Charitable Gifts Of Property
This quiz is part of the introductory curriculum for the graduate course Personal Financial Planning 5325 "Introduction to Charitable Planning" from Texas Tech University. For free downloads of the audio lectures and PowerPoint slides for this course, or to learn about the online Graduate Certificate in Charitable Financial Planning at Texas Tech University, go to www. EncourageGenerosity. Com
Questions and Answers
- 1.
When can you deduct the portion of value of a gift of property that has previously been deducted as a depreciation deduction?
- A.
Only when fair market valuation is permitted
- B.
Only when cost basis valuation is permitted
- C.
When either cost basis or fair market valuation is permitted
- D.
Only when giving to a public charity
- E.
Never
Correct Answer
E. NeverExplanation
If the value of the property that had been previously depreciated (deducted as a depreciation deduction) were allowed to be deducted again as a charitable contribution, it would allow the taxpayer to deduct the same item twice, which is not permitted.Rate this question:
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- 2.
I give real estate to a public charity. I originally paid $10,000 for it 2 months ago. I have taken no depreciation deductions. Its current fair market value is $20,000. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
C. $10,000Explanation
Deducting fair market value ($20,000) for real estate is allowed only for long-term capital gain property. Because this property was purchased 2 months ago, any gain is not long term capital gain. (Long-term capital gain requires that the owner held the property for more than one year.) Consequently, only the basis can be deducted. The original price was $10,000, so original cost basis was $10,000. There have been no depreciation deductions, so no adjustments to the original basis have occurred, meaning the maximum deductible gift is $10,000.Rate this question:
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- 3.
I give real estate to a private (non-operating) foundation. I originally paid $10,000 for it 2 years ago. I have taken depreciation deductions for $5,000 of that original price. Its current fair market value is $20,000. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
B. $5,000Explanation
Because this property was purchased 2 years ago, it is long term capital gain property. (Long-term capital gain requires that the owner held the property for more than one year.) However, gifts of long-term capital gain property to a private (non-operating) foundation do not qualify to be deducted at Fair Market Value (even though the same property, donated to a public charity, could qualify for a Fair Market Value deduction). Consequently, only the basis can be deducted. The original price was $10,000, so original cost basis was $10,000. Since that time $5,000 has been taken as depreciation deductions. Depreciation reduces the basis. (The idea is that depreciation is like a claim that something is “wearing out,” so we can pretend that $5,000 of the original $10,000 of value has disappeared, and deduct this loss.) Consequently, the current adjusted basis is only $5,000 (calculated as the original $10,000 less the $5,000 of depreciation deduction). Thus, the maximum deductible gift is $5,000.Rate this question:
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- 4.
I give real estate to a public charity. I originally paid $10,000 for it 2 years ago. I have taken depreciation deductions for $5,000 of that original price. Its current fair market value is $20,000. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
D. $15,000Explanation
Because this property was purchased 2 years ago, it is long term capital gain property. (Long-term capital gain requires that the owner held the property for more than one year.) Because the property is being given to a public charity I can deduct the fair market value. However, for deduction purposes, fair market value is its current value less any depreciation deductions already taken, or $20,000-$5,000. This has to be the rule, otherwise a taxpayer could deduct the same dollars twice. (E.g., if we didn’t reduce the deduction by depreciation, I could pay $20,000 for property, deduct the full $20,000 as depreciation losses, then give it away and deduct the full $20,000 again!)Rate this question:
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- 5.
I give real estate to a public charity. I originally paid $10,000 for it 2 years ago. I have taken depreciation deductions for $5,000 of that original price. Its current fair market value is $20,000. I take a special election so that I can deduct long-term capital gain gifts up to 50% of my income. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
B. $5,000Explanation
Taking the special election provides the benefit of deducting up to 50% of one’s income, but it comes at the cost of being able to deduct only the basis in the property and not the fair market value. If I had not taken the “special election,” I could have deducted this gift at fair market value. However, having taken the “special election” by deduction is limited to basis. My original cost basis was $10,000, from which I have deducted $5,000 as depreciation deductions, leaving an adjusted basis of $5,000. Thus, $5,000 is my maximum charitable deduction.Rate this question:
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- 6.
I give furniture (not considered business inventory) from my home business to a public charity. I originally paid $10,000 for it 2 years ago. I have taken depreciation deductions for $5,000 of that original price. Its current fair market value is $20,000. The charity sells the furniture at its annual benefit auction. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
B. $5,000Explanation
Because this property was purchased 2 years ago, it is long term capital gain property. (Long-term capital gain requires that the owner held the property for more than one year.) However, gifts of unrelated use tangible personal property can be deducted only at cost basis (even though other types of long-term capital gain can be deducted at fair market value). This gift is personal property (furniture) and the charity is not using it for exempt purposes, but rather is simply selling it. Thus, this property is a gift of unrelated use tangible personal property. The original cost basis for this property was $10,000, but that amount has been reduced by the $5,000 of depreciation deductions already taken, leaving an adjusted basis of $5,000.Rate this question:
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- 7.
