Charitable Giving 3 Gift Valuation and Substantiation Fair

Charitable Giving #3 Gift Valuation and Substantiation

Fair Market Value Definition: Property is bought and sold every day between willing buyers and willing sellers. • The determination of value for any charitable gift is simple. It is merely the value that a willing buyer would pay a willing seller

Fair Market Value Rules The specific rules for determining value can vary considerably. Cash is, of course, worth its face value and public securities can be valued by their worth on an exchange, but other assets are more difficult to value. Thus, there are specific rules for valuing stocks, real estate, mutual funds, life insurance, art and other types of property. Reg. 2031 -1(b).

Publicly Traded Stocks and Bonds • Stocks and bonds that are traded on a public exchange • relatively easy to value

Publicly Traded Stocks and Bonds • The value for stock given on a particular day is the mean between the high and low sales on that day. Example: Stock High = $160 Stock Low = $150 Stock Mean = $155 • If there have been no sales, the value is determined by a weighted average of the mean sale price on the gift date Reg. 2031 -2(b)(1). • If there are no actual sales of a security during a reasonable period, then the same weighted average method may be used. • However, in this case, the bid and asked prices are used for the weighting formula Reg. 2031 -2(c).

Publicly Traded Stocks and Bonds Example 1. 5. 1. A Weighted Average • A stock is sold on January 3 rd and the high and low are 52 and 48. Thus, the mean for January 3 rd is 50. • There are no more sales until January 13 th (10 day between sales). On that date, the stock sells between 60 and 50, producing a mean of 55. • A donor makes a gift of 100 shares of stock on January 7 th. • Since January 7 th is day four of the 10 -day period, the price is 40% of the difference between 50 and 55. The difference is $5 and 40% of $5 is $2. • The weighted value is $50 plus $2, or $52 per share. The charitable deduction for 100 shares is $5, 200.

Real Estate • Applying the willing buyer and willing seller test to real estate is slightly more complicated

Real Estate

Real Estate • Real estate may be either improved or unimproved. If real estate is improved, then a qualified appraiser must evaluate both the land the buildings or other structures. • Real estate valuation must consider several other factors Rev. Proc. 79 -24. Normally, the most reliable valuation is comparable sales of similar property Rev. Proc. 66 -49. However, there may be other factors that affect the value of the property, such as use restrictions, limitations due to restricted access or zoning requirements Rev. Proc. 96 -15.

Mutual Fund Shares • Mutual fund shares are valued as of the close of the market each business day. • The transfer of a mutual fund results in a charitable deduction equal to the number of shares times the value as of the end of the day on the date of transfer. • If the gift is given on a non-trading day (when there is no valuation), then the last prior closing valuation will be used Reg. 2031 -8(b)(1).

Life Insurance • Life insurance may also be valued under the willing buyer -willing seller test. • If there is an increase in value over the premiums, then the charitable gift deduction will be reduced by the ordinary income element. Sec. 170(e)(1). • For a paid-up policy, the deduction is the lesser of premiums paid or the replacement cost of the policy for a person the age of the insured. Reg. 2031 -8(a)(3).

Life Insurance • For most policies with remaining premiums to be paid, the "interpolated terminal reserve value, " or ITRV, is used in determining the value. • The ITRV is generally the cash value plus a pro-rated portion of the last premium paid. Reg. 2031 -8(a)(3). • The charitable deduction is the lesser of IRTV or premiums paid

Works of Art • Art is in the eye of the beholder. • As one federal judge reviewing an art valuation case once noted, "We observe that the objects in this case are referred to as art merely for the sake of convenience. "

Works of Art • Works of art are subject to the same willing buyer - willing seller test as other assets. Understandably, there is great diversity in both the type of art and the determination of value. In order to review art valuations, the Treasury has created the IRS Art Advisory Panel. The panel reviews art items and recommends valuation adjustments. Inevitably, the panel frequently recommends valuation reductions for items given to charities and increases in value of items transferred to family members.

Works of Art • To allow taxpayers to obtain a Statement of Value from the Service, there is a provision that allows the Treasury to determine the value of gifts already made to a charity. Rev. Proc. 96 -15. • If the appraised value is over $50, 000, the donor may request a Statement of Value by paying a fee of $2, 500 and requesting the statement by January 15 th. • If these requirements are met, the IRS will issue a determination of value by June 30 th.

