A taxpayer may benefit from an enhanced deduction by donating appreciated property to charity; however, in a recent Tax Court case, Albrech, TC Memo 2022-53, 5/25/22, the Court ruled that a person must meet strict justification requirements to obtain this relief. tax.
Basic premise: If you donate property you acquired within the last year, you can only deduct your base in the property (normally the amount paid for it). Conversely, if the property would have qualified for a long-term capital gain if you had sold it instead (i.e. if you had owned it for more than a year), you can deduct the fair market value (FMV) of the property on the date of the gift.
For example, if you donate shares that were purchased five years ago for $2,500 and are now worth $10,000, you can deduct $10,000. The $7,500 of appreciation in value remains untaxed forever.
Tax law limits your current deduction for gifts of property to 30% of your adjusted gross income (AGI) for the year. Any excess is carried forward for up to five years.
Caution: The IRS won’t just take your word for large donations. To claim a deduction of $250 or more, you must obtain a Contemporaneous Written Acknowledgment (CWA) that includes the following information:
- Name of the organization ;
- Amount of cash contribution;
- Description of the non-monetary contribution;
- Statement that no goods or services have been provided by the organization;
- Description and good faith estimate of the value of the goods or services, if any, that the organization provided in exchange for the contribution; and
- Statement that the goods or services, if any, that the organization provided in exchange for the contribution consisted entirely of intangible religious benefits, if any.
Facts of the new case: In 2014, a taxpayer donated approximately 120 items from a collection of Native American artifacts to a museum. Under this donation, the taxpayer signed a five-page deed detailing important information.
The second page of the deed specified the conditions governing donations to the museum. One of these conditions stipulated in relevant part that “the donation is unconditional and irrevocable; that all rights, titles and interests held by the donor in the property are included in the gift, unless otherwise specified in the gift agreement. The last three pages of the deed listed the goods donated.
Despite this reference to “donation agreement”, no such agreement was included in the deed. The museum provided the taxpayer with no further written documentation regarding the donation.
The IRS disallowed the deduction because the taxpayer could not file a CWA that complied with all tax law requirements. Eventually, the case went to Tax Court.
Fiscal result : The deed does not specifically state whether the museum provided any goods or services in connection with the donation. When a deed does not contain an explicit declaration, the court considers the deed as a whole. Based on the absence of a declaration in the deed, the Court determined that the donation did not meet the requirements of justification. As a result, the Tax Court sided with the IRS.
Be aware that other rules may come into play. For example, if you donate property to a charity, it must be used to further the organization’s tax-exempt mission (e.g., a museum should expose the good).
Finally, for donations over a $5,000 threshold, you must attach an independent appraisal of the property to your return, in addition to following other record-keeping rules.