CGNA: Key Noncash Gift Process Considerations

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This article is an excerpt from Charitable Gifts of Noncash Assets, a comprehensive guide to illiquid giving by Bryan Clontz, ed. Ryan Raffin. Published by the American College of Financial Services for the Chartered Advisor in Philanthropy Program (CAP), with generous funding from Leon L. Levy. For a free digital copy, click here, and to order a bound copy from Amazon, click here.

By Ryan Raffin

This section quickly outlines the essential considerations common to the noncash donation process. Where the consideration involves an important concept or term, it will be briefly defined.

Due Diligence

Charity

1. What due diligence is necessary for this type of property beyond the charity’s standard evaluation procedures?

2. Has the charity physically inspected the property?

3. What liability issues are associated with the property?

Donor

1. Does the charity have appropriate legal status, i.e. a 501(c)(3) public or private charity?

2. Does the charity have the sophistication to properly accept the gift or manage a deferred gift?

• “Deferred gift” here meaning a planned giving vehicle like a charitable remainder trust, charitable gift annuity, or bequest.

Assignment / Transfer

1. What are the legal requirements for transfer of title or recording and are there any impediments to completing the gift?

• Title and recording show official ownership, usually with a specific state where the property is located.

2. Would the gift to charity be an assignment of income?

• “Assignment of income” is when the donor avoids recognizing gain from sale of property by donating it when receipt of income from that gain is practically certain to occur.

3. Is this a gift of all or substantially all the corporation’s assets?

• If the donor gives a significant proportion of closely held business assets, the IRS may require the donor to recognize gain on those assets.

4. If the gift is part of a bequest, will there be a probate process or estate tax?

5. Are there any restrictions on transfer, including easements or approval from other owners?

Valuation / Substantiation

1. Is the donation of an undivided portion of the entire interest in the property?

• The gift must be some portion of the donor’s whole interest in the property; for example, 50 percent of the donor’s LLC interest is acceptable, but 50 percent of the donor’s profits from the LLC interest is not acceptable under the partial interest rules.

2. What is the tax character of the property?

• Is the donated property capital gain or loss property? If so, what is the holding period (long term or short term)? Could the property be considered inventory? Is the asset considered ordinary income? If the asset is tangible personal property, is it related to the donee’s mission?

3. What is the fair market value of the proposed gift?

• Every charity’s acceptance guidelines are different but lower value assets many not be worth the effort and/or tax savings from the donation.

4. How will the donor obtain a qualified appraisal?

• A qualified appraisal is necessary if the value of the donated property exceeds $5,000, and the appraiser must have relevant, verifiable experience and education.

5. Will the donor receive a deduction for the property? If so, will it be fair market value, adjusted cost basis, or another method?

6. If the charity obtained the property via bargain sale, what portion of the property is allocated to gift versus sale?

• A bargain sale is a transfer of property to charity for below fair market value, resulting in part-gift, part-sale treatment, based on the difference between fair market value and actual sale price.

Holding Period

1. Will the property generate unrelated business taxable income (UBTI)?

• Income-generating property unrelated to the organization’s charitable purposes can lead to tax on that income, with some exceptions for passive income such as rents, leases, royalties, etc.

2. Is the property debt-financed and generating income? If so, it may be subject to UBTI.

• “Debt-financed” meaning that the donated investment property was purchased with borrowed money, or has an existing loan / mortgage, and produces debt-financed income as a result.

3. Does the charity have the ability to manage the asset? What sorts of personnel are required? What are the associated expenses?

4. Is the charity legally obligated to pay-in additional capital or to incur the liabilities and expenses of the donated property, if a closely held business or real estate?

5. What additional reporting requirements does the charity need to satisfy while it holds the property?

Liquidation

1. When will the charity be able to liquidate the property? If there are no legal restrictions on liquidation, should the charity liquidate it?

2. How will the charity find a buyer for the donated property?

3. Is there a pre-arranged sale organized prior to the donation?

• A pre-arranged sale means the charity is legally obligated to sell the property to a third party, under a contract the donor executed, after it receives the donation and may result in the donor incurring capital gains tax.

4. If the charity sells the property within three years, does it need to complete Form 8282 for both the IRS and the donor?