A. Tangible personal property is defined as property that can be physically touched, excluding land and improvements (buildings and permanent structures). Examples of tangible personal property include:
• precious gems and metals
• stamp and coin collections
• motor vehicles.
B. In contrast, intangible personal property is untouchable property, which may be evidenced by a physical piece of paper, i.e. a stock certificate or a promissory note. The physical paper merely signifies the ownership and value of the intangible property.
A. Capital Gains Tax. When an individual sells tangible personal property, he or she may incur the capital gains tax, which is a tax imposed on the gain from the sale of capital assets. The Internal Revenue Code defines capital assets by exception. A capital asset is everything except assets that produce ordinary income or loss when sold. Ordinary income assets include the following, among other things:
• property used in a trade or business;
• copyright, or a literary, artistic or musical compositions (when held by
• accounts receivable;
• a U.S. government publication; and
• supplies which are used or consumed by the taxpayer in the ordinary
course of a trade or business.
1. When an individual sells tangible personal property for a price greater than the asset’s adjusted basis, a capital gain has occurred unless the person fits into one of the preceding categories. Capital gains may be long-term or short-term. A long-term capital gain occurs when a capital asset is sold that has been held by the donor for over one year. A short-term capital gain occurs when a capital asset is sold that has been held for one year or less.
2. Most long-term capital gains are taxed at a maximum rate of 15 percent. However, long-term capital gains on “collectibles,” i.e., certain kinds of appreciated tangible personal property, are subject to a top tax rate of 28 percent. Although the imposition of a higher long-term capital gains tax rate is a disadvantage to the donor, more capital gains
tax may be avoided by donating the tangible personal property to a charitable organization, as opposed to a comparable appreciated asset subject to a 15% top rate on long-term capital gain.
B. Ordinary Income Reduction Rules. Normally, a donor who gives long-term tangible personal property to a qualified charitable organization will take a charitable deduction to the extent of its fair market value. However, the amount of the deduction may be diminished by the ordinary income-reduction rules. The rules reduce the deemed amount of the contribution by any gain that would have been classified as ordinary income, or short-term capital gain if the property had been sold for its fair market value at the date of the gift. Assets that would fall into one of these two categories include:
• appreciated property held for sale in the ordinary course of the donor’s trade or business (e.g. a manufacturer’s inventory, a dealer’s stock-intrade, artwork or a manuscript created by the donor);
• appreciated property subject to recapture (e.g. IRC §1245 property);
• appreciated short-term capital assets; and
• certain kinds of appreciated stock, the gain on which would not be long-term capital gain if the stock were sold.
Two exceptions have existed to this ordinary income reduction rule, with both exceptions only applying to corporate donors:
1. A corporate donor who gives inventory to a public charity can take a deduction for the fair market value of the contribution reduced by one-half of the amount that would have been ordinary income upon a sale if the inventory is used for the care of the ill, needy or infants. The corporation’s deduction will be limited to the property’s tax basis
plus one-half of appreciation up to a limit of twice the property’s basis. Plus, under the Katrina Emergency Tax Relief Act of 2005, the non-c corporations may also take the inventory deduction for gifts of food inventory and book inventory. This deduction opportunity was extended by the Pension Protection Act of 2006 through December 31, 2007.
2. A corporate donor who contributes newly manufactured scientific equipment to a college, university or scientific research organization for use in research, experimentation or research training may claim an income tax charitable deduction equal to its tax basis plus one-half of the appreciation in the property. The maximum deduction a corporate donor may claim is twice the basis in the property.
C. Motor Vehicle, Boat and Plane Donations. A provision in the American Jobs Creation Act of 2004 limits the amount of the contribution for a charitable gift of a motor vehicle to the amount actually received by the charitable
donee upon a subsequent sale of the vehicle, boat or plane when there is no “significant intervening use” or “material improvement” by the charity, or when the charity does not give the donated vehicle to certain “needy individuals.” An example of significant intervening use (prior to a later sale) is the charity’s use of a donated vehicle to deliver meals every day for a year in the ordinary course of its operations [IRS Notice 2005-44, §7.01]. A material improvement is a major repair, or perhaps the restoration of a classic car, in a way that dramatically increases its value. Minor repairs, cleaning, maintenance, etc., are not considered “material improvements.” The IRS has issued explicit guidelines as to the proper valuation of charitable gifts of motor vehicles:
• The IRS warns that fair market value is not necessarily what is reported in a used car guide and may be substantially less than the “blue book value” (to cite one commonly used car guide). Dealer retail value cannot be used [IRS Notice 2005-44, §5].
• The IRS requires all donors to obtain a contemporaneous written acknowledgement from the charity if the total deduction claimed for a donated car is greater than $250. The acknowledgment must assess whether goods or services were provided by the charity in return for the contribution, and, if so, a good faith estimate of the value of those goods and services.
• The IRS requires the taxpayer to complete Section A of Form 8283 if the total deduction claimed for a donated car is greater than $500. Form 8283 requests information concerning donated property. If the total deduction claimed for a donated car is greater than $5,000, the IRS requires the taxpayers to complete Section B of Form 8283, including signature/verification by the taxpayer, the appraiser and the charitable organization. If the taxpayer, appraiser and charity complete Section B of Form 8283 and the charity sells or otherwise disposes of the car within two years after the date of receipt, the charity must file Form 8282 and provide a copy to the donor.
