FLIP-CRUT Basics – Unmarketable Assets Defined

In a prior post, we discussed the FLIP-CRUT concept in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Standard Charitable Remainder Trust at a fixed percentage distribution.

We also discussed various Treasury Department definitions of Triggering Events, which are deemed not to be under the control of the Trustee or any other person.

One of the most common types of Triggering Events is the sale of Unmarketable Assets, such as the sale of a Personal Residence, other real or commercial property, securities or business holdings that are not publicly traded, and lack any formal marketplace to value and sell.

In Treasury Regulations §1.664-1(a)(7)(ii), the definition of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. For example, unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Using a FLIP-CRUT to Sell Appreciated Real Estate

Why this definition is important:

If you have a piece of real estate that is highly appreciated in value, and selling it outright would trigger substantial capital gains, a Charitable Remainder Trust is an excellent way to defer the tax on sale.

If you contribute the real property to a Charitable Remainder Trust after a binding commitment to sell exists, then the IRS will disallow the deduction based on the Step Transaction Doctrine.

However, placing real property in a Standard Charitable Remainder Trust – with its fixed annual commitment to pay the income to the Donor – may also not be feasible.

If the real property takes a longer time to sell (certainly more than a year) then a Standard Charitable Remainder Trust will not work.

This is why the Treasury Department’s inclusion of Real Property as not readily marketable is critical.  It allows you to contribute the asset immediately, take the appropriate deductions, and then convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to accomplish the annual payout requirements.

Therefore, the FLIP-CRUT is the preferred vehicle when selling appreciated assets that are not readily marketable, such as real estate.

Contact a Planned Giving Attorney with Ainer and Fraker 408-777-0776 right away to learn more about the incredibly powerful tax benefits of a FLIP-CRUT.

Adequate Charitable Gift Documentation

Family Philanthropy Lawyers – Ainer & Fraker, LLP

The IRS recently denied a taxpayer’s substantial charitable contribution to his church because the acknowledgement letter from the church lacked the required no goods or services provided statement. The church supplied the taxpayer (we’ll call him Bill) with a replacement acknowledgement letter that included the statement, but the IRS rejected the replacement since it was not received contemporaneously. An obviously upset Bill took the issue to tax court but ended up with the same result – no deduction – because his documentation did not meet the law’s requirements.

To make sure you don’t get caught up in similar unfortunate circumstances, take a moment to review the rules for monetary charitable contributions:

  1. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record (for example, a canceled check or a credit card receipt) or a written communication from the donee organization showing its name, plus the date and amount of the contribution. It’s not sufficient to maintain other written records, such as a log of contributions.
  2. No charitable deduction is allowed for any contribution of $250 or more, even if you have the documentation listed in #1 above, unless you substantiate the contribution by a
    contemporaneously written acknowledgement of the contribution by the donee organization. Contemporaneously means you must have the receipt in hand by the time you file your return (or by the due date, if earlier); if you don’t, you won’t be able to claim the deduction. It is up to the donor to request the acknowledgment from the donee organization; the law does not require the organization to automatically provide the acknowledgment.
  3. The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed. In addition, the acknowledgement must include a statement indicating whether the donee provided any goods or services other than intangible benefits, and if so, a good-faith estimate of the value of any such goods or services.

However, if Bill had made separate contributions of less than $250 each and had met the requirements of #1 above, he would not have had the problems he did. Certainly, Bill and his church have learned a valuable but costly lesson.

Make sure you don’t end up with the same problem. Review your charitable acknowledgements and make sure they meet the requirements above.

Fundraising by Charitable Organizations

Ainer & Fraker, LLP – A regular form of fundraising by charitable organizations consists of sales or auctions of property or services at a price in excess of value.

These are referred to as “quid pro quo” contributions or dual payments made that consist partly of a charitable gift and partly of consideration for goods or services provided to the donor.

Quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, etc., and are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution.

Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the good or services purchased.

Example #1 – A taxpayer purchases a cookbook from a charity for $100. The charity provides the taxpayer with a good faith estimate of $20 for the value of the book in a written disclosure statement. Thus, the taxpayer’s charitable deduction is $80 ($100 minus the $20 value of the book).

