As part of AdvisorOne’s Special Report, 20 Days of Tax Planning Advice for 2013, throughout the month of March, we are partnering with our Summit Business Media sister service, Tax Facts Online, to take a deeper dive into certain tax planning issues in a convenient Q&A format. In this ninth article, we look at determining the value of a property donation.
Q. How is fair market value of a gift of property determined?
Where property other than money is donated to charity, it is necessary to determine the property’s fair market value.
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.”
The willing buyer has often been viewed as a retail consumer, not a middleman. However, in the case of unset gemstones, the ultimate consumer is generally a jeweler engaged in incorporating the gems in jewelry. Therefore, to acquire such stones.
It is often helpful to rely on expert appraisals in determining the fair market value of property. In fact, an appraisal is required for some gifts. However, it is possible that the IRS or the Tax Court will consider factors in addition to those considered by the taxpayer’s appraiser(s) which may reduce the value of the gift and, thus, the charitable deduction. See Williford v. Comm. (involving oversized artwork); Doherty v. Comm. (involving artwork of questionable quality and authenticity); Arbini v. Comm. (involving newspapers; and holding that the appropriate market for purposes of determining the fair market value of the newspapers is the wholesale market). The IRS has warned taxpayers that some promoters are likely to inflate the value of a charitable deduction for gemstones and lithographs, thus subjecting the taxpayer to higher taxes and possible penalties. Earlier case law has indicated that an auction price may be helpful in determining the value of art.
The burden of proof is on the taxpayer to establish fair market value. Evidence of what an organization is willing to pay for copies of a manuscript is evidence of the value of the original manuscript, but it is not conclusive.
The price paid for hospital equipment purchased from a bankruptcy trustee was not determinative of the equipment’s fair market value; instead the substantially higher appraisal established the value of the donated equipment.
For property that is transferred to a charity and subject to an option to repurchase, fair market value under IRC Section 170 is the value of the property upon the expiration of the option.
Guidelines for valuing property generally can be found in Rev. Proc. 66-49, and Announcement 2001-22. See also Crocker v. Comm. (describing the three methods of determining fair market value of commercial real estate: (1) the replacement method, (2) the comparable sales method, and (3) the income capitalization method). No charitable deduction is allowed for a contribution of clothing or a household item unless the property is in good used condition or better. Regulations may deny a deduction for a contribution of clothing or a household item which has minimal monetary value. These rules do not apply to a contribution of a single item if a deduction of more than $500 is claimed and a qualified appraisal is included with the return. Household items include furniture, furnishings, electronics, linens, appliances, and similar items; but not food, art, jewelry, and collections.
>>>Planning Point: It is a good idea to take photographs of these items prior to donation to document that they are in good used condition or better.
Intellectual property. The American Jobs Creation Act of 2004 (AJCA 2004) provides strict rules for charitable donations of patents and intellectual property. For the temporary regulations providing guidance for the filing of information returns by donees relating to qualified intellectual property contributions, see Temp. Treas. Reg. §1.6050L-2T; TD 9206; and Announcement 2005-49.
See all the articles from Tax Facts Online, part of AdvisorOne’s Special Report, 20 Days of Tax Planning Advice for 2013.