Appraisal requirement for charitable deduction.

Many donors transfer appreciated securities to nonprofit organizations to satisfy their charitable commitments. Donors can benefit from this if the organization is a public charity and the gain from the securities (if sold by the donor) would have been characterized as long-term capital gain; the fair market value (FMV) of the property (rather than its tax basis) would be deductible. Such treatment provides a much greater benefit than selling the property and donating the proceeds.

However, Regs. Sec. 1.170A-13 provides strict requirements for obtaining a full deduction, including a property appraisal showing that the property is worth more than $5,000. A summary of that appraisal must be attached to the donor's tax return. For stock that is not publicly traded, the requirement applies to donations worth $10,000 or more. No appraisal is needed for publicly traded stocks.

In John T. Hewitt, 109 TC 258 (1998), the donor donated nonpublicly traded stock; the IRS challenged his deduction, which was based on the stock's FMV. Hewitt was a founder of the tax preparation firm Jackson-Hewitt. Jackson-Hewitt stock was not publicly traded, but there had been a number of private sales.

Hewitt gave some shares to charity and relied on the sales price of other shares to establish the value of the donated shares. He did not make any effort to obtain an appraisal. The Tax Court held that the deduction was limited to Hewitt's tax basis in the shares. Kegs. Sec. 1.170A-13 must be substantially complied with to obtain a full deduction. In Bond, 100 TC 32 (1993), in which a taxpayer obtained an appraisal but failed to attach appropriate information to the return, the deduction was allowed. However, because Hewitt had not obtained an appraisal and the stock was not traded on an exchange, the full deduction was denied.

FROM HARVEY BERGER, CPA, WASHINGTON DC