I give good quality furniture (not considered business inventory) from my home business to a public charity. I originally paid $10,000 for it 2 years ago. I have taken depreciation deductions for $5,000 of that original price. Its current fair market value is $20,000. The charity uses the furniture in its business office. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
D. $15,000Explanation
Because this property was purchased 2 years ago, it is long term capital gain property. (Long-term capital gain requires that the owner held the property for more than one year.) Gifts of unrelated use tangible personal property can be deducted only at cost basis, but in this case the tangible personal property is related use tangible personal property, because the charity is using this personal property in its own office. Thus, we can deduct the fair market value ($20,000) less any depreciation deductions that have already been taken ($5,000), for a total of $15,000.Rate this question:
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- 8.
I give shares of Microsoft Corporation to a private (non-operating) foundation. I originally paid $10,000 for it 2 years ago. Its current fair market value is $20,000. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
E. $20,000Explanation
Long-term capital gain property given to a private foundation is normally deductible at cost basis. However, if the property giving is “qualified stock,” the donor can take the fair market value deduction. This “qualified stock” exception requires that market quotations are available (i.e., it is publicly traded) and that not more than 10% of the company is given to the foundation. In this case, Microsoft stock is regularly traded, and $20,000 worth of stock would reflect less than 0.00001% of the total company value. Thus, the is a gift of “qualified stock” and can be deducted at Fair Market Value, which is $20,000.Rate this question:
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- 9.
I give shares representing 20% ownership in a local locksmith business to a private (non-operating) foundation. I originally paid $10,000 for the shares 2 years ago. Their current fair market value is $20,000. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$5,000
- C.
$10,000
- D.
$15,000
- E.
$20,000
Correct Answer
C. $10,000Explanation
Long-term capital gain property given to a private foundation is normally deductible at cost basis. However, if the property giving is “qualified stock,” the donor can take the fair market value deduction. This “qualified stock” exception requires that market quotations are available (i.e., it is publicly traded) and that not more than 10% of the company is given to the foundation. In this case more than 10% of the company is being given, so the gift cannot be “qualified stock”. (In addition to which, a local locksmith business would not have market quotations for its shares of stock.) Consequently, the “qualified stock” exception does not apply, and the normal rule must be followed, allowing a deduction of only the basis in the stock or $10,000.Rate this question:
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- 10.
I give several bags of clothing in poor condition to the local Salvation Army charity. Originally, I purchased the clothes for a total of $4,000 three years ago. I have a qualified appraisal that proves the total value of the clothes is $400. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$400
- C.
$3,600
- D.
$4,000
- E.
$4,400
Correct Answer
A. $0Explanation
No deduction is allowed for clothing and household items unless the items are in “good used condition or better” or the donor is giving more than $500 worth of clothes as shown by a qualified appraisal. Neither exception applies here as the clothes are in poor quality and qualified appraisal indicates the total value is only $400. Thus, no deduction is allowed.Rate this question:
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- 11.
I give an automobile to a local public charity. I purchased the car for $5,000 three years ago. I have a qualified appraisal that proves the current value of the car is $6,000. After receiving the car, the charity sells it at a poorly attended benefit auction for $800. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$500
- C.
$800
- D.
$5,000
- E.
$6,000
Correct Answer
C. $800Explanation
If the charity sells the automobile, rather than keeping it and using it in the conduct of their charitable purposes, the maximum deduction is the money actually received by the charity for selling the automobile ($800). Thus, in this case the basis of the car ($5,000) and the fair market value of the car ($6,000) become irrelevant because the charity actually received only $800 when the car was sold.Rate this question:
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- 12.
A newly formed local natural history museum (a public charity) puts out a request for donations of specimens of rare animals, such as the Komodo dragon. To do my civic duty I purchase a special lizard gun, fly to Indonesia, stay in a local village, track down a Komodo dragon, shoot it, pay to have it stuffed at a local taxidermist, attempt to take is as carry-on luggage, then have to pay an extra checked baggage fee at the gate, return home and donate the stuffed dragon to the natural history museum. The natural history museum uses the dragon in its display entitled “recently killed endangered animals.” My expenses are travel=$2,000; meals & lodging =$1000; special lizard gun=$1,000; cost of taxidermy=$200. A qualified appraiser values the stuffed dragon at $6,000. What is the maximum deductible amount of this gift?
- A.
$0
- B.
$200
- C.
$3,200
- D.
$4,200
- E.
$6,000
Correct Answer
B. $200Explanation
Because of special action by congress to prevent abuse, deductions for gifts of taxidermy are limited to the cost of stuffing the animal only and do not include any other expenses associated with obtaining the animal.Rate this question:
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- 13.
