How charitable gifts of business and investment assets work

By Richard C. Wilson

Start with the asset, the proposed recipient and the transfer documents. Gather acquisition records, adjusted basis, ownership information, debt documents and any pending sale agreements. Use those records to review deduction treatment, appraisal requirements, transaction timing and recipient tax issues with your advisers.

Research notice: The authorities below include the charitable contribution statute, Treasury regulations on noncash gifts and appraisals, and recipient tax provisions. The two IRS advice documents discussed here are nonprecedential and depend on their particular facts. Ask an estate attorney or CPA to review the proposed contribution before acting.

Private foundation deduction review

A property contribution to or for the use of a private foundation generally requires reducing the deduction by the gain that would have been long term capital gain on a sale at fair market value at the time of contribution. This reduction does not apply to foundations described in §170(b)(1)(F). Qualified appreciated stock has a separate statutory exception.

For that stock exception, the shares must be capital gain property with market quotations readily available on an established securities market on the contribution date. The exception excludes the portion exceeding 10% of the corporation's outstanding stock by value. Count prior such contributions by the donor and contributions by family members defined in §267(c)(4).

Other deduction reductions still apply. The 10% threshold is not indexed for inflation.

Identify the recipient's classification before comparing deduction treatment. Bring a history of stock gifts by the donor and relevant family members if the appreciated stock exception is part of that review.

Records and appraisals depend on the size of the gift

For an individual donor, noncash deductions over $500 through $5,000 require Form 8283 Section A. Above $5,000, Section B generally applies, subject to the exceptions below.

The following property uses Section A without a qualified appraisal even above $5,000, including above $500,000:

• Publicly traded securities.
• Specified intellectual property described in §170(e)(1)(B)(iii).
• Inventory or property held primarily for sale to customers in the ordinary course of business.
• A qualified vehicle sold under §170(f)(12)(A)(ii), with the required sales acknowledgment.

The statutory exception for failure due to reasonable cause and not willful neglect remains applicable. The $500, $5,000 and $500,000 thresholds are not indexed for inflation.

Gather the property's description, approximate acquisition date, manner of acquisition, adjusted basis, valuation and applicable signatures. See the answer about the charity's signature before treating a signed form as approval of the value.

Similar property and reporting

For substantiation thresholds, aggregate deductions for similar property contributed during the same taxable year across all recipients. Similar property means property of the same generic category or type. For property covered by §170(e)(3) or (4), count only the claimed deduction exceeding the hypothetical cost of goods sold.

A separate Form 8283 generally is required for each contributed item requiring that form. One form may cover similar items contributed to the same recipient during the donor's taxable year if it provides the required information for every item. Organize the records by both property category and recipient.

Appraisal timing

A qualified appraisal must be signed and dated no earlier than 60 days before the contribution. It must be signed no later than the applicable return deadline, including extensions, and the donor must receive it before that deadline.

Use the deadline for the return on which the deduction is first claimed. For a partnership or S corporation, use the return first reporting the deduction. If the deduction is first claimed or reported on an amended return, use that return's filing date.

The valuation effective date is a separate requirement. A report dated before the contribution must value the property within the preceding 60 days through the contribution date. A report dated on or after the contribution must value the property on the contribution date.

Put the appraisal signature date, valuation effective date, contribution date and donor receipt date on the same preparation list. Ask the appraiser and return preparer to review the dates together.

Appraisal contents

A qualified appraisal must identify the contributed property in enough detail for a person unfamiliar with the property type to recognize it. For real or tangible personal property, it must also describe the property's condition.

The report must include:

• The valuation effective date and fair market value on that date.
• Relevant agreements or understandings between the donor and recipient concerning use, sale or disposition.
• The contribution date or expected contribution date.
• The appraiser's name, address, taxpayer identification number and qualifications, including education and experience for the property type.
• The appraiser's signature, signature date and required declaration.
• A statement that the appraisal was prepared for income tax purposes.
• The valuation method and specific supporting basis.

If the gift is a partial interest, the appraisal must value that contributed interest itself. An appraisal of the entire holding does not substitute for the required appraisal of the partial interest.

Ask the appraiser to work from the proposed transfer documents. Keep agreements concerning later use, sale or disposition available for review.

Qualified appraiser status has exclusions

A qualified appraiser must have verifiable education and experience in valuing the property type. This requires qualifying coursework plus at least two years of experience, or a recognized appraiser designation for that property type. The appraisal must state the appraiser's education and experience and contain a declaration of qualification.

The appraisal fee cannot depend to any extent on the appraised value.

The appraiser exclusions cover:

• The donor and recipient.
• Parties to the transaction in which the donor acquired the property, subject to the exception below.
• Persons related under §267(b) to, or employed by, the donor, recipient or acquisition parties.
• Spouses of those related persons or employees.
• Independent contractors regularly used as appraisers by the donor, recipient or acquisition parties who do not perform a majority of their appraisals for others during the taxable year.

The acquisition party exception requires contribution within two months of acquisition and an appraised value no greater than the acquisition price.

An appraisal is not qualified for a contribution if the donor fails to disclose or misrepresents facts and a reasonable person would expect that failure or misrepresentation to cause the appraiser to misstate the property's value. Give the appraiser the transaction history and relevant agreements before requesting a final report.