Example #2 – A taxpayer attends a charity auction. The charity provides a catalog of the items for auction and a good-faith estimate of the value of each item. The taxpayer is the successful bidder for a vase valued at $100 in the catalog, for which the taxpayer bid and paid $500. The taxpayer’s charitable deduction is $400 ($500 minus the good-faith valuation of $100).

Example #3 – A taxpayer pays $40 to see a special showing of a movie for the benefit of a qualified charity. The ticket read “Contribution $40”. If the regular price for the movie is $10, the contribution would be $30 ($40 minus the regular $10 ticket price).

 

Charitable Deductions for Travel Expenses

Ainer & Fraker, LLP – Charitable deductions are allowed only for travel expenses (including meals and lodging) by volunteers who do charitable work for their organization while they are away from home on the charity’s behalf.

Unlike other areas of taxes, meals are not subject to the 50% limitation. Any “significant element of personal pleasure” negates a complete deduction (i.e., not even a partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay. If the taxpayer’s personal vehicle is used for the charitable travel, then the taxpayer may deduct the cost of gas and oil, but not depreciation, insurance, or repairs. As an alternative to deducting the cost of gas and oil, the taxpayer can use the current standard mileage rate of 14 cents per mile for charitable travel. The taxpayer can also deduct parking fees and tolls, whether actual expenses or the standard mileage rate is used.

The 14 cents per mile is not adjusted for inflation, so the current high cost of gasoline may well make it appropriate to document the cost of gas and oil for charitable trips. For example, when this article was prepared, gasoline prices were in the range of $4.50 per gallon in many parts of the country. Assuming that a vehicle gets 20 miles to the gallon, this turns out to be 22.5 cents per mile just for the cost of gasoline. Where there is significant charitable usage, it may be worth the time to document the gasoline usage for the year.

Car expenses record requirements – If you claim expenses claimed directly relate to the use of the taxpayers car in giving services to a qualified organization, reliable written records must be kept of the expenses. Whether the records are considered reliable depends on all of the facts and circumstances. Generally, they may be considered reliable if the taxpayer made them regularly and at or near the time in which the expenses were incurred.

For example, the records might show the name of the organization the taxpayer was serving, as well as the dates the car was used for a charitable purpose. If the standard mileage rate of 14 cents per mile was used, the records must show the number of miles that the taxpayer drove the car specifically for the charitable purpose. If actual expenses are deducted, the records must show the costs of operating the car that are directly related to a charitable purpose.

How To for Donating a Vehicle

Bay Area Tax Lawyers – Congress has imposed tough rules that substantially limit the deduction for this charitable donation.

It is common practice for charities to immediately resell the donated vehicles to a wholesaler at substantially reduced prices, generally far less than the Fair Market Value (FMV) one might consider as the listed bluebook FMV of the vehicle.  As a result and to keep taxpayers from deducting more than the charity benefited from the donation, if the deduction exceeds $500, the deduction will be limited to the gross proceeds from the charity’s sale of the vehicle.

Example: A taxpayer donates a car with a FMV of $2,000 to a charity. The charity immediately sells the car to a wholesaler for $900. The taxpayer would only be able to deduct the gross proceeds from the charity’s sale. This limits the taxpayer’s charitable contribution deduction to $900.

In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS  Form 1098-C incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. This form must be obtained within 30 days of the sale of the donated vehicle. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat or airplane.

There is an exception to these rules for donated vehicles which the charity retains for their own use “to substantially further the organization’s regularly conducted activities” or sells it at a price significantly below FMV (or gives it away) to a needy individual in direct furtherance of the charitable purpose of a donee of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.

Is My Charity “Qualified?”

Bay Area Tax Attorneys – Money or property that you donate to “qualified” charitable organizations can be included in your itemized deductions as a charitable contribution. But what is a “qualified” charity? The IRS provides an on-line search for qualified organizations.

A qualified charitable organization will fall into one of the following categories:

  • Churches, synagogues, temples, mosques, and other religious organizations.
  • Federal, state, and local governments, if your contribution is solely for public purposes. This generally includes local government, public schools, Indian tribal government, and governments of U.S. Possessions.
  • Nonprofit schools and hospitals.
  • Nonprofit volunteer fire companies, public parks and recreation facilities, and civil defense organizations.
  • Organizations organized and operated for charitable purposes, such as the Salvation Army, Red Cross, Goodwill Industries, United Way, Boy Scouts, Girl Scouts, March of Dimes, etc.
  • Certain organizations that foster national or international amateur sports competition.
  • War veterans’ organizations, including posts, auxiliaries, trusts, or foundations organized in the United States or any of its possessions.
  • Domestic fraternal societies, orders, and associations operating under the lodge system.
  • Certain Canadian and Mexican charities allowed by treaty – however, generally to deduct your contribution you must have income from sources within the country.