I write a new book on the History of Ducks Unlimited. I donate the copyright for the book to Ducks Unlimited (a public charity). A qualified appraisal indicates that the copyright is worth $50,000. My cost basis in creating the book was only about $50 worth of paper and ink. How much can I deduct for this gift?
- A.
$0
- B.
$50
- C.
$50,000
- D.
$50 + a share of revenue from the copyright for the next 12 years
- E.
$50,000 + a share of revenue from the copyright for the next 12 years
Correct Answer
D. $50 + a share of revenue from the copyright for the next 12 yearsExplanation
Because of the uncertainty in valuating intellectual property, there is a special rule for valuing charitable gifts of copyrights, patents, and trademarks. Under this rule the donor may deduct the lesser of fair market value or cost basis. In addition, the donor may deduct a portion of any revenue that comes to the charity through the charity’s ownership of the copyright. The actual sliding scale for deductions in subsequent years is Year 1 - 100%; Year 2 - 100%; Year 3 - 90%; Year 4 - 80%; Year 5 - 70%; Year 6 - 60%; Year 7 - 50%; Year 8 - 40%; Year 9 - 30%; Year 10 - 20%; Year 11 - 10%; Year 12 - 10%.Rate this question:
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- 14.
I create a piece of artwork involving my shredding, gluing and painting hundred dollar bills to a canvass. My cost basis in creating the art is $10,000. The art is ugly and pointless and has a fair market value of $1. I give this art to a local art gallery (a public charity), and they place it in their quarterly public auction. How much can I deduct for my gift of art to the charity?
- A.
$0
- B.
$1
- C.
$9,999
- D.
$10,000
- E.
$10,001
Correct Answer
B. $1Explanation
The cost basis in any property can be deducted only if it is less than fair market value. In no cases can the cost basis be deducted if it is more than fair market value. In this case cost basis ($10,000) exceeds fair market value ($1), so the deduction is for the fair market value of $1.Rate this question:
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- 15.
A local public charity for children puts out a request for new stuffed animals. I give 500 stuffed animals, each of which normally retails for $10 at local specialty shops ($10 X 500 = $5,000). I purchased the stuffed animals in an e-bay auction 15 months ago, where I was able to buy the entire lot for $2,000. When sold in lots of 500, these stuffed animals usually sell for $2,500 per lot today. The charity accepts the gift and uses the stuffed animals in its charitable operations. How much can I deduct for my gift?
- A.
$0
- B.
$2,000
- C.
$2,500
- D.
$3,000
- E.
$5,000
Correct Answer
C. $2,500Explanation
This is a gift of long-term capital gain property because it was purchased more than 12 months before the gift. It is not unrelated use tangible personal property because the charity is using the items in their charitable operation. Thus, the donor may deduct the fair market value of the donation. However, to arrive at the fair market value for gifts of large quantities, the items must be valued as a group, rather than multiplying the value of one individual item by the total number. In this case, the phrase, “when sold in lots of 500, these stuffed animals usually sell for $2,500 per lot today,” indicates that the fair market value is $2,500.Rate this question:
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- 16.
Sarah donor takes her grandmother’s antique solid gold tea set out of her attic. She has owned it for many years following the death of her grandmother. Sarah decides to give it to the local historical society (a public charity), and they use it as a regular part of one of their seasonal displays for visitors. Sarah investigates the value of the tea set by checking various auction sites and guesses it is worth about $200,000. She gets a qualified appraisal (at a price of $100) showing the value to be $200,000. She deducts the $200,000 and pays $40,000 less tax because of the deduction. After the deduction is taken, the IRS auditor uncovers that, in fact, this particular tea set was a reproduction, rather than an original, and its actual value was only $110,000, and that Sarah should have paid $18,000 more in taxes. In addition to correcting the valuation error and paying the taxes due, what additional penalties for the valuation error will the IRS charge?
- A.
$0 to the taxpayer; $125 to the appraiser
- B.
$0 to the taxpayer; $1000 to the appraiser
- C.
$0 to the taxpayer; $1,800 to the appraiser
- D.
$3,600 to the taxpayer, $125 to the appraiser
- E.
$7,200 to the taxpayer, $0 to the appraiser
Correct Answer
A. $0 to the taxpayer; $125 to the appraiserExplanation
Normally the taxpayer would have to pay a 20% penalty on the unpaid taxes of $18,000 (i.e., a penalty of $3,600) because the valuation was more than 1.5 times actual value and resulted in more than $5,000 of tax underpayment. However, because the valuation was based on a qualified appraisal, and the donor made a good faith investigation of value, and the valuation was less than 2 times the actual value, there are no taxpayer penalties. The appraiser is penalized because the valuation was greater than 1.5 times the actual value. The appraiser’s penalty is the greater of $1,000 or 10% of the tax payment up to 125% of the appraisal fee. The appraisal fee was $100, making the maximum penalty $125.Rate this question:
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- 17.
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