Uncle Sam's Christmas Special: Widows and orphans robbed in tax code switcheroo

[richlevy]

It's too bad Haliburton didn't have some part of the charity resale business. That would have saved the deduction. :p

GWB wants tax breaks without any serious cuts to government spending. This means the money is going to come from people and organizations without effective lobbyists or friends in the White House. AARP has a lot of clout, so seniors are safe, and noone in Washington will touch home deductions, since most Americans get those. It's areas like this where a small group is affected that will feel the pain.

I'm not a tax professional or lawyer, but here is what I think the rules are:

The interesting question is if this policy will be claimed by people receiving cars as gifts. Previously, if you won golf clubs on a game show, you had to pay tax on the 'fair market value' of new golf clubs. If you donated new golf clubs, you could take a deduction on the same 'fair market value' of the same golf clubs.

Copy of the old rules here

IRS rules on Fair Market Value

Heres one link on taxes on game show prizes

Heres a nice link on various rules effecting churches Goods or services provided in exchange for gifts

If you are a good dealmaker, you could game the system by finding a bargain, donating it, and then claiming a higher fair market value than what you paid for it. Be prepared for a fight, but the IRS is supposed to use the same rules for FMV that they use for taxing as they do for deductions. So if you buy a load of bibles for $1 apiece at a liquidation sale, and donate them to a church, you deduction might be much higher if you can prove that the wholesale price of the bibles was $3 apiece. I heard a rumor about a case like this and I was searching the Internet for it when I found these other links.

The key is establishing that the low price you paid for the bibles was an unusual market condition and providing proof that the church would have had to pay $3 apiece for the bibles if they had purchased them from a wholesaler. The IRS already establishes that liquidation sales do not reflect fair market values.

From publication 561.

Problems in Determining Fair Market Value
There are a number of problems in determining the FMV of donated property.

Unusual Market Conditions
The sale price of the property itself in an arm's-length transaction in an open market is often the best evidence of its value. When you rely on sales of comparable property, the sales must have been made in an open market. If those sales were made in a market that was artificially supported or stimulated so as not to be truly representative, the prices at which the sales were made will not indicate the FMV.

For example, liquidation sale prices usually do not indicate the FMV. Also, sales of stock under unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market, may not represent the FMV.

Selection of Comparable Sales
Using sales of comparable property is an important method for determining the FMV of donated property. However, the amount of weight given to a sale depends on the degree of similarity between the comparable and the donated properties. The degree of similarity must be close enough so that this selling price would have been given consideration by reasonably well-informed buyers or sellers of the property.