how to buy low and donate high

7/26/2019 How to Buy Low and Donate High

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How to Buy Low and Donate High Building Wealth through Wise

Charitable Giving

Presenter:

Stuart Sobel

Tax Media Network, Inc.

www.taxmedianetwork.com
http://www.taxmedianetwork.com/http://www.taxmedianetwork.com/


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5 Elements for Building Wealth

Preserve and grow your assets.

Reduce and effectively manage your debt. Prioritize and control your personal spending.

Maimize ta savings.

!nd number 5 is""""..


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Build wealth through wise charitable giftplanning.

#s it illegal$ immoral$ or unethical to ma%e moneyfrom charitable activity&


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'et(s loo% at some case studies) *onations of items in a ta+motivated

transaction #mpact of intent on a charitable deduction.


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Donations of items in a tax

motivated transaction,here can be no -uestion that most people want to ma%e a

profit. #ndividuals who ac-uire materials at low cost andthen$ at a later date$ donate them to a charity can

sometimes generate large ta savings for themselves. #fthe donated items are later appraised at a high value$the ta savings could yield even more than the price thedonor actually paid for them.

,wo significant court cases discuss donations of items inta+motivated transactions.


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A. The facts

#n the first case$Max Weitz and Sylvia Weitz v. the Commissioner ofthe Internal Revenue,,.. memo /010+00$ Ma and 2ylvia Weitzdonated several pieces of medical e-uipment to a hospital.

,heir accountant had created a scheme.

,he bro%er bought medical e-uipment at ban%ruptcy auctions forsignificantly lower prices than the items( usual retail prices.

,he investors held the e-uipment for more than /3 months and

then donated it to designated charitable institutions. ,he bro%er had a warehouse where the purchasers stored the

e-uipment.


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A. The facts (cont.)

. ,he tapayers too% a sizable deduction for the contribution on their ta

return. ,he #R2 selected the Weitzes( return for eamination and theeamining agent ad4usted their very sizable deductions.

. ,he court construed this arrangement to be a tax-sheltering investmentplan.

2ince the Weitzes had no specific concern regarding who wouldultimately receive the assets$ it appeared the plan was a purely ta+motivated transaction.

,he court ruled that there was a lac% of economic substance andasserted that the arrangement was nothing more than a convoluted planto provide a ta deduction at a ratio of four dollars of deduction for eachdollar of investment capital.

,he court reduced the Weitzes( deduction for their contribution by theamount of ordinary gain that they would have received if they had sold thee-uipment.


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C. The mistake and conclusion

. ,he opinion in this case states that a charitable contribution may be

motivated by the basest and most selfish of purposes as long as thedonor does not reasonably anticipate benefit from the donee inreturn.

The Weitzes intent appeared to e profit! not charit". ,heiractions were ta%en only to inflate the deductible contributions on

their ta return. ,he court(s basic summary established that this was a ta+

motivated transaction. ,he donors( deduction was limited to theircost.

. #n a subse-uent case Daniel L. Herman and Barara !. Herman v.

the "nited Statesand #aul Bro$n v. the "nited States of %meri&aanac-uisition of medical e-uipment and the subse-uent donation to apublic charity resulted in a legitimate ta benefit to the parties.


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. Impact of intent on acharitable deduction

,he second case deals with individuals whoac-uired medical e-uipment for the purpose ofhelping a new hospital. ,heir court case$ DanielL. Herman and Barara !. Herman v. the "nited

States and #aul Bro$n v. "nited States of

%meri&a$ goes into considerable detail on this

very different type of situation.


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A. The facts and la#

. #n this situation the tapayers were trying to save a hospital that

had closed. ,hey purchased medical e-uipment at a ban%ruptcy auction for

a bargain price of 67$777 and donated it to the hospital.

! completed appraisal of the e-uipment concluded that it wasworth /$777$777.

,he tapayers too% a /$777$777 ta deduction for thecontribution.

. ,hese tapayers were anious to reopen the hospital and help theircommunity.

. ,he #R2 audited their ta returns and limited their deduction to the

67$777 amount that they had paid for the e-uipment.


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A. The facts and la# (cont.)

,he tapayers contested the matter in 8.2. ,a ourt.

