Noncash charitable contributions can be as simple as a bag of used clothing donated to the Salvation Army, or as complicated as artwork worth millions given to a museum. Contributions can provide a donor with the opportunity to receive a fair-market-value tax deduction on the donated property without being taxed on the built-in gain.
The complications arise when dealing with substantiation requirements.
"Donors need proper documentation — failing to meet the substantiation requirements under IRS Code Section 170 and the regulations will result in disallowance of a deduction for the contribution," said Lori McLaughlin, a partner in the exempt organizations practice at Top 25 Firm Crowe. "Donors are required to obtain a contemporaneous written acknowledgment — a CWA — from the charity receiving the contribution. The acknowledgment must include the description of any noncash property contributed, whether the charity provided any goods or services in exchange for the gift, and, if so, a description and good faith estimate of the value of those goods or services."
Donors are required to attach Form 8283, "Noncash Charitable Contributions," to their income tax return, and complete Section A of the form. And donations of more than $500 for any single item of clothing or household item that is not in at least "good used" condition require donors to also complete Section B of Form 8283 and attach an appraisal to their return.
Generally, noncash contributions with a fair market value of more than $5,000 will require a "qualified appraisal," as defined in Reg. Section 1.170A-17, McLaughlin noted. In addition, the Form 8283 will need to be signed by the charity receiving the donation, as well as the qualified appraiser.
"A qualified appraisal is required to be attached to the donor's tax return only for donations of art valued at $20,000 or more, a qualified conservation contribution of an easement on the exterior of a building in a registered historic district, or donations with an FMV of more than $500,000," McLaughlin said.
In cases where a qualified appraisal is not required, such as publicly traded securities, patents or vehicles, donors are still required to substantiate the fair market value of the contribution, she added.
While the donation of securities results in a deduction equal to fair market value, the donation of tangible personal property can be more muddled, especially if the property has appreciated in value, according to McLaughlin. "In that case, the deduction is calculated as the lower of FMV or basis," she said. "And a donation to a donor-advised fund requires a contemporaneous written acknowledgement."
A qualified appraisal must be signed and dated by a qualified appraiser and be prepared in accordance with generally accepted appraisal standards for the type of contributed property, McLaughlin cautioned: "And in order to be qualified, no part of the appraisal fee can be based on a percentage of the appraised value of the property."
The appraisal must be dated no more than 60 days before the date the property was contributed and no later than the due date, including extensions, of the income tax return on which the tax deduction is claimed. The effective date of the valuation must be no earlier than 60 days before the date of the contribution and no later than the date of the contribution.
Fresh regs
New Regulation Section 1.170A-17 sets out conditions for contributions made on or after Jan. 1, 2019, for an appraisal to constitute a "qualified" appraisal. These include:
- A statement that the appraisal was prepared for income tax purposes;
- A description of the physical condition of the tangible or real property in sufficient detail to determine that the property appraised is the property that was contributed;
- The date or expected date of the contribution, the appraised FMV on the date of contribution, and the method of valuation used; and,
- The terms of any agreement by the donor and the charity that relates to the use, sale or other disposition of the donated property, including any agreement that temporarily or permanently restricts the charity's right to use or dispose of the property, earmarks donated property for a particular use, reserves to or confers upon anyone any right to the income from the donated property or to the possession of the property, including the right to vote donated securities, to acquire by purchase or otherwise, or to designate the person having the income, possession or right to acquire the property.
For art valued at $20,000 or more, a donor can request a statement of value for that item from the IRS. The taxpayer must request the statement before filing the tax return that reports the donation, and must include a copy of a qualified appraisal of the item, a user fee of $7,500 for one to three items, and $400 for each additional item paid through Pay.gov. A payment confirmation will be provided through the Pay.gov portal and should be submitted with the request for the statement of value. A completed Form 8283 Section B should accompany the request, along with the location of the IRS territory that has examination responsibility for the return. If the IRS declines to issue a statement of value in the interest of efficient tax administration, it will refund the user fee.
"The charitable contribution deduction substantiation rules are extremely complex," acknowledged McLaughlin. "The IRS closely scrutinizes whether documentation is complete and if a qualified appraisal is required, as well as whether the strict rules under the regulations have been followed."
The perils of art
Charitable contributions of personal property can be complicated from a tax perspective, especially when it involves only part of the asset. The gift of a fractional interest in art illustrates the potential complexity of such transactions, according to Timothy Speiss, a tax partner in the private client services group at Top 25 Firm EisnerAmper.
"A fractional interest contribution consists of a gift of an undivided portion to a charity that uses the property in connection with its exempt purposes," he explained. "This could be, for example, an interest in an artwork donated to a museum."
The initial deduction is computed by multiplying the fair market value by the fractional interests contributed. The subsequent deduction is limited to the lesser of the value at the time of the initial donation or at the time of the subsequent donation.
For example, a donor might donate a painting valued at $400,000 for three months that is retained for the rest of the year; in that case, the charitable deduction is $100,000, or 25%. "If the donor decides to give an additional three months interest in the subsequent year and the fair market value is now at $500,000, a charitable contribution would still be $100,000," Speiss explained.
"Let's say there is artwork worth $1 million," he continued. "The owner contemplates selling it to a nonprofit museum for $250,000, so there's a gift of $750,000, which generates a charitable deduction. Meanwhile a buyer comes along and wants to buy the art. So the original owner gets income and also a fractional charitable contribution deduction."
The type of art patron who does this is one who is trying to sell the property but is not ready to give the entire property away, explained Speiss. "They might be having trouble finding a buyer. These transactions come under heavy scrutiny. The biggest thing that comes into play is how the charity comes up with a value."
Revenue Ruling 1959-60 gives the classic definition of fair market value, according to Speiss. It defines FMV as the price that property would sell for on the open market.
"It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts," he said.
"That revenue ruling is the touchstone — it laid the groundwork to determine the basis of fair market value. If the appraisal is done objectively and by an accredited appraiser who is an expert in the field, the IRS might accept the numbers," he added. "They will also bring in their own appraisers, and often will use outside experts to help. If they come up with a lower number, they might split the difference."
"There can always be disagreement as to value — that's one of the perils of owning very distinctive property, whether it's art, a home, or jewelry or furniture," he concluded.
