Case of the Week

Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.

Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.

The condition of the building turned many buyers away. It was being sold "as-is," but Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.

After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building – a $2 million interest! This was no surprise to Karl. He knew the building was another great buy.

After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. (See Parts 1 and 2 for a full discussion of this decision.) It looked like the perfect solution. However, Karl did still have some important questions.

Question:

Karl wants to know what IRS forms need to be filed in order to substantiate his charitable income tax deduction. He knows the IRS will not just "take his word for it."

Solution:

This is a very important question and, accordingly, it is crucial that Karl follow the valuation and substantiation rules closely. In fact, taxpayers may lose their charitable income tax deductions when the required forms are not properly filed. In this case, Karl is making a gift of property (i.e., the building and land). Therefore, the critical form for Karl's situation is IRS Form 8283.

The basic rule states that if a donor makes a noncash charitable contribution greater than $500, Form 8283 must be included with his or her income tax return. Karl's property gift easily surpasses this $500 threshold, so he must file Form 8283.

The first section of Form 8283 – Part A – must include a description of the property. For tangible personal property, this description should include the general condition of the property. In addition to the description, if there are any restrictions or reservations of income, voting rights, acquisition rights or limits on use, those should be disclosed. For example, all charitable remainder trust interests must be disclosed. One method for disclosure is to attach the deduction calculation to Form 8283.

For gifts of property over $5,000 in value ($10,000 for closely held stock), Part B of Form 8283 must also be completed. Part B is essentially an appraisal summary. Karl's property gift exceeds $5,000, so he must complete Part B as well. There is an exception to this rule for publicly traded securities. Form 8283 instructions state that public securities are reported only on Part A. For public securities, signatures by the appraiser and charitable donee on Form 8283 are not required. However, public securities gifts over $250 still require a receipt or "contemporaneous written acknowledgement" from the charitable donee.

Part B requires that both the appraiser and the charitable donee sign and date Form 8283. With a charitable remainder unitrust or annuity trust, there may not be a vested charitable donee as the remainder recipient. Therefore, for all unitrusts or annuity trusts, the trustee signs as the charitable donee on Part B of Form 8283. In this instance, Karl is making a gift to a FLIP CRUT. Thus, the trustee of the FLIP CRUT will sign Part B of Form 8283.

If the noncash gift is over $500,000 in value, then both the Form 8283 and the appraisal are required to be attached to the donor's tax return. The appraiser and the charity still must sign the Form 8283. However, the full appraisal must be attached to the donor's income tax return. Sec. 170(f)(11)(D).

Finally, Karl must provide a copy of Form 8283 to the charitable donee or, in this case, the CRT trustee. The signature of the charitable donee or trustee is merely to acknowledge the receipt of the property. As such, the charitable donee or trustee is making no statement as to the proper value of the donated property.

Editor's Note: In Part 11 of this case study series, we addressed the appraisal rules and qualifications for an appraiser.