Appreciated Property Charitable Donation

[WhiteOleander]

Client has a building he wants to sell to a church.

FMV and agreed sales price is $250,000. Can client actually sell the property for $200,000 to the church and show $50,000 as a charitable donation to the church? Perhaps show the sales price on the closing stament as $250,000 and a $50,000 donation on the statement?

If not, is there a way to structure the sale so this would be possible? The property has appreciated well beyond the $50,000 donation he wants to make.

[Bees Knees]

Yes, it would qualify for a charitable contribution deduction, but it isn’t quite as simple as taking the difference between FMV and the Sales Price. The Bargain Sale rules of Section 1011(b) kick in where you have to allocate a portion of the basis to the gift part, which means the gain on the sale part is increased accordingly, while the deduction on the gift part is reduced accordingly. I have never done this before so I can’t tell you exactly how to do this. If you would like, I could copy and paste the 8 or so examples on the message board that are from Regulation Section 1.1011-2 that illustrate how all these rules work.

[Bees Knees]

Well, I might as well post them anyway. I haven't read through all of them as I am involved with something else at the moment, but here they are for all to try and figure out.

(c) ILLUSTRATIONS. The application of this section may be illustrated by
the following examples, which are supplemented by other examples in
paragraph (d) of Section 1.170A-4:

EXAMPLE 1. In 1970, A, a calendar-year individual taxpayer, sells to
a church for $4,000 stock held for more than 6 months which has an
adjusted basis of $4,000 and a fair market value of $10,000. A's
contribution base for 1970, as defined in section 170(b)(1)(F), is
$100,000, and during that year he makes no other charitable
contributions. Thus, A makes a charitable contribution to the church
of $6,000 ($10,000 value - $4,000 amount realized). Without regard
to this section, A is allowed a deduction under section 170 of $6,000
for his charitable contribution to the church, since there is no
reduction under section 170(e)(1) with respect to the long-term
capital gain. Accordingly, under paragraph (b) of this section the
adjusted basis for determining gain on the bargain sale is $1,600
($4,000 adjusted basis x $4,000 amount realized/$10,000 value of
property). A has recognized long-term capital gain of $2,400 ($4,000
amount realized - $1,600 adjusted basis) on the bargain sale.

EXAMPLE 2. The facts are the same as in example (1) except that A
also makes a charitable contribution in 1970 of $50,000 cash to the
church. By reason of section 170(b)(1)(A), the deduction allowed
under section 170 for 1970 is $50,000 for the amount of cash
contributed to the church; however, the $6,000 contribution of
property is carried over to 1971 under section 170(d). Under
paragraphs (a)(2) and (b) of this section the adjusted basis for
determining gain for 1970 on the bargain sale in that year is $1,600
($4,000 x $4,000/$10,000). A has a recognized long-term capital gain
for 1970 of $2,400 ($4,000 - $1,600) on the sale.

EXAMPLE 3. In 1970, C, a calendar-year individual taxpayer, makes a
charitable contribution of $50,000 cash to a church. In addition, he
sells for $4,000 to a private foundation not described in section
170(b)(1)(E) stock held for more than 6 months which has an adjusted
basis of $4,000 and a fair market value of $10,000. Thus, C makes a
charitable contribution of $6,000 of such property to the private
foundation ($10,000 value - $4,000 amount realized). C's contribution
base for 1970, as defined in section 170(b)(1)(F), is $100,000, and
during that year he makes no other charitable contributions. By
reason of section 170(b)(1)(A), the deduction allowed under section
170 for 1970 is $50,000 for the amount of cash contributed to the
church. Under section 170(e)(1)(B)(ii) and paragraphs (a)(1) and
(c)(2)(i) of Section 1.170A-4, the $6,000 contribution of stock is
reduced to $4,800 ($6,000 - [50% x ($6,000 value of contributed
portion of stock - $3,600 adjusted basis)]). However, by reason of
section 170(b)(1)(B)(ii), applied without regard to section 1011(b),
no deduction is allowed under section 170 for 1970 or any other year
for the reduced contribution of $4,800 to the private foundation.
Accordingly, paragraph (b) of this section does not apply for
purposes of apportioning the adjusted basis of the stock sold to the
private foundation, and under section 1.1011-1(e) the recognized gain
on the bargain sale is $0 ($4,000 amount realized - $4,000 adjusted
basis).

