Interest in a Business
The FMV of any interest in a business, whether a sole
proprietorship or a partnership, is the amount that a willing buyer
would pay for the interest to a willing seller after consideration of
all relevant factors. The relevant factors to be considered in valuing
the business are:
- The FMV of the assets of the business,
- The demonstrated earnings capacity of the business, based on
a review of past and current earnings, and
- The other factors used in evaluating corporate stock, if
they apply.
The value of the goodwill of the business should also be taken into
consideration. You should keep complete financial and other
information on which you base the valuation. This includes copies of
reports of examinations of the business made by accountants,
engineers, or any technical experts on or close to the valuation date.
Annuities, Interests for Life or Terms of Years, Remainders, and Reversions
The value of these kinds of property is their present value, except
in the case of annuities under contracts issued by companies
regularly engaged in their sale. The valuation of these commercial
annuity contracts and of insurance policies is discussed later under
Certain Life Insurance and Annuity Contracts.
To determine present value, you must know the applicable interest
rate and use actuarial tables.
Interest rate.
The applicable interest rate varies. It is announced monthly in a
news release and published in the Internal Revenue Bulletin as a
Revenue Ruling. The interest rate to use is under the heading Rate
Under Section 7520 for a given month and year. You can call the
local IRS office to obtain this rate.
Actuarial tables.
You need to refer to actuarial tables to determine a qualified
interest in the form of an annuity, any interest for life or a term of
years, or any remainder interest to a charitable organization.
Use the valuation tables set forth in IRS Publications 1457 (Alpha
Volume) and 1458 (Beta Volume). Both of these publications provide
tables containing actuarial factors to be used in determining the
present value of an annuity, an interest for life or for a term of
years, or a remainder or reversionary interest. For qualified
charitable transfers, you can use the factor for the month in which
you made the contribution or for either of the 2 months preceding that
month.
Publication 1457 also contains actuarial factors for computing the
value of a remainder interest in a charitable remainder annuity trust
and a pooled income fund. Publication 1458 contains the factors for
valuing the remainder interest in a charitable remainder unitrust.
These are available for purchase by phone at (202)512-1800 or by
mail from the:
Superintendent of Documents
United States Government
Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
If you call in your order,
you can pay by VISA or MasterCard.
Tables containing actuarial factors for transfers to pooled income
funds may also be found in Income Tax Regulation 1.642(c)-6(e)(5),
transfers to charitable remainder unitrusts in Regulation 1.664(e)(6),
and other transfers in Regulation 20.2031-7(d)(6).
Special factors.
If you need a special factor for an actual transaction, you may ask
for it by writing a request for a letter ruling to the:
Internal Revenue Service
Associate Chief Counsel (Domestic)
Attn: CC:DOM:Corp:T
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Be sure to include the date of birth of each person, the duration
of whose life may affect the value of the interest, and copies of the
relevant instruments. IRS charges a user fee for providing special
factors.
For information on the circumstances under which a charitable
deduction may be allowed for the donation of a partial interest in
property not in trust, see Partial Interest in Property Not in
Trust, later.
Certain Life Insurance and Annuity Contracts
The value of an annuity contract or a life insurance policy issued
by a company regularly engaged in the sale of such contracts or
policies is the amount that company would charge for a comparable
contract.
But if the donee of a life insurance policy may reasonably be
expected to cash the policy rather than hold it as an investment, then
the FMV is the cash surrender value rather than the replacement cost.
If an annuity is payable under a combination annuity contract and
life insurance policy (for example, a retirement income policy with a
death benefit) and there was no insurance element when it was
transferred to the charity, the policy is treated as an annuity
contract.
Partial Interest in Property Not in Trust
Generally, no deduction is allowed for a charitable contribution,
not made in trust, of less than your entire interest in property.
However, this does not apply to a transfer of less than your entire
interest if it is a transfer of:
- A remainder interest in your personal residence or
farm,
- An undivided part of your entire interest in property,
or
- A qualified conservation contribution.
Valuation of a remainder interest in real property, not transferred in trust.
The amount of the deduction for a donation of a remainder interest
in real property is the FMV of the remainder interest at the time of
the contribution. To determine this value, you must know the FMV of
the property on the date of the contribution. Multiply this value by
the appropriate factor. Publications 1457 and 1458 contain these
factors.
You must make an adjustment for depreciation or depletion using the
factors shown in Publication 1459 (Gamma Volume). You can use the
factors for the month in which you made the contribution or for either
of the two months preceding that month. See the earlier discussion on
Annuities, Interests for Life or Terms of Years, Remainders, and
Reversions. Publication 1459 is available free by writing to the
IRS address given under Special factors earlier.
For this purpose, the term depreciable property means any
property subject to wear and tear or obsolescence, even if not used in
a trade or business or for the production of income.
