Vous êtes sur la page 1sur 53

How to Buy Low and Donate High

Building Wealth through Wise


Charitable Giving
Presenter:
Stuart Sobel
Tax Media Network, Inc.
www.taxmedianetwork.com

5 Elements for Building Wealth


Preserve and grow your assets.
Reduce and effectively manage your debt.
Prioritize and control your personal spending.
Maximize tax savings.
And number 5 is..

Build wealth through wise charitable gift


planning.
Is it illegal, immoral, or unethical to make money
from charitable activity?

Lets look at some case studies:


Donations of items in a tax-motivated
transaction
Impact of intent on a charitable deduction.

Donations of items in a tax


motivated transaction
There can be no question that most people want to make a
profit. Individuals who acquire materials at low cost and
then, at a later date, donate them to a charity can
sometimes generate large tax savings for themselves. If
the donated items are later appraised at a high value,
the tax savings could yield even more than the price the
donor actually paid for them.
Two significant court cases discuss donations of items in
tax-motivated transactions.

A. The facts
In the first case, Max Weitz and Sylvia Weitz v. the Commissioner of
the Internal Revenue, T.C. memo 1989-99, Max and Sylvia Weitz
donated several pieces of medical equipment to a hospital.
Their accountant had created a scheme.
The broker bought medical equipment at bankruptcy auctions for
significantly lower prices than the items usual retail prices.
The investors held the equipment for more than 12 months and
then donated it to designated charitable institutions.
The broker had a warehouse where the purchasers stored the
equipment.

A.
.

The facts (cont.)


The taxpayers took a sizable deduction for the contribution on their tax
return. The IRS selected the Weitzes return for examination and the
examining agent adjusted their very sizable deductions.
. The court construed this arrangement to be a tax-sheltering investment
plan.
Since the Weitzes had no specific concern regarding who would
ultimately receive the assets, it appeared the plan was a purely taxmotivated transaction.
The court ruled that there was a lack of economic substance and
asserted that the arrangement was nothing more than a convoluted plan
to provide a tax deduction at a ratio of four dollars of deduction for each
dollar of investment capital.
The court reduced the Weitzes deduction for their contribution by the
amount of ordinary gain that they would have received if they had sold the
equipment.

C.
.

The mistake and conclusion


The opinion in this case states that a charitable contribution may be
motivated by the basest and most selfish of purposes as long as the
donor does not reasonably anticipate benefit from the donee in
return.
The Weitzes intent appeared to be profit, not charity. Their
actions were taken only to inflate the deductible contributions on
their tax return.
The courts basic summary established that this was a taxmotivated transaction. The donors deduction was limited to their
cost.
. In a subsequent case Daniel L. Herman and Barbara J. Herman v.
the United States and Paul Brown v. the United States of America an
acquisition of medical equipment and the subsequent donation to a
public charity resulted in a legitimate tax benefit to the parties.

. Impact of intent on a
charitable deduction
The second case deals with individuals who
acquired medical equipment for the purpose of
helping a new hospital. Their court case, Daniel
L. Herman and Barbara J. Herman v. the United
States and Paul Brown v. United States of
America, goes into considerable detail on this
very different type of situation.

A.
.

The facts and law


In this situation the taxpayers were trying to save a hospital that
had closed.
They purchased medical equipment at a bankruptcy auction for
a bargain price of $40,000 and donated it to the hospital.
A completed appraisal of the equipment concluded that it was
worth $1,000,000.
The taxpayers took a $1,000,000 tax deduction for the
contribution.
. These taxpayers were anxious to reopen the hospital and help their
community.
. The IRS audited their tax returns and limited their deduction to the
$40,000 amount that they had paid for the equipment.

A. The facts and law (cont.)


The taxpayers contested the matter in U.S. Tax Court.
The Court determined that the appraiser was fully qualified to
determine the value of the donated property.
The IRS argued that if this property was purchased and then
donated to the charity, it could be perceived as ordinary income
property and the deduction would be limited to the tax basis.
The court, however, was not convinced. It cited 170 which
provides that the amount of any contribution is deductible at fair
market value if there is an absence of finding that the donor
actually engaged in a trade or business of selling a particular
donated property.
Since the individuals in this case did not regularly purchase
equipment at bankruptcy sales and merely took this action to
benefit a charitable organization, the fact that they made a
bargain purchase was not perceived as a tax shelter scheme
by the court.

