A recent Tax Court decision illustrates some of the tax headaches that can accompany making a major donation.
John and Susan Crimi owned a considerable amount of real estate in New Jersey. They received offers from a number of developers who hoped to develop homes on certain vacant parcels. To be more confident about the value of the land, the Crimis had an appraisal prepared in 2000. It found that if the land were subdivided into building lots, it would be worth over $45,000 per acre, or $2.95 million overall.

At the same time, local municipalities and conservation groups indicated an interest in obtaining the land for a nature conservancy. However, they did not have enough cash to pay the fair market value of the property.
In October 2003 the Crimis entered into a bargain sale with the county, selling the property for $1.55 million. The deal was completed in July 2004. The Crimis claimed the difference between the fair market value and the proceeds, $1.4 million, as a charitable contribution over the next two tax years.

The IRS challenged the gift on two grounds. First, the Service felt that the property was not worth $2.95 million, reducing the value of the charitable gift in turn. Second, for gifts valued at more than $500,000, the taxpayer is required to attach Form 8283 to the tax return and include a “qualified appraisal.” A qualified appraisal values the property on the date of the transfer; the appraisal done in 2000 would not be qualified under the technical requirements of the tax code. Failure to meet the qualified appraisal requirements bars the charitable deduction regardless of the underlying values.

The Crimis took the matter to the Tax Court. Two experts were called to testify to the value of the property on the date of the gift, and new appraisals were done. The IRS expert found the value to be $660,000, which was less than the cash received. The taxpayers’ expert posited a value of $3.7 million. On the whole, the Tax Court favored the approach taken by the taxpayers’ expert, subject to some downward adjustments.
More importantly, the Tax Court accepted the taxpayers’ paperwork on the donation that accompanied their tax return. The Court did not reach the question of whether the appraisal met all technical requirements, but it held instead that the Crimis had reasonably relied upon the expertise of tax professionals, with whom they had worked for 20 years. The charitable deduction for the donation of the land was sustained.
The moral of this story may be that no good deed goes unpunished. The Crimis no doubt feel vindicated by their Tax Court victory, but had they known that a donation of land to the town would trigger a costly, major fight with the IRS, they might have opted for the simpler approach of selling to a developer.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Each year the IRS alerts the public to the 12 worst tax scams that have been brought to its attention. The list changes slightly from year to year, and there never seems to be a problem coming up with candidates.

Identity theft. This is the number one problem, as identity thieves have been known to file false tax returns to obtain fraudulent tax refunds. The first tip-off for the taxpayer may be a note from the IRS that more than one tax return has been filed. Reportedly, the IRS screening procedures in 2011 protected more than $1.4 billion from getting into the wrong hands.

Phishing. Scammers send e-mails that purport to be from the IRS, hoping that an unsuspecting recipient will open it or an attachment. This can lead to identity theft. The IRS never initiates contact via e-mail.

Return preparer fraud. An estimated 60% of taxpayers now find their returns so complicated that they have to pay a professional to help them file. Some tax return preparers are fraudsters. Bad signs: promises of larger than normal refunds; failure to give you a copy of the return; charging a percentage of the refund as a preparation fee.

Hiding income offshore. A major crackdown on foreign accounts has been accompanied by a voluntary disclosure program, to permit taxpayers with offshore accounts to resolve their tax liabilities. Some $3.4 billion was collected under that program in 2009, $1 billion so far from a second round conducted in 2011.

“Free money” from the IRS and tax scams involving Social Security. The targets of these scams are low-income individuals and the elderly. Flyers have been appearing in some churches around the country.

False or inflated income and expenses. Interestingly, some taxpayers are now claiming income that they have not earned, in order to maximize their refundable credits. Some are inappropriately claiming the fuel credit that is available to farmers and others who use fuel for off-highway business purposes.

False 1099 refund claims. Contrary to the claims of some scam artists, the federal government does not maintain secret accounts for U.S. citizens that may be accessed by issuing 1099-OID forms.

Frivolous arguments. The argument that the income tax is unconstitutional is not going to work. The IRS maintains a list of frivolous arguments that will lead to additional penalties.

Falsely claiming zero wages. Some fraudsters have advised filing a Form 4852 to try to get wages adjusted down to zero. Filing this Form falsely can lead to a $5,000 penalty.

Abuse of charitable organizations and deductions. Deductions for donations of non-cash assets is a problem area.
Disguised corporate ownership. Disguising ownership is associated with money laundering and other financial crimes. The IRS is working with state authorities to identify these entities.

Misuse of trusts. This is the one that bothers us the most. Trusts are a legitimate, long-established wealth management tool. Some trusts have tax benefits; some do not. They are not a means to create deductions for personal expenses.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

When you retire or change employers, arranging for a rollover directly from your company retirement plan to an IRA allows you to continue to defer tax on your money until you reach age 70½. Then you’ll have to begin making annual taxable withdrawals.
However, you may be able to arrange for a direct rollover from a 401(k) or other tax-qualified plans to a Roth IRA.