D. Related Use Rule. Whether the donated tangible personal property can be used for an unrelated or related use determines the donor’s allowable deduction. If the tangible personal property is unrelated to the charity’s exempt purposes, the deduction must be reduced by the amount of gain that would have been long-term capital gain had the property been sold at its fair market value on the date of the gift. An unrelated use is a use of property which does not further a charitable organization’s exempt purposes. Donors frequently have trouble determining whether a donation will be related to the charitable organization’s exempt purposes.
1. The burden of determining whether the charity will put tangible personal property to a related or unrelated use lies on the donor. A donor is advised to treat the tangible personal property as being put to a related use, if:
• the donor determines that the charity has not in fact put the tangible personal property to an unrelated use, or
• at the time of the gift, the donor could reasonably anticipate that the property would not be put to an unrelated use by the charitable donee.
2. A donor who is concerned about the relatedness of the gift should obtain written confirmation of a charity’s intended use of the property in advance of making a tangible personal property gift.
3. A donor may claim the fair market value for gifts of tangible personal property when the donee organization will use such gifts for its taxexempt purpose. In the event that a donee organization disposes with the property within three years of the contribution of the property, the donor is subject to an adjustment of the tax benefit according to the following schedule:
• If the charity disposes of the property in the same tax year the gift is made, the donor’s deduction is the basis.
• If the charity disposes of the property a subsequent tax year (within three years of the contribution), the donor must include as ordinary income for its taxable year in which the disposition occurs an amount equal to the excess (if any) of the amount of the deduction over the donor’s basis in the property at the time of the contribution.
There is an exception if the donee organization certifies in a written statement either that the property had a related use function and was actually used in that capacity before its sale, or that the intended use of the property at the time of contribution became impossible or infeasible to implement after such gift. The donor should, also, receive a copy of this certification.
4. Gifts to Museums. The Internal Revenue Service treats the relatedness of gifts to museums differently. A donor giving property to a museum probably has no way of knowing whether the museum will decide to exhibit or sell a donated art object. If the donated property is of the type usually retained by the museum for display, then the donor may reasonably anticipate that the tangible personal property will be put to a related use. If the museum should eventually sell the object, this will not retroactively affect the donor’s deduction, assuming the donor had no foreknowledge. However, if the donor has actual knowledge that the donated tangible personal property will be sold (or exchanged) rather than exhibited, then the donor may not claim a deduction based on related-use.
5. Charity Auctions. The Internal Revenue Service also includes a special exception for charity auctions. Frequently, charitable organizations auction off tangible personal property items donated by individuals and businesses. Although the proceeds of the auction support the charity’s exempt purposes, the charity’s use of the donated tangible personal property for fund-raising purposes is unrelated to its exempt purposes. Therefore, the donor’s charitable deduction must be reduced by the amount of gain that would have been long-term capital gain if the tangible personal property had been sold for its fair market value. If the fair market value of the tangible personal property is less than the donor’s tax basis, the related-use rule will have no practical effect. This is often the case with donated computers and other equipment that has been surpassed by later technology.
6. Bequests. The estate tax charitable deduction is not subject to the related-use rule. Therefore, a testamentary bequest of a tangible personal property is valued at its fair market value without regard to charity’s use of the property.
7. Future Interest Gifts. To claim an income tax charitable deduction at the time of the gift of tangible personal property, the gift must be of a present interest. In this case, an income tax charitable deduction may be allowed if all the intervening rights have expired or passed to a person other than the donor or someone closely related to the donor. Generally, funding a charitable remainder trust with a tangible personal property interest is only appropriate when the trustee has the discretion to sell the property and reinvest the proceeds. A charitable remainder trust may still run into future-interest problems depending on whether the trust is established at death (testamentary) or during life (intervivos). A charitable gift annuity may be funded by tangible personal property, providing there is no prohibition under state law or the charity’s gift acceptance policy. Under federal tax law, the gift annuity is viewed as a present-interest gift of the gift portion of the transaction. Therefore, the future interest rule would not be tripped if tangible personal property were transferred to a charity in exchange for the gift annuity.
8. Gifts of Undivided Interests. As a general rule, the charitable deduction will be denied for gifts of a partial interest. However, the tax code builds in certain exceptions to this rule. For example, if the gift is of an “undivided portion of a taxpayer’s entire interest in property” then the charitable deduction will be received. The charity’s interest must:
• consist of a portion of each and every substantial right or interest owned by the donor; and
• the interest must extend over the entire period of the donor’s interest.
Although a donor cannot deduct currently a gift of a future interest, he may “time-share” tangible personal property with a charity and secure a current charitable deduction. For example, a donor may donate to a university the right to exhibit a painting for that portion of the year which coincides with the academic year, and reserve the right to possess and enjoy the painting during the balance of the year. Charity’s right to possess and display the painting during a defined portion of the year generates a charitable deduction for the donor. However, the donor must contribute all of the donor’s remaining interest in such property to the same donee before the earlier of 10 years from the initial fractional contribution or the donor’s death. If this requirement is not met, the charitable income and gift tax deductions for all prior contributions of interests in the item shall be recaptured (plus interest). The same penalty applies in the event that the donee organization fails to either (i) take substantial physical possession of the item, or (ii) put the item towards a related use, during the same 10 years.