Valuing Charitable Gifts of Property

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These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com

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Valuing Charitable Gifts of Property

  1. 1. Valuing Gifts of Property
  2. 2. All slides are taken from this book. Available from Amazon.com Full color version available at www.createspace.com/4707238
  3. 3. Giving cash requires no valuation
  4. 4. Valuing gifts of property can be more complex
  5. 5. Common valuation options Cost Basis (if lower than current value) Current Fair Market Value $0
  6. 6. Cost Basis What you paid for it less depreciation deductions already taken
  7. 7. Current Fair Market Value Its value on the open market (less any depreciation deductions already taken)
  8. 8. Which valuation applies? Cost Basis (if lower than current value) Current Fair Market Value $0
  9. 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 Use Tangible Personal Property
  10. 10. Private Foundation [except “qualified stock”] • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property 1990 Paid $1 Current Value: $25
  11. 11. Private Foundation [except “qualified stock”] • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property 1990 Paid $1 Current Value: $25
  12. 12. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25
  13. 13. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25
  14. 14. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $600/acre Current Value: $1800/acre
  15. 15. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $600/acre Current Value: $1800/acre
  16. 16. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $600/acre Current Value: $1800/acre
  17. 17. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $600/acre Current Value: $1800/acre
  18. 18. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $600/acre Current Value: $1800/acre
  19. 19. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 6 Weeks Ago Paid $1 Current Value: $25 Charity displays toy in collection
  20. 20. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 6 Weeks Ago Paid $1 Current Value: $25 Charity displays toy in collection
  21. 21. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 6 Weeks Ago Paid $1 Current Value: $25 Charity displays toy in collection
  22. 22. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity displays toy in collection
  23. 23. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity displays toy in collection
  24. 24. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity displays toy in collection
  25. 25. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity displays toy in collection
  26. 26. 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
  27. 27. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity sells toy at annual benefit auction
  28. 28. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity sells toy at annual benefit auction
  29. 29. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity sells toy at annual benefit auction
  30. 30. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity sells toy at annual benefit auction
  31. 31. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 Current Value: $25 Charity sells toy at annual benefit auction
  32. 32. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible 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)
  33. 33. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 10,000 Shares Current Value: $25
  34. 34. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 10,000 Shares Current Value: $25
  35. 35. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 10,000 Shares Current Value: $25
  36. 36. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 10,000 Shares Current Value: $25
  37. 37. • Short-term capital gain • Inventory or creative works by donor • Ordinary income items Special Election [50% income limitation] Unrelated Use Tangible Personal Property Private Foundation [except “qualified stock”] 1990 Paid $1 10,000 Shares Current Value: $25
  38. 38. 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
  39. 39. Why so many special asset rules? …to prevent abuse
  40. 40. 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
  41. 41. Don’t throw away those old clothes, give them away and deduct it!
  42. 42. Of course your old car is worth its blue book value…if you donate it!
  43. 43. Donate the stuffed animals to a museum and take a charitable tax deduction for all equipment and travel Hunt on safari for free!
  44. 44. From the Wyobraska Wildlife Museum in Gering (pop: 7,751) Nebraska (plus four train cars storing another 800 animals each)
  45. 45. I hereby give you the copyright to my novel. It will be a best seller, I’m sure. P.S. I’ll be taking a large deduction today for this very valuable gift.
  46. 46. Special asset rules • Clothing or household items • A car, boat, or airplane • Taxidermy • Inventory from your business • A patent or other intellectual property
  47. 47. Don’t throw away those old clothes, give them away and deduct it! Problem: Clothing & Household Items
  48. 48. No deduction unless in “good used condition or better” or giving >$500 worth with a qualified appraisal Solution: Clothing & Household Items
  49. 49. Household items Furniture Electronics Appliances Linens NOT Household Items XFood XArt XAntiques XJewelry XCollections
  50. 50. Problem: Donors deduct “Blue Book” value but charity sells for much less
  51. 51. Solution: If charity does not use, deduction capped at sales price $3,000 Current Value $6,000 Charity sells at auction for $3,000 1990 Paid $5,000
  52. 52. $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
  53. 53. 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
  54. 54. Use normal gift valuation if charity certifies (Form 1098-C) it will use the vehicle or give it to a needy person
  55. 55. Problem: Deducting cost of hunting trip when animal given to museum
  56. 56. Solution: Deduction for taxidermy property is limited to cost of stuffing the animal only
  57. 57. Problem: How to value intellectual property? “I give you the copyright to my novel that I think will be a best seller”
  58. 58. 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%
  59. 59. 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
  60. 60. 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
  61. 61. 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
  62. 62. Can the donor blame the appraiser and avoid the penalty?
  63. 63. No taxpayer penalty if: 1.Based on qualified appraisal 2.Donor made a good faith investigation of value 3.Valuation <2X actual
  64. 64. 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.
  65. 65. Final issue: Illegal Assets • “Canyon” artwork appraised by the IRS at $65M ($29.2M in Estate Taxes). • It is a felony to sell the art because it includes a bald eagle. • Other examples: Ivory, Indian Artifacts, • Maybe exception to the rule that clients must have pre-existing charitable desires
  66. 66. Valuing charitable gifts of property: How much deduction? Russell James, J.D., Ph.D., CFP® Professor Texas Tech University
  67. 67. 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 donors and you reviewed these slides, please let me know by clicking
  68. 68. If you clicked on the link to let me know you reviewed these slides… Thank You!
  69. 69. This slide set is from the curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning. To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/ Graduate Studies in Charitable Financial Planning at Texas Tech University

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