If the remainder interest includes both depreciable and
nondepreciable property, for example a house and land, the FMV must be
allocated between each kind of property at the time of the
contribution. This rule also applies to a gift of a remainder interest
that includes property that is part depletable and part not
depletable. Take into account depreciation or depletion only for the
property that is subject to depreciation or depletion.
For more information, see section 1.170A-2 of the Income Tax
Regulations.
Undivided part of your entire interest.
A contribution of an undivided part of your entire interest in
property must consist of a part of each and every substantial interest
or right you own in the property. It must extend over the entire term
of your interest in the property. For example, you are entitled to the
income from certain property for your life (life estate) and you
contribute 20% of that life estate to a qualified organization. You
can claim a deduction for the contribution if you do not have any
other interest in the property. To figure the value of a contribution
involving a partial interest, see Publication 1457.
If the only interest you own in real property is a remainder
interest and you transfer part of that interest to a qualified
organization, see the previous discussion on valuation of a remainder
interest in real property.
Qualified conservation contribution.
A qualified conservation contribution is a contribution of a
qualified real property interest to a qualified organization to be
used only for conservation purposes.
Qualified organization.
For purposes of a qualified conservation contribution, a qualified
organization is:
- A governmental unit,
- A publicly supported charitable, religious, scientific,
literary, educational, etc., organization, or
- An organization that is controlled by, and operated for the
exclusive benefit of, a governmental unit or a publicly supported
charity.
Conservation purposes.
Your contribution must be made only for one of the following
conservation purposes:
- Preservation of land areas for outdoor recreation by, or for
the education of, the general public.
- Protection of a relatively natural habitat of fish,
wildlife, or plants, or a similar ecosystem.
- Preservation of open space, including farmland and forest
land. The preservation must yield a significant public benefit. It
must be either for the scenic enjoyment of the general public or under
a clearly defined federal, state, or local governmental conservation
policy.
- Preservation of a historically important land area or a
certified historic structure. A historically important land area
includes an independently significant land area, any land area in a
registered historic district, and any land area next to a property
listed in the National Register of Historic Places if its physical or
environmental features contribute to the historic or cultural
integrity of the listed property. A certified historic structure is
any building, structure, or land area that is listed in the National
Register, or is located in a registered historic district and is
certified by the Secretary of the Interior as being of historic
significance to the district.
There must be some visual public access to the property. Factors
used in determining the type and amount of public access required
include the historical significance of the property, the remoteness or
accessibility of the site, and the extent to which intrusions of
privacy would be unreasonable.
Qualified real property interest.
This is any of the following interests in real property:
- Your entire interest in real estate other than a mineral
interest (subsurface oil, gas, or other minerals, and the right of
access to these minerals).
- A remainder interest.
- A restriction (granted in perpetuity) on the use which may
be made of the real property.
Valuation.
A qualified real property interest described in (1) should be
valued in a manner that is consistent with the type of interest
transferred. If you transferred all the interest in the property, the
FMV of the property is the amount of the contribution. If you do not
transfer the mineral interest, the FMV of the surface rights in the
property is the amount of the contribution.
If you owned only a remainder interest or an income interest (life
estate), see Undivided part of your entire interest,
earlier. If you owned the entire property but only transferred a
remainder interest (item (2)), see Valuation of a remainder
interest in real property, not transferred in trust, earlier.
In determining the value of restrictions, you should take into
account the selling price in arm's-length transactions of other
properties that have comparable restrictions. If there are no
qualified sales, the restrictions are valued indirectly as the
difference between the FMVs of the property involved before and after
the grant of the restriction.
The FMV of the property before contribution of the restriction
should take into account not only current use but the likelihood that
the property, without the restriction, would be developed. You should
also consider any zoning, conservation, or historical preservation
laws that would restrict development. Granting an easement may
increase, rather than reduce, the value of property, and in such a
situation no deduction would be allowed.
Example.
You own 10 acres of farmland. Similar land in the area has an FMV
of $2,000 an acre. However, land in the general area that is
restricted solely to farm use has an FMV of $1,500 an acre. Your
county wants to preserve open space and prevent further development in
your area.
You grant to the county an enforceable open space easement in
perpetuity on 8 of the 10 acres, restricting its use to farmland. The
value of this easement is $4,000, determined as follows:
FMV of the property before granting easement: |
|
|
$2,000 × 10 acres |
|
$20,000 |
FMV of the property after granting easement: |
|
|
$1,500 × 8 acres |
$12,000 |
|
$2,000 × 2 acres |
4,000 |
16,000 |
Value of easement |
|
$4,000 |
If you later transfer in fee your remaining interest in the 8 acres
to another qualified organization, the FMV of your remaining interest
is the FMV of the 8 acres reduced by the FMV of the easement granted
to the first organization.
Appraisals
Appraisals are not necessary for items of property for which you
claim a deduction of $5,000 or less, or for which the value can easily
be determined, such as securities whose prices are reported daily in
the newspapers. However, you generally will need an appraisal for
donated property for which you claim a deduction of more than $5,000.