Here’s why you should consider a Roth IRA rollover
With a Roth IRA, withdrawals may be completely tax free. (Earnings will be taxable, and penalties may be imposed, on withdrawals if you have not owned the Roth IRA for at least five years or if you make them before reaching age 59½. You can keep the funds in your Roth IRA for as long as you live and never have to worry about following a schedule of required withdrawals. And you can leave your Roth IRA to your heirs free of income tax.
You have to pay tax on the amount that you roll over, at regular tax rates of up to 36.9%. (State and local taxes may apply as well.) If the sum is sizeable, you may need significant resources to cover the tax bill. There’s a small silver lining in that cloud: At least you will have removed what you paid from the threat of being taxed as part of your estate.

Take the direct approach
Whichever IRA choice you make, don’t ask for a check and then set up your IRA. If you do, you’ll have only 60 days to complete the rollover. The consequences are serious if you miss the deadline. You’ll pay the tax on your distribution and, if you are under age 59½, a 10% early withdrawal penalty as well.
Additionally, your check will be less than you expect because a 20% withholding tax applies when you don’t arrange for a trustee-to-trustee transfer. If you have the cash, you can replace the amount withheld with your own funds in order to make your rollover whole, and the amount withheld will be credited toward your income taxes for the year. If you don’t, you have lost the opportunity for continued tax deferral on 20% of the amount that you have accumulated in your plan account.

Is it almost time for your rollover?
If you are planning to retire or change jobs at any time in the near future, please contact us to discuss your rollover choices and the wide variety of investment options that we can offer you. We’ll put everything in place for you, dot all the “i’s” and cross all the “t’s,” providing a seamless transition from your company retirement plan to the Rollover IRA of your choice.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

A charity-sponsored auction can be a great fundraiser; successful auctions have already raised millions of dollars. Donors provide the goods; bidders receive valuable property or services; everyone has a good time; and the charity receives the proceeds. Plus, there are tax breaks all around, right?
Not necessarily.
As with all matters of taxation, there are rules, and they can be complicated. The tax rules don’t take all the fun out of the party, but they do put a damper on it, and they mustn’t be ignored.

Rules for donors

A donation of cash to a charity to purchase items to auction generally will be fully deductible. Otherwise, the usual restrictions that apply to noncash charitable gifts apply.
Inventory. Donations of items from inventory are a common method for a business to participate in an auction. Generally, the charitable deduction will be limited to the donor’s cost.
Part gift, part sale. With very valuable property, such as automobiles, the charity may purchase the item to be auctioned. There is no deduction for the business unless the purchase was a bargain sale, in which case the deduction is limited to the bargain element.
Ordinary income property. The charitable deduction is limited to the donor’s tax basis in the property.
Tangible personal property. Because the property will be sold by the charity, not used by it in the course of its charitable mission, the deduction is normally limited to the taxpayer’s basis in the donated property, not its fair market value.
Capital gain property. A donation of capital gain property may be deductible by the donor at its full fair market value. Unfortunately, such property typically is not very attractive as auction property.
Depreciated property. If the fair market value of donated property is less than its tax basis, the charitable deduction is limited to the lower figure.
Services. Professional services can be an excellent item for auction. Donation of services for an auction yields no charitable deduction at all.

Rules for bidders

One who purchases something at a charitable auction may have the impression that, because the check is made out to the charity, the full amount is deductible as a charitable gift. Not so. There is no charitable gift unless the amount paid exceeds the fair market value of the property purchased. What’s more, there is a presumption that the amount paid for the item fairly represents its value, and that there is no gift. It’s up to the taxpayer to prove otherwise.
Example: An unusual bottle of wine from a local winery is being auctioned by Charity. The fair market value of the item is estimated to be $250.
Tom bids $150 for the wine. If his is the winning bid, there will be no charitable deduction—he has received a bargain. Dick’s bid of $250, the market value, similarly generates no deduction. A winning bid of $400 by Harry will secure for him a charitable deduction, but only for $150, the excess of the bid price over the fair market value.

Rules for the charity

Sponsoring charities have tax responsibilities associated with their auctions as well. The charity should provide advance estimates of fair market value for each item being auctioned. Receipts provided to successful bidders should identify the item, note the amount paid and include an estimate of the fair market value.
Donors must file Form 8283 and have a qualified appraisal for contributions of property worth more than $5,000, and the donee charity also must sign the form and acknowledge its own reporting requirements. If the property is sold within three years (as auction property almost certainly would be), the charity must file Form 8282 to report the sale. The purpose of the filings is to keep the amount claimed as a deduction and the amount realized by the charity in harmony.
A charity sponsoring an auction should take steps to make certain that both donors and bidders are not overestimating the tax benefits of their participation. Clearing the air early can avoid misunderstandings and hard feelings down the road.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.