Closely held company shares raise sale timing questions

A gift involving a pending company sale requires a factual assignment of income review. Completing the sale after the gift does not settle the issue.

Nonprecedential IRS advice discusses whether the donor already had a fixed right to income. Its analysis includes practical certainty, control and the recipient's ability to change the disposition. A legally enforceable right to income is only one factor.

For redemptions factually similar to Palmer, the advice describes the IRS rule as treating redemption proceeds as the donor's income only if the recipient is legally bound or can be compelled by the corporation to surrender the shares for redemption. This is not a universal merger or sale test.

Prepare a transaction chronology for counsel before the proposed contribution. Include sale discussions, agreements, approvals, tender activity, redemption arrangements and the recipient's role in deciding what happens to the shares.

Real estate and LLC interests involve ownership mechanics

For a contribution outside trust of less than the donor's entire property interest, the deduction is limited to the amount that would be deductible if the interest were transferred in trust. Giving the right to use property counts as giving a partial interest.

The partial interest restriction has exceptions for an undivided portion of the donor's entire interest, a remainder in a personal residence or farm, and a qualified conservation contribution. These exceptions do not establish that every fractional land or LLC gift qualifies.

For domestic eligible entities without a contrary election, the federal defaults generally classify an entity with two or more members as a partnership and an entity with one owner as disregarded. The regulation preserves specified existing entity classifications. Eligible entities may elect corporate classification.

Bring the LLC's classification elections and ownership records to the review. Ask counsel to identify the precise interest being transferred before the appraiser values it.

Debt and charitable bargain sales

Under the charitable bargain sale rules, debt on transferred property is treated as amount realized even if the recipient does not agree to assume or pay it. Basis is allocated when a §170 deduction is allowable, including the regulation's carryover or postponement situations.

If no deduction is allowable after §170's limits and no carryover or postponement rule applies, the entire adjusted basis is used in computing sale gain.

Consider hypothetical mortgaged investment property with $100,000 fair market value, $40,000 adjusted basis and $30,000 debt as the only consideration. Review the calculation in this order:

1. Treat the $30,000 debt as amount realized, even without the recipient agreeing to assume or pay it.
2. Subtract $30,000 from $100,000 to identify a $70,000 contributed portion before deduction reductions.
3. Test deduction allowability under §170, including percentage limits, without regard to the basis allocation regulation. Determine the §170(e)(1) reduction using a hypothetical sale of the contributed portion at fair market value.
4. If basis allocation applies under the conditions above, multiply $40,000 by $30,000 divided by $100,000 to allocate $12,000 of basis to the sale component.
5. Subtract the $12,000 allocated sale basis from $30,000 amount realized to obtain $18,000 gain.

Each arithmetic result is exact and uses no rounding. The $70,000 contributed portion remains subject to the deduction rules. The character of the gain requires separate analysis.

Cryptocurrency gifts need a qualified appraisal

Nonprecedential IRS advice required a qualified appraisal for a cryptocurrency donation with a claimed deduction over $5,000. The cryptocurrency fell outside the listed appraisal exceptions, including publicly traded securities.

The donor neither obtained nor attempted to obtain an appraisal. An exchange quotation did not replace the appraisal or establish reasonable cause on those facts. The statute preserves relief for failure due to reasonable cause and not willful neglect.

Discuss appraisal arrangements before transferring cryptocurrency. Keep exchange records available for the adviser without treating them as the appraisal itself.

Recipient tax and business holdings

If a partnership regularly carries on a trade or business unrelated to a charitable partner, that partner includes its share of the business's gross income and directly connected deductions in unrelated business taxable income. This applies whether or not the income is distributed.

The computation remains subject to §512(b)'s exceptions, additions and limitations, including its express override for debt financed property.

For an S corporation shareholder described in §1361(c)(2)(A)(vi) or (c)(6), the stock interest is treated as an unrelated trade or business. All §1366(a) income, loss and deduction items, plus gain or loss on disposition of the stock, enter the unrelated business taxable income computation. The rule excepts qualifying employer securities held by a qualifying employee stock ownership plan.

Ask the recipient to review both the expected tax items and the expected cash distributions. Include partnership agreements, S corporation records and financing information in that discussion.

For excess business holdings under §4943, a donor advised fund is treated as a private foundation. First determine whether the holding is in a statutory business enterprise.

That definition excludes functionally related businesses and businesses deriving at least 95% of gross income from the passive sources specified in the statute. The 95% threshold is not indexed for inflation. Ownership, attribution, disposal periods and special exceptions require a full statutory review.

Have the recipient's advisers review the proposed holding. Use the full business holdings statute linked below for the ownership and disposition analysis.

Common questions

Resources to check out

• Noncash gift reporting and Form 8283 requirements: Review reporting, signatures and exceptions.
• Qualified appraisal and appraiser requirements: Check appraisal timing, contents and appraiser safeguards.
• IRS advice on cryptocurrency donation appraisals: Read the nonprecedential memorandum discussed above.
• Charitable bargain sales and mortgaged property: Examine debt treatment and basis allocation.
• Business holdings limits for foundations and DAFs: Use the full statute for the recipient's business holdings review.