Noncash Charitable Gifts: Make Sure to Get your Details Right
Submitted by American Endowment Foundation on August 29th, 2016
By Laura J. Malone, CAP®, CEPA
Noncash assets like closely held stock and real estate often make great charitable gifts. In particular, the avoidance of significant capital gains exposure makes these gifts particularly beneficial.
However, it is for this same reason that these gifts also face special scrutiny from the IRS when evaluating charitable deductions. In order to make sure that donors get the maximum charitable benefit for these gifts, it is extremely important that donors and their advisors make sure they are doing the appropriate documentation of these gifts when they file their taxes.
For some noncash charitable gifts, Form 8283 (Noncash Charitable Contributions) must be filed. Certain benchmarks deserve notice:
$500: If donors' noncash gifts for the year total more than $500, they’ll have to include Form 8283 with their income tax return.
$5,000: When the gifted items’s value is more than $5,000 ($10,000 for closely held stock), they’ll generally need to have it appraised. The appraiser’s findings are reported in Section B of Form 8283.
$500,000: For gifts valued at over $500,000, the donor must attach the qualified appraisal — as well as Section B of Form 8283 — to his or her tax return.
In the recent court case, Gemperle v. Commissioner, TC Memo 2016-1, the IRS argued, and the Court agreed, that a 20% negligence penalty under 6662(a), and a 40% gross valuation misstatement penalty under 6662(h) should be applied when no appraisal was attached on this charitable contribution case. The Internal Revenue Code, the instructions for Form 8283, and the commentary from the Joint Committee on Taxation’s Technical Explanation clearly indicate that an appraisal should have been attached to the return. The irony of this case is that an appraisal had been completed. However, the preparers and the donors never attached the appraisal to the tax forms as required.
It is important that donors understand the importance of the appraisal and the role it plays in the charitable deduction process. If the donor needs an appraisal, certain criteria must be followed:
- the gift must be made within 60 days after the date of the appraisal; OR
- the gifted item can be appraised after the date of the gift (the appraisal would need to state the item's value on the date that the gift was made);
- the appraisal must be received by the due date (including extensions) of the return on which the deduction is first claimed.
What is considered a qualified appraisal? A qualified appraisal is an appraisal document that is prepared by a qualified appraiser in accordance with generally accepted appraisal standards and otherwise complies with the qualified appraisal requirements.
If the gift is valued at over $10,000, then both an appraisal and Section B of Form 8283 are required. Section B must be signed by the appraiser and by the charity that received the client’s gift. It’s essential to complete Section B of Form 8283 and to attach that form to the donors' tax return.
It is also important not to make sure the donor uses the appropriate qualified appraiser. The requirements to be a “qualified appraiser” are stringent. The definition is critically important: no qualified appraiser, no deduction for property gifts valued over $5,000 (over $10,000 for closely held stock). Generally, no part of the appraisal fee can be based on a percentage of the item's appraised value. An appraisal fee isn’t a charitable gift. If you itemize, the appraisal fee is deductible on your income tax return as a miscellaneous deduction.
While many of these points may seem simple or trivial, the Gemperle case exemplifies how easily they can be overlooked and the severe consequences that can follow in a lost charitable deduction as well as potential penalties to the donor for the unqualified donation.
For the trusted advisor, ensuring that their donor-client dots all "i's" and cross all "t's" when engaging in a noncash gift is of utmost importance. At American Endowment Foundation, we look forward to discussing your circumstances and helping you and your donor-client make a charitable gift in the best way possible. Contact us or call at 1-888-660-4508.
Learn more about how to calculate the after-tax value of non-cash assets.