Charitable giving is an American tradition, and Americans give to charitable organizations at high levels. Gifts in the form of donations of cash remain the favorite vehicle for positively impacting charities of personal significance. Increasingly, however, individuals are seeking tax advantageous methods of utilizing asset-rich portfolios in order to achieve philanthropic financial goals. Now more than ever, charitable giving involves the donation of assets other than cash as effective and tax efficient methods for effectuating charitable gifts.
Viewed as viable alternatives to cash contributions are contributions of complex assets. “Complex assets” include private company stock (S-Corporation and C-Corporation stock), limited liability company and limited partnership interests, real estate, works of art, and collectibles. Complex assets have proven to be a strategic method of maximizing giving, allowing for the same type of tax advantages as those available when cash is contributed to tax-exempt entities.
Complex assets often have a relatively low cost basis (i.e., original cost) for the donor, and in the cases of entrepreneurs who have founded companies, the cost basis may effectively be zero and a significant current market value that would result in large capital gains taxes if sold. When such an asset is donated to a public charity in the correct and optimal manner, the donor not only minimizes any potential capital gains exposure, but is also generally entitled to claim a tax deduction of the full current market value (and not just the original cost basis).
The Internal Revenue Code permits tax-exempt contributions to entities including a community chest, corporation, trust, fund, or foundation organized and operating only for charitable, religious, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. Certain organizations that foster national or international amateur sports competition also qualify for tax-exempt status (but only if no part of its activities involve the provision of athletic facilities or equipment). There are a broad range of opportunities for short-term and long-term charitable planning.
Specific requirements have been established in the Internal Revenue Code (“Code”) and its treasury regulations for qualification of charitable contributions of property, including complex assets. Rules and regulations apply to donations in excess of certain levels of charitable giving. IRS Form 8283 is required to be attached to a tax return if the donor claims a total deduction of over $500 of contributed property. For contributions for which the donor claims a deduction of more than $5,000, a qualified appraisal of such property must be obtained and attached to the income tax return for the year of contribution along with any additional information which may be required by the Secretary of the Treasury (“Secretary”). For contributions for which a deduction of in excess of $500,000 is claimed, the donor must attach to the return for the taxable year a qualified appraisal of the property. Each level of deduction includes the requirement for filing of IRS Form 8283.
Under the Code, a “qualified appraisal” is an appraisal of property which is treated as a qualified appraisal under regulations or other guidance prescribed by the Secretary and is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed by the Secretary. The term “qualified appraiser” is used to refer to an individual who:
(i) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary,
(ii) regularly performs appraisals for which the individual receives compensation,
(iii) meets such other requirements as may be prescribed by the Secretary in regulations or other guidance.
(iv) demonstrates verifiable education and experience in valuing the type of property subject to the appraisal, and
(v) has not been prohibited from practicing before the Internal Revenue Service by the Secretary under § 330 (c) of Title 31, United States Code, at any time during the 3-year period ending on the date of the appraisal. IRC Section 170(f)(11)(E).
Valuation of the complex asset is required for substantiation of the deduction which is being claimed on the federal income tax return. A donor will be able to increase the amount of a tax deduction and lower the level of income tax liability, by having a high valuation of the asset. In the case of a charitable contribution of complex assets or other property other than cash, the amount of the contribution is generally deemed to be the fair market value of the assets at the time of their contribution. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Treasury Regulations Section 1.170A-1(c)(2). According to the IRS, in making and supporting the valuation of property, all factors affecting value are relevant and must be considered. These include: (a) the cost or selling price of the item, (b) sales of comparable assets, (c) replacement cost, and (d) opinions of experts. IRS Publication 561. A donor can potentially benefit from a higher valuation of the complex asset by having access to documentation substantiating its marketability.
If you would like to create an estate plan that maximizes the use of tax deduction and tax deferment mechanisms in the Internal Revenue Code, or if you would like to modify an existing estate plan to maximize the use of such mechanisms, please do not hesitate to contact the experienced estate planning attorneys at Chepenik Trushin LLP to schedule an initial consultation.