,he ourt determined that the appraiser was fully -ualified to

determine the value of the donated property. ,he #R2 argued that if this property was purchased and then

donated to the charity$ it could be perceived as ordinary incomeproperty and the deduction would be limited to the ta basis.

,he court$ however$ was not convinced. #t cited 9/:7 which

provides that the amount of any contribution is deductible at fairmar%et value if there is an absence of finding that the donoractually engaged in a trade or business of selling a particulardonated property.

$ince the individuals in this case did not regularl" purchase

e%uipment at ankruptc" sales and merel" took this action toenefit a charitale organization! the fact that the" made a

argain purchase #as not perceived as a tax shelter scheme

" the court.


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A. The facts and la# (cont.). Bargain purchases

,he %ey in these situations is whether the donors arein a trade or business$ see%ing a ta+motivated

transaction$ or ma%ing the purchase with donativeintent.

;actors to be considered include the number$fre-uency$ and substantiality of the transactions$ the

purpose of the ac-uisition and duration of ownership$and the involvement of the individuals in therespective charities.


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&. The conclusion

. #f an individual is purchasing assets for the purpose of ma%ing aprofit by ac-uiring the materials and then selling them to others$they are un-uestionably in a trade or business.

. =?>public charities$ the individuals are entitled to a deduction.

#f they have owned the materials for less than a /3+monthperiod$ their deductions will be limited to their cost or basis.


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&. The conclusion (cont.)

,he ac-uired e-uipment or materials could then be 4ustifiably heldfor at least /3 months until the charity has the authority andresources to properly utilize the materials.

,he donor must follow the donation criteria set forth in the #nternalRevenue ode.

The ac%uisition of assets accompanied " the formation of a

charit" should e a one-time event.

,he individual whose ac-uisition of materials was secondary to theformation of the charity could ta%e an enhanced deduction.


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&. The conclusion (cont.)

,he #R2 can assert significant penalties in situations where it

perceives that an individual is claiming deductions in a ta+motivatedtransaction.

8nder 9 @@@3 a finding of negligence, substantialunderstatement, or valuation overstatement=claiming morethan double the amount finally determined> can produce a 37

percent penalty for the tapayer. ! finding of gross valuation overstatement=claiming more than

four A6 times the amount actually allowed> can produce a 67percent penalty.

#ndividuals should be aware of the costs and time that involvement in

a charity re-uires. ,here is a ris% of potential litigation if the #R2 raises an issue.

,apayers should be prepared by securing legal and ta assistancefrom -ualified professionals.


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What is something worth&

Who can you rely on to tell you what it is worth&

What will the #R2 accept as verification of thededuction amount&


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A qualified appraisal by a

qualified appraiser !lthough !lbert and his wife have donated artwor%$ 4ewelry$ business

e-uipment$ and many other items to various charities over a long period oftime$ they had not donated any of these items in the past three years.

A. The facts

/. ,he tapayers %new they were re-uired to have a -ualified appraisal forany donated asset that is valued at more than 5777. 2ince individuals suchas their 4eweler and art dealer held themselves out to the public asappraisers for insurance purposes$ the couple assumed that they were-ualified to do the appraisals.

3. #n 377: the tapayers once again began to donate art$ 4ewelry$ and otheritems.

,hey followed the same guidelines that they had used before.


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?. ,he couple received a letter advising them that the #R2 waseamining its 377: ta return. 2ince !lbert and his wife had filed;orm 131?$ 'on&ash Charitale Contriutions$ and submitteddeclarations by the appraisers for Part ### of the form.

6. *uring the eamination$ the agent as%ed the couple if theappraisers were members of any professional appraiserorganization or if they had completed the minimum educationeperience re-uirements under #R2 regulations.

5. ,he couple responded that the appraisals were done by eperts

who were active in associations of 4ewelers and art galleries.


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&. The mistake

/. .

! -ualified appraiser must meet minimum educationre-uirements.

