Often, when people speak of making a noncash charitable contribution, they are referring to intangible property such as stocks and bonds. Although they have their own set of rules and limitations, such gifts are fairly easy to value and complete. However, this article focuseson the gifting of tangible personal property to charity, an area that can be quite profitable for both sides but also fraught with misunderstanding and planning landmines.
Years ago, I used to get a kick out of the radio commercials run by certain charities urging listeners to donate used cars to their organizations. They would often claim that you would save more in taxes than you could make if you sold the car (wrong) and that they would give you a “tax-deductible receipt” for the value of your car. I was never quite sure what a “tax-deductible receipt” was because, silly me, I thought the contribution itself was tax deductible, not the scrap of paper evidencing the gift. Anyway, those days are thankfully long gone, as the government has tightened up on the rules to limit such bogus deductions.
Such gifting can still be a good strategy, particularly with appreciated property, but you have to be cognizant of several issues. Most importantly, perhaps, is to know the use to which the charity will put the property once it receives it. Will the property actually be used in the furtherance of the charity’s exempt purpose? It is not always clear. Take, for example, the case of fictional client Phil Lanthropist, who owns an original “Kramer” painted by the noted avant-garde artist Nina West[1]. Phil purchased his beloved painting in 2002 for $6,000; today it is worth $80,000. Phil is now considering donating the painting to his alma mater. The value of his contribution will ultimately depend upon how the University uses the painting. If the University displays it for educational purposes in the permanent collection of its art gallery, then Phil should be able to deduct its full fair market value. If, however, the University sells the painting (and even if it turns right around and uses the proceeds to fund other educational programs), the painting will no longer be considered employed in a related use and Phil will only be able to deduct his cost basis. THIS CAN BE A HUGE, HUGE DIFFERENCE! In this case, if the painting is used for exempt purposes, Phil ends up with an $80,000 contribution; at a 39.6% tax rate, he saves $31,680. If, however, it is not used for exempt purposes, Phil will only be able to deduct $6,000, with a corresponding tax savings of only $2,376. The message is clear: Make sure there are no misunderstandings with the charity as to the intent of the donation!
(As an aside, whether Phil gets to deduct his cost or FMV, he will have to spring for a qualified written appraisal of the value of the painting. Appraisals are required for the valuation of any single item or group of items that exceeds $5,000 and in the case of artwork, if the claimed value is $20,000 or more, the appraisal must be submitted with the return.)
There is also a final piece of paperwork, specifically, written certification from the charity confirming to the IRS and the donor that the property use was indeed related to the charity’s exempt purpose and that such use was substantial or, alternatively, that such use, although intended at the time of the contribution for one reason or another has become impossible or infeasible to implement (form 8282). Without this certification, if the property is disposed of during the year of the gift, the taxpayer’s contribution will be limited to his basis. Similarly, if the charity disposes of the property within three years of the donation, the donor will be required to recapture the excess of the FMV over cost basis as ordinary income.
The IRS is not messing around with this one! While such contributions can be quite worthwhile for both the donor and the donee, you have to follow the “use” and “documentation” rules. Remember the old adage – No job is done until the paperwork is finished. Never so true as in the tax world.
[1] With apologies to Seinfeld, Season 3, Episode 21
If you have any questions or would like to discuss this matter further, please contact a member of Withum’s Private Client Services Group by filling out the form below.
How Can We Help?