EXAMPLE 4. In 1970, B, a calendar-year individual taxpayer, sells to
a church for $2,000 stock held for not more than 6 months which has
an adjusted basis of $4,000 and a fair market value of $10,000. B's
contribution base for 1970, as defined in section 170(b)(1)(F), is
$20,000 and during such year B makes no other charitable
contributions. Thus, he makes a charitable contribution to the church
of $8,000 ($10,000 value - $2,000 amount realized). Under paragraph
(b) of this section the adjusted basis for determining gain on the
bargain sale is $800 ($4,000 adjusted basis x $2,000 amount
realized/$10,000 value of stock). Accordingly, B, has a recognized
short-term capital gain of $1,200 ($2,000 amount realized - $800
adjusted basis) on the bargain sale. After applying section 1011(b)
and paragraphs (a)(1) and (c)(2)(i) of Section 1.170A-4, B is allowed
a charitable contributions deduction for 1970 of $3,200 ($8,000 value
of gift - [$8,000 - ($4,000 adjusted basis of property x $8,000 value
of gift/$10,000 value of property)]).

EXAMPLE 5. The facts are the same as in Example 4 except that B sells
the property to the church for $4,000. Thus, B makes a charitable
contribution to the church of $6,000 ($10,000 value - $4,000 amount
realized). Under paragraph (b) of this section the adjusted basis for
determining gain on the bargain sale is $1,600 ($4,000 adjusted basis
x $4,000 amount realized/$10,000 value of stock). Accordingly, B has
a recognized short-term capital gain of $2,400 ($4,000 amount
realized - $1,600 adjusted basis) on the bargain sale. After applying
section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of Section 1.170A-
4, B is allowed a charitable contributions deduction for 1970 of
$2,400 ($6,000 value of gift - [$6,000 - ($4,000 adjusted basis of
property x $6,000 value of gifts/$10,000 value of property)]).

EXAMPLE 6. The facts are the same as in Example 4 except that B sells
the property to the church for $6,000. Thus, B makes a charitable
contribution to the church of $4,000 ($10,000 value - $6,000 amount
realized). Under paragraph (b) of this section the adjusted basis for
determining gain on the bargain sale is $2,400 ($4,000 adjusted basis
x $6,000 amount realized/$10,000 value of stock). Accordingly, B has
a recognized short-term capital gain of $3,600 ($6,000 amount
realized - $2,400 adjusted basis) on the bargain sale. After applying
section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of Section 1.170A-
4, B is allowed a charitable contributions deduction for 1970 of
$1,600 ($4,000 value of gift - [$4,000 - ($4,000 adjusted basis of
property x $4,000 value of gift/$10,000 value of property]).

EXAMPLE 7. In 1970, C, a calendar-year individual taxpayer, sells to
a church for $4,000 tangible personal property used in his business
for more than 6 months which has an adjusted basis of $4,000 and a
fair market value of $10,000. Thus, C makes a charitable contribution
to the church of $6,000 ($10,000 value - $4,000 adjusted basis). C's
contribution base for 1970, as defined in section 170(b)(1)(F) is
$100,000 and during such year he makes no other charitable
contributions. If C had sold the property at its fair market value at
the time of its contribution, it is assumed that under section 1245
$4,000 of the gain of $6,000 ($10,000 value - $4,000 adjusted basis)
would have been treated as ordinary icome. Thus, there would have
been long-term capital gain of $2,000. It is also assumed that the
church does not put the property to an unrelated use, as defined in
paragraph (b)(3) of Section 1.170A-4. Under paragraph (b) of this
section the adjusted basis for determining gain on the bargain sale
is $1,600 ($4,000 adjusted basis x $4,000 amount realized/$10,000
value of property). Accordingly, C has a recognized gain of $2,400
($4,000 amount realized - $1,600 adjusted basis) on the bargain sale,
consisting of ordinary income of $1,600 ($4,000 ordinary income x
$4,000 amount realized/$10,000 value of property) and of long-term
capital gain of $800 ($2,000 long-term gain x $4,000 amount
realized/$10,000 value of property). After applying section 1011(b)
and paragraphs (a) and (c)(2)(i) of Section 1.170A-4, C is allowed a
charitable contributions deduction for 1970 of $3,600 ($6,000 gift -
[$4,000 ordinary income x $6,000 value of gift/$10,000 value of
property]).

[WhiteOleander]

Thanks so much Bees Knees. This is one of those deals where your client has a friend who did this. But, I can't talk to the friend or his tax preparer to find out just exactly what they are talking about.

Now I know how to respond to my client.