Valuation Penalties • There are two general categories of valuation penalties. If the claimed value is 200% or more of the actual value, an underpayment of income tax over $5, 000 may be subject to a penalty of 20%. Sec. 6662(e)(1)(a). • Furthermore, if the claimed value is in excess of 400% of the correct value, there may be a 40% penalty on the underpayment of tax. Sec. 6662(h)(1).

Valuation Penalties • Clearly, Treasury is interested in preventing valuation abuses. The donors may avoid the valuation penalties by obtaining a qualified appraisal and making a good faith review of the appraisal and the surrounding circumstances. Sec. 6664(c)(2). • Therefore, for donations of valuable works of art, it is important for the donor both to obtain a qualified appraisal and to be able to document a reasonable level of review of comparable works of art.

Gift Substantiation-IRS form 1771 • Recordkeeping and Substantiation for Cash Gifts: Gifts of money are substantiated by a receipt from the organization or reliable written records. • Cash Gifts Over $250: Specific documentation requirements exist for gifts of $250 or more • Payroll Deduction Substantiation Guidelines: Specific documentation requirements exist for gifts of $250 or more • Volunteer Expenses: A volunteer may deduct expenses that are directly related to his or her volunteer work for a charitable organization.

Gift Substantiation-IRS form 1771 • Charitable Remainder Annuity Trust/Unitrust: The gift to a CRAT or a CRUT is deductible without a receipt from a charity • Pooled Income Fund or Charitable Gift Annuity: For transfers to a pooled income fund or in exchange for a charitable gift annuity, the normal receipt requirements will apply • Property Gifts Under $500: Gifts of property under $500 may be deductible, provided the donor is given receipt by the charity • Property Gifts Over $500: Noncash gifts over $500 require filing IRS Form 8283

Recordkeeping and Substantiation for Cash Gifts • 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. ) • Cash gifts of any amount are deductible only if there are reliable written records. • The reliable record must be a bank record or a receipt from the charity specifying the amount and date of the contribution. Sec. 170(f)(17).

Cash Gifts Over $250 • Specific documentation requirements exist for gifts of $250 or more. The charity has an obligation to send the donor a receipt for such gifts stating the amount of the gift. • Normally, the receipt indicates that the charity provided no goods or services to the donor. Sec. 170(f)(8)(B). • If there is a "quid pro quo, " that must be stated on the receipt. An exception to the "quid pro quo" requirement is created for "intangible religious benefits. " Reg. 1. 170 A-13(f)(1). • The donor must receive the receipt prior to filing his or her tax return.

Payroll Deduction Substantiation Guidelines • In Notice 2006 -110; 2006 -51 IRB 1 (1 Dec 2006), Treasury released guidelines for substantiation of payroll charitable deductions. Under Sec. 170(f)(17) deductions for gifts by cash or check or payroll deduction require specific substantiation. • Generally, there must be a contemporaneous written acknowledgement for gifts of $250 or more. • All gifts also require a bank record or written confirmation from the donor to qualify for deduction.

Payroll Deduction Substantiation Guidelines • Because payroll deductions are automatically withdrawn from earnings by the employer, there are different substantiation requirements. • To comply with Sec. 170(f)(8) substantiation rules, employees must retain a pay stub or Form W-2 that describes the amount withheld by the employer for the charitable gift and a pledge card or other document prepared by the charitable donee organizations. • The pledge card or other document must also state that the charitable organization does not provide goods or services in whole or partial consideration for the contribution.

Volunteer Expenses • A volunteer may deduct expenses that are directly related to his or her volunteer work for a charitable organization. For this purpose, the volunteer must maintain records of the expenditures. • In addition, the charity should send the volunteer a statement that describes the services rendered and indicates whether any goods or services were transferred by the charity to the volunteer in exchange for his or her efforts. Reg. 1. 170 A-13(f)(10).

Charitable Remainder Annuity Trust/Unitrust • The gift to a CRAT or a CRUT is deductible without a receipt from a charity. While the remainder interest must be irrevocably committed to a charitable entity, the donor is not required to vest any specific charity with the remainder at the time the gift is created. Therefore, no receipt is required. Reg. 1. 170 A-13(f)(13). • Note that no receipt is required for the charitable deduction, but unless the trust is funded with cash, Form 8283, "Noncash Charitable Contributions, " is still required.

Pooled Income Fund or Charitable Gift Annuity • For transfers to a pooled income fund or in exchange for a charitable gift annuity, the normal receipt requirements will apply. The charity should indicate the value of the contribution. • Since an income interest is retained with a pooled income fund an annuity interest is retained with a charitable gift annuity, the charity should show on the receipt the value of the charitable interest. • Only the remainder interest in a pooled income fund or the gift interest in a gift annuity qualifies for a charitable deduction Reg. 1. 170 A-13(f)(13).

