas Tech University

2. Valuing Gifts of Property Part I: The rules

3. Giving cash requires no valuation

4. Valuing gifts of property can be more complex

5. Common valuation options Cost Basis (if lower than current value) Current Fair Market Value $0

6. Cost Basis What you paid for it less depreciation deductions already taken

7. Current Fair Market Value Its value on the open market (less any depreciation deductions already taken)

8. Which valuation applies? Cost Basis (if lower than current value) Current Fair Market Value $0

9. Private Foundation [except “qualified stock”] • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property

10. Valuing Gifts of Property Part I: The rules

11. Valuing Gifts of Property Part II: Examples

12. Private Foundation [except “qualified stock”] • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property 1990 Paid $1 Current Value: $25

13. Private Foundation [except “qualified stock”] • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property 1990 Paid $1 Current Value: $25

14. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25

15. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25

16. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $600/acre Current Value: $1800/acre

21. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 6 Weeks Ago Paid $1 Current Value: $25 Charity displays toy in collection

24. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity displays toy in collection

28. Recapture If charity transfers donor’s “related use” tangible personal property >$5,000 within 3 years, it must certify substantial related use (or that intended use became impossible), otherwise valuation changes to cost basis • Short-term capital gain • Inventory or creative works by donor • Ordinary income items 1990 Paid $1 Current Value: $25 Charity displays toy in collection

29. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity sells toy at annual benefit auction

34. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] • Market quotations available • Not more than 10% of company given to the foundation (counting all family member transfers)

35. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50%income limitation] Unrelated UseTangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 10,000 Shares Current Value: $25

40. Valuing Gifts of Property Part II: Examples

41. Valuing Gifts of Property Part III: Special assets

42. Special asset rules • Clothing or household items • A car, boat, or airplane • Taxidermy • Inventory from the donor’s business • A patent or other intellectual property

43. Why so many special asset rules? …to prevent abuse

44. With potential income tax deductions worth nearly half of a gift’s “value,” property with uncertain valuation creates opportunities for abuse Top Tax Rates: 13.3% California + 39.6% Federal

45. Don’t throw away those old clothes, give them away and deduct it! Problem: Clothing & Household Items

46. Problem: Donors deduct “Blue Book” value but charity sells for much less

47. Donate the stuffed animals to a museum and take a charitable tax deduction for all equipment and travel Hunt on safari for free!

48. Problem: How to value intellectual property? “I give you the copyright to my novel that I think will be a best seller”

49. No deduction unless in “good used condition or better” or giving >$500 worth with a qualified appraisal Solution: Clothing & Household Items

50. Household items Furniture Electronics Appliances Linens NOT Household Items XFood XArt XAntiques XJewelry XCollections

51. $3,000 Current Value $6,000 1990 Paid $5,000 Deduction Solution: If charity does not use, deduction capped at sales price Charity sells at auction for $3,000

52. Applies to any car, boat, or plane deduction >$500 $3,000 Current Value $6,000 1990 Paid $5,000 Deduction Charity sells at auction for $3,000

53. Use normal gift valuation if charity certifies (Form 1098-C) it will use the vehicle or give it to a needy person

54. Solution: Deduction for taxidermy property is limited to cost of stuffing the animal only

55. Deduction for copyrights, patents, and trademarks = Cost basis (if < FMV) + Share of next 12 years income (n/a private foundations) Year 1 100% Year 2 100% Year 3 90% Year 4 80% Year 5 70% Year 6 60% Year 7 50% Year 8 40% Year 9 30% Year 10 20% Year 11 10% Year 12 10%

56. C-corporations may deduct average of basis and FMV (not more than 2X basis) for inventory gifts 1. To public charity for care of ill, needy, or infants 2. Of qualified research property to a higher education or scientific institution

57. Some items must be valued by special rules • For used cars, use “private party” value, not dealer retail • For boats, an individual appraisal is required • For used clothing, compare with consignment or thrift shops • For large quantities, value as a group, not individual value X number

58. Valuing Gifts of Property Part III: Special assets

59. Valuing Gifts of Property Part IV: Penalties

60. Penalties for bad valuation are a percentage of the unpaid taxes 20% penalty 40% penalty 75% penalty • More than 1.5X actual value AND • More than $5,000 underpayment of tax • More than 2X actual value • AND more than $5,000 underpayment of tax • Misstatement due to fraud

61. Can the donor blame the appraiser and avoid the penalty?

62. No taxpayer penalty if: 1.Based on qualified appraisal 2.Donor made a good faith investigation of value 3.Valuation <2X actual

63. If valuation >1.5X actual, appraiser penalty is greater of $1,000 or 10% of tax underpayment. But, penalty can’t be > 125% of appraisal fee.

64. Valuing Gifts of Property Part IV: Penalties

65. Help me HERE convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise clients and you reviewed these slides, please let me know by clicking

66. All slides are taken from the book Visual Planned Giving. Available from Amazon.com

67. Valuing Gifts of Property Russell James, J.D., Ph.D., CFP® Professor Texas Tech University

Valuing charitable gifts of property

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