A. The facts and law (cont.)


. Bargain purchases
The key in these situations is whether the donors are
in a trade or business, seeking a tax-motivated
transaction, or making the purchase with donative
intent.
Factors to be considered include the number,
frequency, and substantiality of the transactions, the
purpose of the acquisition and duration of ownership,
and the involvement of the individuals in the
respective charities.

B.
.

The conclusion
If an individual is purchasing assets for the purpose of making a
profit by acquiring the materials and then selling them to others,
they are unquestionably in a trade or business.
. Other individuals have a deep commitment to help others by
alleviating illness and disease. They purchase assets to help
existing organizations and, immediately upon their acquisition,
donate them to charitable entities.
If the entities to which they donate are approved 501(c)(3)
public charities, the individuals are entitled to a deduction.
If they have owned the materials for less than a 12-month
period, their deductions will be limited to their cost or basis.

B. The conclusion (cont.)


The acquired equipment or materials could then be justifiably held
for at least 12 months until the charity has the authority and
resources to properly utilize the materials.
The donor must follow the donation criteria set forth in the Internal
Revenue Code.
The acquisition of assets accompanied by the formation of a
charity should be a one-time event.
The individual whose acquisition of materials was secondary to the
formation of the charity could take an enhanced deduction .

B. The conclusion (cont.)


The IRS can assert significant penalties in situations where it
perceives that an individual is claiming deductions in a tax-motivated
transaction.
Under 6662 a finding of negligence, substantial
understatement, or valuation overstatement (claiming more
than double the amount finally determined) can produce a 20
percent penalty for the taxpayer.
A finding of gross valuation overstatement (claiming more than
four [4] times the amount actually allowed) can produce a 40
percent penalty.
Individuals should be aware of the costs and time that involvement in
a charity requires.
There is a risk of potential litigation if the IRS raises an issue.
Taxpayers should be prepared by securing legal and tax assistance
from qualified professionals.

What is something worth?


Who can you rely on to tell you what it is worth?
What will the IRS accept as verification of the
deduction amount?

A qualified appraisal by a
qualified appraiser

Although Albert and his wife have donated artwork, jewelry, business
equipment, and many other items to various charities over a long period of
time, they had not donated any of these items in the past three years.
A. The facts
1. The taxpayers knew they were required to have a qualified appraisal for
any donated asset that is valued at more than $5000. Since individuals such
as their jeweler and art dealer held themselves out to the public as
appraisers for insurance purposes, the couple assumed that they were
qualified to do the appraisals.
2. In 2007 the taxpayers once again began to donate art, jewelry, and other
items.
They followed the same guidelines that they had used before.

3. The couple received a letter advising them that the IRS was
examining its 2007 tax return. Since Albert and his wife had filed
Form 8283, Noncash Charitable Contributions, and submitted
declarations by the appraisers for Part III of the form.
4. During the examination, the agent asked the couple if the
appraisers were members of any professional appraiser
organization or if they had completed the minimum education
experience requirements under IRS regulations.
5. The couple responded that the appraisals were done by experts
who were active in associations of jewelers and art galleries.

B. The mistake
1. On October 19, 2006 the IRS issued Notice 2006-96, which
defines what constitutes a qualified appraisal and appraiser for
purposes of substantiating property for which a charitable
contribution deduction is in excess of $5000.
A qualified appraisal must be conducted in accordance with
generally accepted appraisal standards.
A qualified appraiser is one who has been certified by a
professional appraisal licensing organization such as the American
Society of Appraisers (ASA) or the International Society of
Appraisers (ISA).
A qualified appraiser must meet minimum education
requirements.
An individual will not be considered a qualified appraiser for
any specific appraisal unless he demonstrates verifiable
education experience in valuing the type of property

2. The Pension and Protection Act of 2006 created


6662(a), which is a new penalty provision. Under this
section if the claimed value of property in a substantial
or gross evaluation misstatement is based on appraisal
results, a penalty will be imposed on any person who
prepared the appraisal and who knew, or reasonably
should have known, the appraisal would have been
used in connection with a return or claim for refund.
3. Because Albert and his wife did not get a
qualified appraisal, the IRS disallowed the
contributions for noncompliance with the
regulations.

C. The law
1. I.R.C. 170(f)(11)c, 170(f)(11)d, and 170(f)(11)(E)(i)
2. I.R.C. 6695(a)
3. IRS Notice 2006-96
D. The conclusion
1. Donations of tangible property valued over $5000 now
require a qualified appraisal by a qualified appraiser.
2. Before they filed their return, Albert and his wife
should have consulted a tax professional who was
familiar with recent tax changes.