!n individual will not be considered a -ualified appraiser forany specific appraisal unless he demonstrates verifiableeducation eperience in valuing the type of property


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3. ,he Pension and Protection !ct of 377@ created9@@@3=a>$ which is a new penalty provision. 8nder thissection if the claimed value of property in a substantialor gross evaluation misstatement is based on appraisal

results$ a penalty will be imposed on any person whoprepared the appraisal and who %new$ or reasonablyshould have %nown$ the appraisal would have beenused in connection with a return or claim for refund.

?. &ecause Alert and his #ife did not get a%ualified appraisal! the '$ disallo#ed the

contriutions for noncompliance #ith the

regulations.


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C. The la#

/. #.R.. 99/:7=f>=//>c$ /:7=f>=//>d$ and /:7=f>=//>=E>=i>3. #.R.. 9@@05=a>

?. #R2 Cotice 377@+0@ . The conclusion

/. *onations of tangible property valued over 5777 nowre-uire a -ualified appraisal by a -ualified appraiser.

3. Before they filed their return$ !lbert and his wifeshould have consulted a ta professional who wasfamiliar with recent ta changes.


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The Basic Deduction Rule

Re-uirement that charitable deduction from adonation of property must be reduced by theamount of gain that would not have been long+term capital gain if the contributed property hadbeen sold by the tapayer at its fair mar%et valueat the time of such contribution.


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Essentially limits the deduction to the cost basis.

Cet long+term gain has preferential ta rate.

2ale of non+business property =capital> assetsyields capital gain =9/33/> and sale of certainassets used in a business =9/3?/Aa>.


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Dolding Period

,o yield ', an asset must be held one year.

Eception is livestoc% which has a 36+monthholding period


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Con+', Property

2hort+term capital+gain property

#nventory Recapture property


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', held over one year can be deducted at;MF.

Con+long+term property and property held lessthan the holding period deductible at basis.


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*onations of ,angible Personal Property

#f use of the property is unrelated to the eempt

purpose of the charity$ the allowable contributionmust be reduced by the amount of gain thatwould have been ', had the property beensold at its ;MF. ='imiting the deduction to basis>


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*onorGs responsibility to determine whetherproperty will have the re-uired use.

,he need for a restri&ted gift. *etermination at the time of the gift.

Museum may later sell donated art withoutcreating unrelated use.


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onditions of a ift

Must be complete and irrevocable.

annot be tied to the occurrence of a subse-uent event.

#f at later date governmental or similar authority deems itimpermissible$ gift still allowed as charitable deduction.

#f a reversion provision returns the property because thedonee did not achieve goals$ the deduction is not

allowable.


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Earmar%ed ifts

Passing a gift through a charity for a specific

person is not permissible. ,he organization must have control of the funds.

Earmar%ing funds through an organization formissionary children is not permitted. =*avis vs.

8nited 2tates>


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Payments to harities as Business Epenses

*elivery is re-uired to create a gift.

Eception to delivery standard when theretention actually benefits the charity. ;or eample$ the done does not have housing or

space for the donation.

*eeding the property to donee would be sufficient fordeduction.


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'etter of redit

*onor may have a ban% issue a charity a letter of crediton which the charity may draw as it sees fit.

#n a technical advice #R2 ruled that$ if the letter isirrevocable$ the donor could deduct the full amount in theyear the letter of credit was issued even though thecharity did not draw the funds until the following year.


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'ife #nsurance Policies

Paid+up policy generally yields a deduction e-ual to itsreplacement value.

'imited to basis because if it was sold$ it would not-ualify for ',.

#f loans on the policy$ deduction could be limited to thecash surrender value.

#f donor continues to ma%e payments of premiums$ adeduction is allowed for the payments.

#f adverse change in health since policy issuance$ may4ustify higher ;MF.


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#nterest+free 'oans

! donor(s interest+free loan to a charity would bea contribution to the etent of the interest notcharged.

!lthough the two amounts would normally offseteach other$ it is not the case when the donor(s

contributions are not fully deductible because ofthe percentage limitation.


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'oans of !rtwor%

#n prior years would have been sub4ect to gift ta

ertain loans of this type no longer treated astaable gifts

Must be -ualified art

8se must be related to the charity(s or private+

operating foundation(s eempt purpose


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Fehicles$ Boats$ and !irplanes

When deduction eceeds 577$ communication betweenthe donor and donee is re-uired.

