Had a potential client drop off his last three years of returns to look over. He felt they might not have been prepared correctly. When I looked at his charitable contributions, he had donated capital gain property valued over 6 figures. The preparer attached a certified appraisal along with form 8283 but then used only 10% of the appraised value as a deduction. There was no deduction based on 30% of AGI. In addition, the carry forward schedule that was being used was 9 years; equating to a 10 year write-off period. I'd welcome any viewpoints on whether this treatment has any validity. I have only seen 5 year carry forward periods and I believe this donation should have been limited to 30% of AGI after first reducing by any other charitable contribution amounts. Any comments are most appreciated.
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Generally, you are correct. Was the charitable deduction limited to 10% because of the gross income limitation? -
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The only 10% limit I know of is the one applicable to a corporation's contribution deduction. For non-corporate taxpayers capital gain property donated to a 50% charity gets the 30% ceiling.
Even so, the taxpayer can elect a 50% ceiling if he limits his deduction to the basis of the donated property. This would be beneficial if the FMV was no higher, or just a little higher, than basis. (Code §170(b)(1)(C)) It can also be the wise choice if the donor doesn't believe he will ever be able to use very much ... perhaps even none ... of any carryover.Roland Slugg
"I do what I can."Comment
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Amount is not Amortized
Additionally, the charitable deduction is not AMORTIZED similar to a depreciable asset. From the OP, it appears like this guy was going to deduct 10% of the amount every year. Doesn't work that way.
The amount remaining on the table is SUSPENDED until the following year and then used to the maximum extent. The amount which may be deducted is 30% of AGI each year until the amount is used up.
Example: FMV is $150,000. Taxpayer's AGI in Year 1 is $90,000, so 30% of $90,000 allows a deduction of $27,000 for Year 1 leaving some $133,000 on the table for the next year. Taxpayer's AGI in Year 2 is $120,000, so he is able to deduct $36,000 for Year 2, leaving $97,000 for future years until used up.
(The example is simplified by assuming no other contributions. The amount rolled forward each year includes ALL contributions not eligible for deduction by virtue of AGI limit)Comment
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It turns out this and other transactions were ten year "loans" of the artwork, upon which time, the items revert back to the donor. Donor has been taking the 10% each year based on the term of the loan. The appraiser who performed the work for the 8283 said this was a common practice when donors loan items to museums and historical societies. He said there is no published guidelines but that the IRS is aware of the practice. I am awaiting receipt of the loan agreement but remain skeptical a deduction is warranted if the donor has not fully relinquished control of the artwork.Comment
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The taxpayer may have set up a Charitable Remainder Trust ... or thought he did. Even so, no deduction is allowed unless ownership is relinquished, either to the CRT or to the charitable organization itself. The tax law is quite clear that a taxpayer who gives a charity the right to use property, while retaining the property itself, can't take a charitable deduction for the value of that use. (Code §170(f))
Based on what you wrote in your first and second posts, I would speculate that the taxpayer didn't just make a loan of his artwork but may have actually entered into a contract with the donee organization whereby he is transferring actual ownership of the artwork to the donee in the form of an undivided 10% ownership interest each year over a 10-year period. If this is what he actually did, then he is, in essence, "loaning" his undivided interest in the art to the donee, but the deduction taken on his tax returns isn't for the hypothetical value of that loan but is for the actual value of the 10% ownership interest transferred that year. If this is, in fact, what he did, then the way it was reported on his return would seem to be correct. I would wonder, though, if each year's charitable deduction amount should be based on the original FMV, as per the initial appraisal, or if there should be a new appraisal each year. I do not know the answer to that.
In your OP you wrote that your potential new client told you, regarding his tax returns, that ....
Before you tell him they were not prepared correctly, I suggest you find out more about the transaction in question and determine exactly what he did, and it appears you are trying to do just that.He felt they might not have been prepared correctly.Roland Slugg
"I do what I can."Comment
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Google "loans of artwork charitable donation"... I found several interesting articles from various museums regarding this issue.
One detailed explanation
The taxpayer donation of artwork through fractional interest is valid but he can NOT get the artwork back.Originally posted by taxedtothemax View Post
"First, the donor must transfer all of the retained interest to the donee charity before the earlier of (1) 10 years after the initial contribution; or (2) the donor's death." IRC Section 170(o)(A)(3)(i).
" If the donor fails to satisfy either requirement, the donor must recapture, as ordinary income, the amount of the previously claimed deduction."
So I would definitely get more information on that 10 year period that he thinks he will get the artwork back. He can not by the rules as I understand them.Last edited by geekgirldany; 10-12-2014, 06:37 AM.Comment
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