The Basic Deduction Rule


Requirement that charitable deduction from a
donation of property must be reduced by the
amount of gain that would not have been longterm capital gain if the contributed property had
been sold by the taxpayer at its fair market value
at the time of such contribution.

Essentially limits the deduction to the cost basis.


Net long-term gain has preferential tax rate.
Sale of non-business property (capital) assets
yields capital gain (1221) and sale of certain
assets used in a business (1231[a]).

Holding Period
To yield LTCG an asset must be held one year.
Exception is livestock which has a 24-month
holding period

Non-LTCG Property
Short-term capital-gain property
Inventory
Recapture property
Other ordinary income property

LTCG held over one year can be deducted at


FMV.
Non-long-term property and property held less
than the holding period deductible at basis.

Other ordinary-income property limited to basis.


Accounts and notes receivable from a business
Certain copyrights: literary, music, letters or memoranda,
and similar property
Publications of the US Government received other than
by purchase
OID debt instruments
Partnership interests with unrealized receivables
Shares in an S corporation with unrealized receivables or
income that has substantially appreciated

Donations of Tangible Personal Property


If use of the property is unrelated to the exempt
purpose of the charity, the allowable contribution
must be reduced by the amount of gain that
would have been LTCG had the property been
sold at its FMV. (Limiting the deduction to basis)

Donors responsibility to determine whether


property will have the required use.
The need for a restricted gift.
Determination at the time of the gift.
Museum may later sell donated art without
creating unrelated use.

Conditions of a Gift
Must be complete and irrevocable.
Cannot be tied to the occurrence of a subsequent event.
If at later date governmental or similar authority deems it
impermissible, gift still allowed as charitable deduction.
If a reversion provision returns the property because the
donee did not achieve goals, the deduction is not
allowable.

Earmarked Gifts
Passing a gift through a charity for a specific
person is not permissible.
The organization must have control of the funds.
Earmarking funds through an organization for
missionary children is not permitted. (Davis vs.
United States)

Payments to Charities as Business Expenses


Delivery is required to create a gift.
Exception to delivery standard when the
retention actually benefits the charity.
For example, the done does not have housing or
space for the donation.
Deeding the property to donee would be sufficient for
deduction.

Letter of Credit
Donor may have a bank issue a charity a letter of credit
on which the charity may draw as it sees fit.
In a technical advice IRS ruled that, if the letter is
irrevocable, the donor could deduct the full amount in the
year the letter of credit was issued even though the
charity did not draw the funds until the following year.

Life Insurance Policies


Paid-up policy generally yields a deduction equal to its
replacement value.
Limited to basis because if it was sold, it would not
qualify for LTCG.
If loans on the policy, deduction could be limited to the
cash surrender value.
If donor continues to make payments of premiums, a
deduction is allowed for the payments.
If adverse change in health since policy issuance, may
justify higher FMV.

Out-of-pocket Expenses
Auto expenses either 14 cents a mile or actual
expenses with no insurance or depreciation.
Expenses as a delegate to a convention
Volunteers working with children
Civil defense duties
Sponsoring cocktail or dinner parties to promote a
charitable organization
Expenses of volunteer pilots performing services for
charity

Interest-free Loans
A donors interest-free loan to a charity would be
a contribution to the extent of the interest not
charged.
Although the two amounts would normally offset
each other, it is not the case when the donors
contributions are not fully deductible because of
the percentage limitation.

Loans of Artwork
In prior years would have been subject to gift tax
Certain loans of this type no longer treated as
taxable gifts
Must be qualified art
Use must be related to the charitys or privateoperating foundations exempt purpose

Vehicles, Boats, and Airplanes


When deduction exceeds $500, communication between
the donor and donee is required.
When vehicle is used by charity, deduction equals FMV.
When vehicle sold by charity, deduction equals sale
price.
Donor must provide information within 30 days of resale.
Donation should not exceed private-party value in a
pricing guide or comparable dealer trade-in value.

Lets look at another case study that deals with


Enhanced deductions for C corporations

Obtaining enhanced charitable


deductions under 170(e)(3)
Big Bargain Company, Inc. had a large amount
of inventory that it was unable to sell. The
company felt that it could help a charitable
cause and possibly receive a tax deduction at
the same time by donating the items to charity.
Since the thrift store down the street was always
asking for donated items to sell, Big Bargain
Company decided to donate the excess
inventory to the store.