When vehicle is used by charity$ deduction e-uals ;MF. When vehicle sold by charity$ deduction e-uals sale

price.

*onor must provide information within ?7 days of resale.

*onation should not eceed private+party value in apricing guide or comparable dealer trade+in value.


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'et(s loo% at another case study that deals with

Enhanced deductions for corporations


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Obtaining enhanced charitable

deductions under 17!e"!#" Big Bargain ompany$ #nc. had a large amount

of inventory that it was unable to sell. ,hecompany felt that it could help a charitablecause and possibly receive a ta deduction atthe same time by donating the items to charity.2ince the thrift store down the street was always

as%ing for donated items to sell$ Big Bargainompany decided to donate the ecessinventory to the store.


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A. The facts

Big Bargain ompany too% a deduction for its costIbasis of thedonated property on its ;orm //37 ta return.

,he company did not %now about 9/:7=e>=?> that allows corporations to ta%e en!anced deductionsfor their donations ofinventory to a public charity.

ode section /:7=e>=?> allows a charitable deduction up to thefair mar%et value of the donated property reduced by one+half ofthe amount$ which would constitute noncapital gain if theproperty was sold$ but in no event to eceed two times thedonor(s basis in such property.

Either inventory sold to consumers or depreciable tangibleproperty used in the tapayer(s trade or business may becontributed.


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. Big Bargain ompany gave the property to an organization thatsold it. #f$ however$ the company had given the merchandise to an

organization in the form of a restricted gift$ the donation wouldhave -ualified under 9/:7=e>=?>.

! restricted giftmust be used in the eempt purpose of thedonee organization and solely for the care of the needy$ ill$ orinfants.

,he charity must restrict t!e useof the donated property bytransferring it to someone$ or a relative of someone$ who is illor needy.

,he property may also be transferred from the doneeorganization to another eempt organization that -ualifies

under code section 57/=c>=?> if that subse-uent organizationuses it for helping the ill or the needy.


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*ote+

!s defined in 93/?$ an ill ersonis an individualsuffering from a physical in4ury$ handicapped from birth$suffering from malnutrition$ or incapable of self+care.

! need" ersonis one who lac%s necessities of life

involving physical$ mental$ or emotional well+being as aresult of being in a state of poverty or temporary distress.


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. ,he law places limitations on how the property may be subse-uentlytransferred by the donee organization.

. ,here are some eceptions to charging of fees.

. When a corporation donates property under this code section$ thedonee organization must furnish the donor with a specific writtenstatement that includes the following)

! description of the contributed property with date of receipt Representation by the charity that the property will be used in

compliance with 9/:7=e>=?>

ertification that the donee organization -ualifies under 957/=c>=?>

Representation by the charity that ade-uate boo%s and recordswill be maintained and made available to the #R2 upon itsre-uest


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! business can also donate tangible depreciableproperty to a charity that uses the property forthe ill$ needy$ or infants. #f the charity agrees touse the property following the re-uirements setforth in 9/:7=e>=?>$ the corporation can obtain a

deduction that is greater than its basis.


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&. The mistake

#f it had given its ecess inventory to an entity thatcomplied with 9/:7=e>=?>$ &ig &argain Compan" could

have %ualified for a larger deduction. #nstead of giving its assets to organizations that merely

sell them$ a business should strive to donate toorganizations that will use the items in their eempt

purpose ! business should consult with its professional ta

practitioner prior to ma%ing donations of this type.


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C. The la# or authorit"

ode section /:7=e>=?> describes the applicable law andis supplemented by the regulations under it.

. The conclusion

! business should establish a prescribed method fordonating inventory and depreciable assets.

,he tapayer should %eep a current listing oforganizations that will accept donations under the strictguidelines of 9/:7=e>=?>.


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*onation of Barter Balances

Barter echanges allow accounts to be createdby using barter balances.

Barter income is taable when earned.

*onations of barter balances are deductible.


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ranting 2toc%


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2ummary

#t is not immoral$ unethical$ or illegal to profitfrom wise charitable planning.

#ntent is a ma4or criterion for charitable taplanning.

#nstead of spending time only on estate ta

planning$ spend some time on charitable gift taplanning too.


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,han% you for attending our program

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