GIFT PROPERTY VALUATION
The contribution deduction for any gift of property is based on the property’s "fair market value" although the deduction may be less than the amount due to the reduction rules.
As noted, fair market value is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy and sell and both having a reasonable knowledge of relevant facts."
LISTED SECURITIES - SELLING PRICES
Perhaps the least troublesome form of property gift is a gift of listed securities much as stocks and bonds.
In cases where there is a market for listed securities (stock exchange, over-the-counter market or otherwise) the value is the mean between the highest and the lowest selling prices on the valuation date.
However, in some rare instances, a discount may be allowed for lack of marketability of thinly traded or otherwise restricted shares. Conversely, a "premium" may be added to the value of a controlling or "swing" block of stock.
LISTED SECURITIES - BID AND ASKED PRICES
It is not always possible to base the fair market value of securities on selling price, since there are times when there are no sales of a particular security within a reasonable period beginning before and ending after the valuation date.
In such case, fair market value may be determined by taking the mean between the bid and asked prices on the evaluation date.
CLOSELY HELD STOCK
Charitable gifts of stock of a closely held corporation nearly always present difficult valuation problems, since the typically infrequent transactions in such stock generally are insufficient to establish fair market value. Such sales tend to be among related persons and do not necessarily represent a realistic market value.
Because of the difficulties inherent in valuing such stock, the IRS has outlined the approaches, methods and factors that should be considered in such valuations. Under those guidelines, the following factors are deemed fundamental and are required to be carefully analyzed in each case:
This would be of corporations engaged in the same or a similar line of business, the stocks that are actively traded in a free and open market, either on an exchange or in the over-the-counter market.
There is additional consideration valuing the gift of preferred and common stock of a closely held corporation that has been recapitalized in an effort to "freeze" the value of an older-generation stockholder’s interest for estate tax purposes. Be careful of the recently enacted valuation rules [IRC § 2701] concerning gifts of such stock.
MUTUAL FUND SHARES
The fair market value of a mutual fund share is its public redemption price on the valuation date.
LIFE INSURANCE POLICIES
Life insurance policies are often used to make charitable gifts and must be valued for that purpose. If a policy is a paid-up policy (i.e. one that requires no further payment of premiums), its fair market value is its replacement cost.
The value is the amount the insurer would charge for a single premium contract of the same face value on a life of a person of the same age as the insured.
One court has held that under certain circumstances (where substantial loans have been made against the policy, where it appears unlikely that the transferee will take the policy as an investment but will surrender it for its net cash value, and where the transferor is not the insured), the value of a life insurance policy may be less than its replacement cost.
If premiums remain to be paid on a life insurance policy, its fair market value is equal to the "interpolated terminal reserve" value of the policy (an amount slightly in excess of the cash surrender value), plus that part of the last premium payment that covers any period extending beyond the date of the gift.
The sale of a life insurance policy at fair market value will not yield long-term capital gain. Accordingly, when the fair market value of a life insurance policy exceeds the donor’s cost (total premiums paid minus total dividends received), the charitable deduction is limited to the donor’s cost.
REAL ESTATE
Another kind of property commonly used to make charitable contributions is real estate, both improved and unimproved. The fair market value of the real estate depends on many factors, especially its location. Various methods may be used to value real estate, such as comparable sales and income capitalization.
Because the value of real estate requires special knowledge and experience, the services of a professional appraiser ordinarily are required to determine the fair market value of a contribution of real estate.
To assist in the valuation process, the IRS has issued revenue procedures; to use as guidelines in making appraisals of donated property.
MORTGAGED PROPERTY
The value of a gift of mortgaged property must be reduced by the amount of the debt. Such a gift has additional tax consequences to a donor because it is treated as a bargain sale.
VALUATION OVERSTATEMENTS
The IRS can impose penalties of 20-40% in cases where property is valued in an income tax return at 200% or more of its correct value. These penalties apply to individuals, closely held corporations and personal-service corporations.
GIFTS OF PROPERTY - 1984 TAX ACT
For charitable contributions made after December 31, 1984, there is a special requirement for gifts of property other than publicly traded stock:
Single item property gifts in excess of $5,000 or closely held stock in excess of $10,000 requires the donor to obtain and submit an appraisal with the tax return. A qualified appraiser must be used. Strict appraisal requirements and substantiation by both the donor and recipient charity are also required.
If the recipient charity sells the property within two (2) years of the date of the gift, and if the value claimed exceeds 150% at the determined value, a penalty is imposed. [See IRS Publications 526 and 561]
APPRAISALS