Property Gifts Under $500 • Gifts of property under $500 may be deductible, provided the donor is given a receipt by the charity. • The receipt should list the name of the charity, the date of the gift, the city and state where the gift was received, a brief description of the property (but not the value, as that is the donor's responsibility) and a statement that no goods or services were provided by the charity to the donor Reg. 1. 170 A-13(b)(1) • In addition to the above information, the donor should retain an estimate of the fair market value of the property and an explanation of the methods used to determine the value

Property Gifts Over $500 • Noncash gifts over $500 require filing IRS Form 8283. • The information in Part A of Form 8283 includes the date and method of acquiring the property, the cost basis of the asset and a general description of the property. Reg. 1. 170 A-13(b). • The charity should also provide a receipt.

Charitable Organizations – Substantiation and Disclosure Requirements

Charitable Contribution Reporting • The Internal Revenue Code applies substantiation requirements for donors, and disclosure requirements for charitable organizations, in connection with charitable contributions. • For a detailed discussion of the substantiation and disclosure requirements for charitable contributions, see Publication 1771, Charitable Contributions: Substantiation and Disclosure Requirements. Required Disclosures is our online mini-course explaining these requirements.

Substantiation of Contributions • A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization. The donor must get the acknowledgement by the earlier of: 1. The date the donor files the original return for the year the contribution is made, Or 2. The due date, including extensions, for filing the return. • The donor is responsible for requesting and obtaining the written acknowledgement from the donnee. • A donor cannot claim a deduction for any contribution of cash, a check or other monetary gift made on or after January 1, 2007, unless the donor maintains a written record of the contribution

Charity Auctions • Donors who purchase items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value

Substantiating Noncash Contributions • Additional substantiation requirements generally apply to contributions of property. Charitable organizations can help their contributors by providing the required substantiation

Quid Pro Quo Contributions • A charitable organization must provide a written disclosure statement to any donor of a quid pro quo contribution over $75

Vehicle Donations • Additional substantiation and disclosure rules may apply when a donor contributes a vehicle to a charitable organization and claims the value of the vehicle is more than $500. • See Publication 4302, A Charity’s Guide to Vehicle Donations, Publication 4303, A Donor’s Guide to Vehicle Donations, and the IRS Video portal for more information

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True or False?

True or False? Many individuals own life insurance at some time in their lives True False

True or False? Many individuals own life insurance at some time in their lives. A life insurance policy may provide peace of mind, financial liquidity, investment diversification or an inheritance for loved ones. As an individual's situation changes over time, a life insurance policy may no longer be needed for its original purpose. True False As an individual's situation changes over time, a life insurance policy may no longer be needed for its original purpose. For instance, a person may have accumulated a substantial estate and no longer need the insurance policy for inheritance purposes. Alternatively, a person may have purchased life insurance to protect against a premature death. However, after the person reaches a certain age, the insurance policy no longer serves its original purpose. An individual with philanthropic intent may decide to make a charitable contribution of the life insurance policy.

True or False? A donor who wants to make a gift of a life insurance policy must create an insurance trust with charity as the remainder. True False - A donor who wants to make a gift of a life insurance policy must irrevocably transfer ownership of the policy to charity. An insurance trust is not required. By this transfer the donor must relinquish all incidents of ownership and rights in the policy. Most states allow for such a transfer to charity; some, however, may not. Therefore, it is imperative that a donor determine whether his or her state allows such a transfer before proceeding.

True or False? To complete a transfer of an insurance policy, the donor will need to contact the insurance company and fill out the proper change of ownership forms. True False True - A donor who wants to make a gift of a life insurance policy must irrevocably transfer ownership of the policy to charity. Once the charity owns the policy, it may hold or surrender the policy. The charity should verify that it not only owns the policy but is the designated beneficiary as well.

True or False? An individual who decided to surrender his or her insurance policy for cash would realize taxable ordinary income equal to the excess of the policy's value over the cost basis. True False True - This taxable event would be reported as ordinary income (not capital gain income), and the insurance company would report the income to the individual on IRS Form 1099.

True or False? The transfer of a life insurance policy to charity should not trigger any income tax liability. True False True - However, this result may change in some rare instances, i. e. , if there are loans against the policy in excess of basis. Therefore, each situation must be reviewed prior to any transfer.