Various types of property require specific forms of substantiation. While the appraiser will document most substantiation requirements, it is useful to understand the general factors that apply to specific properties.
An appraiser who specializes in valuing family businesses can be extremely helpful. The valuation on the date of transfer will be based on the economic factors of the business or comparable sales. Economic factors include total sales, book value, net profits and growth history. If less than 50% of the private company is transferred to charity, then there could be a discount for a minority interest or for a lack of liquidity.
The value of land is usually based on comparable sales. For residential or urban commercial property, it typically is possible to obtain multiple comparables. The appraiser will then evaluate the unique characteristics of the particular asset and determine whether the gifted property should be valued at a higher or lower level than each comparable property. Once again, the gift of less than a 50% interest in real property may result in a discount for minority interest or lack of marketability.
Some real estate appraisers are Members of the Appraisal Institute (MAI). It is not required to have this or other specific certification, but the appraiser's credibility will be considered if the IRS contests the valuation.
An additional consideration with real property is potential environmental remediation. If the property has been used for commercial or industrial purposes or there has been a history of environmental pollution in adjoining parcels, then an environmental impact survey should be completed. The presence of adverse environmental factors will invariably reduce the value.
Tangible personal property can have great value, but also may give rise to major disputes with the Service. It is essential to locate an appraiser who is qualified to evaluate the specific type of tangible personal property. Some appraisers are qualified to value art, some may be skilled in valuing stamps or coins and others may understand the valuation of boats and other vehicles.
Art is particularly subject to large value variations determined by different appraisers. Therefore, an IRS Art Advisory Panel meets regularly to evaluate gifts of art to charities. The Art Advisory Panel reduces many of the claimed deductions for gifts of art by 20% to 40%.
Donors who give tangible personal property should exercise caution in valuing the gifts. Forms 8283 and 8282 were in part developed because of excessive deductions claimed by donors for tangible personal property. High deductions for tangible personal property gifts are more likely to raise the risks of an audit by the IRS than are gifts of cash or public securities.
Case Studies on Property Gifts
Sam Storeowner and the Tax-Free Buyout:
Sam Storeowner was having coffee at Small Town Café when his friend Bob Banker walked into the café. Bob motioned Sam to a booth in the back and said that he wanted to talk to Sam. It turns out that Bob and several friends were in the process of obtaining a charter for a new bank. They were contacting a number of business owners in town and offering them the opportunity to invest.
1.5.2
Form 8283 and Appraiser Qualifications:
Gifts of $250 or more to a charity require a receipt. The receipt issued by the charity must state that no goods or services have been transferred in exchange for the gift. Reg. 1.170A-13. If the donor receives a "quid pro quo" (i.e., something in return) from the charity, the deduction value is reduced by the value of the "quid pro quo." For "quid pro quo" gifts over $75, the charity must make a good faith estimate of the value of the goods or services transferred to the donor and disclose the estimate. Reg. 1.170A-13(f).
1.6.1
Gift Substantiation:
Gifts of money are substantiated by a receipt from the organization or reliable written records. Gifts of $250 or more also require a "contemporaneous written acknowledgement" from the charity, typically a receipt.
1.6.3
"Quid Pro Quo" Gifts:
Charities appreciate and frequently honor their donors. In many ways, charities attempt to demonstrate that appreciation through plaques, dinners, conferences and other tangible ways. One of the challenging issues for the Treasury has been how to regulate fairly the many benefits that donors receive from their gifts to and associations with charities.
Rolfs:
In Theodore R. Rolfs et ux Commissioner; 135 T.C. No. 24: No. 9377-04 (3 Nov 2010), the Tax Court denied a charitable deduction for a home given to a volunteer fire department to be burned down for training purposes.
Rolfs:
In Theodore Rolfs et al. v. Commissioner; No. 11-2078 (8 Feb 2012), the 7th Circuit affirmed a Tax Court decision. Taxpayers had given a home to the Village of Chenequa Fire Department and it was burned down as part of normal firefighter training. The Tax Court denied a deduction.
Bass:
In Duncan Bass v. Commissioner; No. 833-20; T.C. Memo. 2023-41, the Tax Court sustained the majority of an IRS deficiency and penalty for a claimed gift of clothing in excess of $25,000.
Taxpayer was employed by Hirschfeld industries and Supreme Maintenance Organization (SMO). During 2017 he earned $97,888 in wages. He also operated Bass & Co. a landscaping and janitorial business, a used clothing store called Cheap Shop and a North Carolina nonprofit named Lend-A-Hand.
Through Bass & Co. and various contacts, he received large quantities of used clothing. Some of the clothing was distributed to disadvantaged individuals through Lend-A-Hand, but taxpayer made 173 trips to Goodwill and The Salvation Army to make gifts. He filled out his own receipts and reported charitable gifts to the three nonprofits of more than $30,000 in value and deducted $18,999. The majority of the receipts were for gifts of used clothing, but there were various additional household items.
Bass hired a preparer to assist with his IRS Form 1040. He reported $18,999 of noncash gifts on Form 8283 but did not obtain any appraisals. The IRS audited the taxpayer and issued a notice of deficiency.
Gifts to charity are deductible under Sec. 170(a)(1). However, the deduction must comply with Reg. 1.170A-13 requirements. A contribution of $250 or more requires a contemporaneous written acknowledgment. Noncash contributions over $500 must include a description of the property contributed and a taxpayer must maintain appropriate records to document the transaction. Reg. 1.170A-13(b)(3)(i). If the noncash charitable contribution exceeds $5,000, the taxpayer must obtain a qualified appraisal, attach the IRS Form 8283 appraisal summary to the income tax return and maintain records to document the gift. See Reg. 1.170A-13(b)(2).
If the taxpayer gives "similar items of property" to a nonprofit, then those items are aggregated for purposes of the $500 and $5,000 thresholds. Sec. 170(f)(11)(F). The phrase "similar items of property" generally includes items of the same category or type.
While the taxpayer did report the gifts to the nonprofits on separate Forms 8283, the information was only reported on Section B. The taxpayer reported gifts of various items in "Good Used" condition. However, Bass failed to obtain the required appraisals for the aggregated gifts of clothing that were approximately four times the threshold for obtaining a qualified appraisal. The Court noted, "Since there was no such appraisal, petitioner is not entitled to the deductions claimed on his 2017 Schedule A for noncash charitable gifts of clothing to Goodwill and The Salvation Army."
However, the furniture, toys and other items were over the $500 threshold but were not in aggregate over the $5,000 threshold. Therefore, Bass was permitted to deduct these items at the claimed value.
A taxpayer who is subject to a deficiency may also be required to pay a Section 6662(a) accuracy penalty. The IRS must prove that taxpayer has not correctly valued the property. At that point, the burden of proof shifts and the taxpayer must demonstrate that he or she had reasonable cause for the failure. Because Mr. Bass did not demonstrate reasonable cause, the penalty was applicable.