A. The facts
Big Bargain Company took a deduction for its cost/basis of the
donated property on its Form 1120 tax return.
The company did not know about 170(e)(3) that allows C
corporations to take enhanced deductions for their donations of
inventory to a public charity.
Code section 170(e)(3) allows a charitable deduction up to the
fair market value of the donated property reduced by one-half of
the amount, which would constitute noncapital gain if the
property was sold, but in no event to exceed two times the
donors basis in such property.
Either inventory sold to consumers or depreciable tangible
property used in the taxpayers trade or business may be
contributed.

A. The facts (cont.)


. Big Bargain Company gave the property to an organization that
sold it. If, however, the company had given the merchandise to an
organization in the form of a restricted gift, the donation would
have qualified under 170(e)(3).
A restricted gift must be used in the exempt purpose of the
donee organization and solely for the care of the needy, ill, or
infants.
The charity must restrict the use of the donated property by
transferring it to someone, or a relative of someone, who is ill
or needy.
The property may also be transferred from the donee
organization to another exempt organization that qualifies
under code section 501(c)(3) if that subsequent organization
uses it for helping the ill or the needy.

A. The facts (cont.)


Note:
As defined in 213, an ill person is an individual
suffering from a physical injury, handicapped from birth,
suffering from malnutrition, or incapable of self-care.
A needy person is one who lacks necessities of life
involving physical, mental, or emotional well-being as a
result of being in a state of poverty or temporary distress.

A. The facts (cont.)


. The law places limitations on how the property may be subsequently
transferred by the donee organization.
. There are some exceptions to charging of fees.
. When a C corporation donates property under this code section, the
donee organization must furnish the donor with a specific written
statement that includes the following:
A description of the contributed property with date of receipt
Representation by the charity that the property will be used in
compliance with 170(e)(3)
Certification that the donee organization qualifies under 501(c)
(3)
Representation by the charity that adequate books and records
will be maintained and made available to the IRS upon its
request

A. The facts (cont.)

A business can also donate tangible depreciable


property to a charity that uses the property for
the ill, needy, or infants. If the charity agrees to
use the property following the requirements set
forth in 170(e)(3), the corporation can obtain a
deduction that is greater than its basis.

B. The mistake
If it had given its excess inventory to an entity that
complied with 170(e)(3), Big Bargain Company could
have qualified for a larger deduction.
Instead of giving its assets to organizations that merely
sell them, a business should strive to donate to
organizations that will use the items in their exempt
purpose
A business should consult with its professional tax
practitioner prior to making donations of this type.

C. The law or authority


Code section 170(e)(3) describes the applicable law and
is supplemented by the regulations under it.
D. The conclusion
A business should establish a prescribed method for
donating inventory and depreciable assets.
The taxpayer should keep a current listing of
organizations that will accept donations under the strict
guidelines of 170(e)(3).

One of the IRSs Dirty Dozen: Charity Abuse


The IRS continues to observe the misuse of tax-exempt
organizations. Abuse includes arrangements to improperly shield
income or assets from taxation and attempts by donors to maintain
control over donated assets or income from donated property.
The IRS also continues to investigate various schemes involving
the donation of non-cash assets including situations where several
organizations claim the full value for both the receipt and
distribution of the same non-cash contribution. Often these
donations are highly overvalued or the organization receiving the
donation promises that the donor can repurchase the items later at
a price set by the donor.
The Pension Protection Act of 2006 imposed increased penalties
for inaccurate appraisals and set new definitions of qualified
appraisals and qualified appraisers for taxpayers claiming
charitable contributions.

Donation of Barter Balances


Barter exchanges allow accounts to be created
by using barter balances.
Barter income is taxable when earned.
Donations of barter balances are deductible.

Granting Stock Options


Giving a charity an option to purchase a
corporations stock at some future time for a
price that is fixed at the time the option is
granted
On exercise of the option, the corporation is
allowed a contribution measured by the excess
of the stocks FMV over its option price on the
exercise date. (Rev. Rul. 82-197)

Other Tools for Charitable Tax


Savings
Joint ventures
Converting a for-profit to a nonprofit
organization

Summary
It is not immoral, unethical, or illegal to profit
from wise charitable planning.
Intent is a major criterion for charitable tax
planning.
Instead of spending time only on estate tax
planning, spend some time on charitable gift tax
planning too.

Thank you for attending our program!


Stuart Sobel
Tax Media Network, Inc.
www.taxmedianetwork.com
sobel@taxmedianetwork.com
866-477-5012

Vous aimerez peut-être aussi