See Deductions of More Than $5,000, later.
The weight given an appraisal depends on the completeness of the
report, the qualifications of the appraiser, and the appraiser's
demonstrated knowledge of the donated property. An appraisal must give
all the facts on which to base an intelligent judgment of the value of
the property.
The appraisal will not be given much weight if:
- All the factors that apply are not considered,
- The opinion is not supported with facts, such as purchase
price and comparable sales, or
- The opinion is not consistent with known facts.
The appraiser's opinion is never more valid than the facts on which
it is based; without these facts it is simply a guess.
Membership in professional appraisal or dealer organizations does
not automatically establish the appraiser's competency. Nor does the
lack of certificates, memberships, etc., automatically disprove the
competency of the appraiser.
The opinion of a person claiming to be an expert is not binding on
the Internal Revenue Service. All facts associated with the donation
must be considered.
Cost of appraisals.
You may not take a charitable contribution deduction for fees you
pay for appraisals of your donated property. However, these fees may
qualify as a miscellaneous deduction, subject to the 2% limit, on
Schedule A (Form 1040) if paid to determine the amount allowable as a
charitable contribution.
Deductions of More Than $5,000
Generally, if the claimed deduction for an item or group of similar
items of donated property is more than $5,000, other than money and
publicly traded securities, you must get a qualified appraisal made by
a qualified appraiser, and you must attach an appraisal summary
(Section B of Form 8283) to your tax return. You should keep the
appraiser's report with your written records. Records are discussed in
Publication 526. For special rules that apply to publicly traded
securities and nonpublicly traded stock, see the discussions later in
this section.
The phrase similar items means property of the same
generic category or type (whether or not donated to the same donee),
such as stamps, coins, lithographs, paintings, photographs, books,
nonpublicly traded stock, nonpublicly traded securities other than
nonpublicly traded stock, land, buildings, clothing, jewelry,
furniture, electronic equipment, household appliances, toys, everyday
kitchenware, china, crystal, or silver. For example, if you give books
to three schools and you deduct $2,000, $2,500, and $900,
respectively, your claimed deduction is more than $5,000 for these
books. You must get a qualified appraisal of the books and for each
school you must attach a fully completed appraisal summary (Section B
of Form 8283) to your tax return.
Publicly traded securities.
Even if your claimed deduction is more than $5,000, neither a
qualified appraisal nor an appraisal summary is required for publicly
traded securities that are:
- Listed on a stock exchange in which quotations are published
on a daily basis,
- Regularly traded in a national or regional over-the-counter
market for which published quotations are available, or
- Shares of an open-end investment company (mutual fund) for
which quotations are published on a daily basis in a newspaper of
general circulation throughout the United States.
Publicly traded securities that meet these requirements must be
reported in Section A, Form 8283.
A partially completed appraisal summary (Parts I and IV of Section
B, Form 8283) signed by the donee, but not a qualified appraisal, is
required for publicly traded securities that do not meet these
requirements, but do have readily available market quotations. Market
quotations are readily available if:
- The issue is regularly traded during the computation period
(defined later) in a market for which there is an interdealer
quotation system (defined later),
- The issuer or agent computes the average trading price
(defined later) for the same issue for the computation period,
- The average trading price and total volume of the issue
during the computation period are published in a newspaper of general
circulation throughout the United States, not later than the last day
of the month following the end of the calendar quarter in which the
computation period ends,
- The issuer or agent keeps books and records that list for
each transaction during the computation period the date of settlement
of the transaction, the name and address of the broker or dealer
making the market in which the transaction occurred, and the trading
price and volume, and
- The issuer or agent permits the Internal Revenue Service to
review the books and records described in paragraph (4) with respect
to transactions during the computation period upon receiving
reasonable notice.
An interdealer quotation system is any system of general
circulation to brokers and dealers that regularly disseminates
quotations of obligations by two or more identified brokers or dealers
who are not related to either the issuer or agent who computes the
average trading price of the security. A quotation sheet prepared and
distributed by a broker or dealer in the regular course of business
and containing only quotations of that broker or dealer is not an
interdealer quotation system.
The average trading price is the average price of all
transactions (weighted by volume), other than original issue or
redemption transactions, conducted through a United States office of a
broker or dealer who maintains a market in the issue of the security
during the computation period. Bid and asked quotations are not taken
into account.
The computation period is weekly during October through
December and monthly during January through September. The weekly
computation periods during October through December begin with the
first Monday in October and end with the first Sunday following the
last Monday in December.
Nonpublicly traded stock.
If you contribute nonpublicly traded stock, for which you claim a
deduction of $10,000 or less, a qualified appraisal is not required.
However, you must attach to your tax return a partially completed
appraisal summary (Parts I and IV of Section B, Form 8283) signed by
the donee.
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