Substantial tax advantages are bestowed upon individuals donating appreciated capital gain property to charities. They generally get income tax deductions for the full values of the properties without paying capital gain tax on the appreciation. These situations sometimes occur for highly valued items. Every tax professional with Enrolled Agent certification is aware that Form 8283 is used for claiming donated non-cash items with a value exceeding $500. Section A of the form demands capturing several details about the charity and the donated property.
The more troubling element from EA training about Form 8283 is Section B. This is the component of property donation reporting that triggers qualified appraisals to support value claims. Appraisals are required to substantiate property values greater than $5,000. An appraisal is even attached to submitted tax returns when the value claimed for a property donation is more than $500,000.
The IRS periodically changes the rules for non-cash donations. For instance, Enrolled Agent education a few years ago delivered the IRS update that donated clothing and household items must be in at least good used condition. No more tax deductions for these properties that are not in good working order. This rule doesn’t apply to other articles, such as art, jewelry, or antiques. So, giving away great-grandpa’s non-functioning pocket watch still gets a tax deduction.
Further changes to charitable donation standards are likely to arise for an Enrolled Agent course of the future. Most of the contemplated measures entail improving substantiation of value determinations. The IRS leans heavily on independent valuations by appraisal. In fact, taxpayers are entitled to tax deductions for any type of property, regardless of condition, when an appraisal supports a value of more than $500.
The key component of supporting documentation for a charitable donation is the meaning of “qualified appraisal.” A recent Tax Court decision provides some enlightening information to advance Enrolled Agent preparation about this subject. In the case, Harvey Evenchik was the shareholder of Chateau Apartments, Inc, a corporation whose sole assets were two apartment buildings in Tucson. Evenchik donated his stock to a nonprofit housing corporation in 2004 and claimed a charitable deduction of $1,045,289 on his tax return for that year.
This amount was more than half of his income and he was required to carry over the excess. The IRS challenged the carryover amount used on his 2006 tax return. The Tax Court agreed that Evenchik’s disclosure of value was insufficient. He obtained appraisals covering the apartment buildings, but his donation consisted of stock in the corporation owning the properties. In fact, the donation was only 72 percent of the corporation’s capital stock. The tax code is quite clear about the evidence taxpayers need for defense of their charitable deductions. An appraisal meeting specific guidelines is required whenever the donated value exceeds $5,000. The first step is assuring that the right property is assessed.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.