We had a donation of an engagement ring, which we then sold in order to use the funds for our mission. The revenue from the sale was several thousand dollars less than the fair market value determined by an independent appraiser. How do we report this to the donor for her tax purposes? We also had a donation of publicly traded stock that we sold. Do we report the FMV of this as well?
Your two different gifts illustrate a couple of the differences in deductibility and reporting of gifts other than cash. A donor may deduct more than $500 for a gift of personal property only if the donor files a Form 8283 with the tax return on which the donor claims the contribution deduction. If the donor claims more than $5000, the donor must include the summary of an independent appraisal report setting forth the estimate of value. The charity must acknowledge the gift but needs to sign the Form 8283 only if the deduction claimed is more than $5000. The charity should not be the party that values the gift.
Gifts of personal property can be deducted at an appreciated fair market value only if they have been held for more than a year and will be used by the charity in its charitable program. Otherwise they are generally deductible only at the lower of fair market value or tax basis. Because the property may be disposed of and not used within the charitable program, the IRS requires the charity to file a Form 8282 and give a copy to the donor if personal property reported on the Form 8283 at more than $5000 value is disposed of within three years of the date of receipt (unless consumed within the program or substantially repaired or improved). (See Ready Reference Page: “IRS Requires Substantiation of Contributions”)
Since the Form 8283 is supposed to include the cost basis of the items, and because the Tax Code now provides that property disposed of within three years is presumed not to have been used within the program, the IRS is in a position to determine whether the donor claimed an appreciated value. If so, the donor must declare income in the year of the sale equal to the difference between the tax basis, which should have been the basis of the deduction, and the fair market value claimed as the deduction. The Form can also show a sharp difference between the appraised and actual fair market value, which could trigger an IRS inquiry into the originally claimed deduction.
For gifts of publicly traded stock, the donor must still file a Form 8283 if the value is more than $10,000. Because the value is based on the value on the date of the gift, the charity should acknowledge receipt of XX shares of stock on the date it was received. The donor can determine the value according to IRS rules. There is no expectation that the charity will hold the stock or use it within the charitable program, so the charity can sell it immediately and the donor ‘s deduction is not affected. The donor may claim an appreciated fair market value if held more than a year, or the lower of fair market value or cost if held for less time.