Tax question?

Question

Tax question—

My client donated a boat on August 1, 2003. He received an appraisal on the boat 1 week before for 395,000. After donating the property the charity sold the boat for 135,000 on August 8, 2003. IRS has disapproved the 395,000 and says the deduction can only be 135,000 and want 100,000 right away. Any help regarding this issue would be greatly appreciated.

Answer 1

The IRS has always maintained that the fair market value of property determines the value for gift purposes. You have a conflict of values here: The appraisal may be a bit high but the selling price is obviously quite a bit low - you can't sell a big boat in only seven days without drastically reducing the price below the fair market value. But, your problem is that the IRS now as a matter of policy uses the price the charity gets to determine the fair market value.

Your client is not going to get away without some pain. Your best bet is to show that the charity practically gave the boat away and argue that your client had no control over this and should not suffer as a result. The best way is to find magazine ads that support your client's appraisal by showing asking prices for the same boat around the same time. Yacht brokers may help, too.

This is the only way you are going to counter the IRS position that the price the charity sold the boat for is the fair market value. Find the supporting documents, lay out your case, hope for best and appeal if you don't like the result. You will eventually reach a level in the IRS that would rather settle than continue the fight. If your client likes the settlement then take it and get on with life.

The danger for the IRS is that the amount is big enough that your client might take it to tax court and win. This would be a huge loss for the IRS since what your client's charity did was typical and the IRS has used this behavior to shake down a lot of taxpayers. Incidentally, charities have a interest in your client's winning as these types of donations are going to dry up unless the IRS gets reasonable on fair market valuation. So, you might be able to get a statement from the charity that their policy is to unload donations at less than the fair market value for a quick sale.

Answer 2

The law has changed regarding donations of cars. boats and airplanes. The deduction is no longer fair market value, it's what the charity sells it for. But that only came in for donations after 12/31/04, so your client still has room to argue, and could probably settle it for some "fair market value" in between the two, since a discrepancy like that certainly raises some doubts about the validity of the original appraisal.

Is it possible that he/you are dealing with a new agent who doesn't realize that rules change was AFTER the donation?