Tax Deductions for Volunteering

According to Bay Area Family Philanthropy Lawyers, if you volunteer your time for charity, you may qualify for tax breaks!

Although no tax deduction is allowed for the value of services performed for a charity, some deductions are permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:

  • Away-from-home travel expenses while performing services for a charity, including out-of-pocket roundtrip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%. Unlike other areas of taxes, meals are not subject to the 50% limitation. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. Any “significant element of personal pleasure” negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay.
  • The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed at 100 % (but the cost of your own entertainment or meal is not deductible).
  • If you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
  • You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed for a contribution of $250 or more unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution:

  • Get written documentation from the charity about the nature of your volunteering activity and the need to pay for related expenses. For example, if you travel out-of-town as a volunteer, request a letter from the charity explaining why you’re needed at the out-of-town location.
  • Submit a statement of expenses if you are out-of-pocket for substantial amounts, and preferably, a copy of the receipts to the charity. Also, arrange for the charity to acknowledge the amount of the contribution in writing.
  • Maintain detailed records of your out-of-pocket expenses, including receipts and a written record of the time, place, amount and charitable purpose of the expense.

Non-Monetary Contributions

When you give away household items like clothing, appliances and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions.

Ainer & Fraker, LLP confirms that the amount of your deduction is generally the donated property’s “fair market value” (i.e., the price similar property would sell for in the open market).

Unfortunately, one of the most difficult problems connected with noncash donations is determining their FMV. In fact, when you give away property of high value, the job of determining worth is best left in the hands of a professional appraiser. Or, when you donate property that has increased in value, special tax rules apply and you should consult with an attorney before you make your donation.

The guidelines offered below are provided as aids for setting value on the most common type of noncash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired:

  • Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what you paid for them. A visit to a local thrift shop may help give you an idea of current selling prices for items like yours.
  • Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation.
  • Cars and Other Vehicles: Congress imposed some tough rules that substantially limit the deduction for this popular charitable donation.

For more information, be sure to click the following link for more on Record Keeping and Reporting of Non-Cash donations.

Record Keeping & Reporting of Non-Cash Donations

Your recordkeeping of non-cash donations depends on the dollar amount of your gift. That value also determines the manner in which donations get reported on your tax return.

  • Gifts valued at less than $250: You will need a receipt from the charity showing the date of your contribution, the organization’s address, and a reasonably detailed description of the property. The receipt doesn’t have to state the value of the property you gave away. Keep in mind that you aren’t required to have a receipt when it’s impractical to get one, for example, if you deposit your donation at an unattended bin site. But whether or not a receipt is required, you still need to keep a written record of each item you give away.
  • Gifts of $250 but not over $500: For goods valued in this category, you must obtain a timely written acknowledgment of your gift from the charity. Without the written acknowledgment, you get no charitable deduction. The acknowledgment needs to contain the following information: (a) a description of the property you gave away, and (b) whether you received any goods or services from the charity in return for your gift (if so, the value of the goods or services needs to be stated).
  • Gifts over $500 but not over $5,000: For donations of this amount, you must have a receipt from the charitable organization in the same format described under “Gifts of $250 but not over $500”; otherwise, you’ll get no deduction. However, the information required to be included in the written record must also include details about your acquisition of the property donated. In addition, deductions for these larger gifts require attaching a special IRS form to your tax return for the year of your contribution.
  • Gifts over $5,000: You are required to obtain a qualified appraisal and attach an “appraisal summary” to your tax return. The values of all items donated during the year that are similar in nature are added together to determine whether this rule applies. Since many complicated rules can apply to contributions in this category, it’s best to contact this office before you make your contribution. Recordkeeping for gifts valued over $5,000 are the same as those listed previously for “Gifts over $500 but not more than $5,000.” In addition, you are required to get an authorized signature from an official of the charitable organization. Page 2 of IRS Form 8283