The American Jobs Creation Act also tightened rules for charitable contributions of vehicles and patents. As David T. Leibell and Daniel L. Daniels of Cummings & Lockwood LLC in Stamford, Conn., report: Buried in the 600 pages of the act are two provisions that limit charitable deductions for gifts of vehicles and patents. These provisions aim to curb abuses regarding over-inflated deductions for these kinds of gifts.
Before the law, a donor who contributed a used vehicle worth less than $5,000 to charity was entitled to a fair market value deduction based on the value listed in an established used car pricing guide. Similar rules applied to contributions of boats and planes. Donors were required to obtain a qualified appraisal for donated vehicles with a value of $5,000 or more. Under the act, the deduction for charitable contributions of used vehicles for which the claimed value is more than $5,000 depends on the use of the vehicle by the recipient charity. If the charity sells the auto without making any significant intervening use or material improvement of the vehicle, the amount of the deduction cannot exceed the gross proceeds received from the sale. A deduction is not allowed unless the donor obtains a contemporaneous written acknowledgement from the recipient charity. This acknowledgement must contain the name and taxpayer identification number of the donor and the vehicle identification number.
If the charity sells the vehicle without a significant intervening use or material improvement, the acknowledgement must provide a certification that the vehicle was sold in an arm's length transaction between unrelated parties, and state the gross proceeds from the sale. The deductible amount also may not exceed the gross proceeds. A charity will face penalties for knowingly furnishing a false or fraudulent acknowledgement, or knowingly failing to furnish a timely acknowledgement showing the required information. The law applies to contributions of vehicles made after Dec. 31, 2004.
The Jobs Act also takes aim at gifts of patents. Earlier this year the Internal Revenue Service issued Notice 2004-7 announcing it was aware that some taxpayers were taking overinflated deductions for gifts of patents, which (until the Jobs Act) were deductible at full fair market value. The Jobs Act will limit a donor's initial deduction for a patent gift to the lesser of the donor's basis in the patent or its fair market value. A donor will be permitted to take an additional deduction in the year of the contribution and in future years based on a specified percentage of the net income received or accrued by the charity that is allocable to the patent. Any additional charitable deduction will be calculated as a sliding-scale percentage of the patent income received by the charity. Any additional charitable deduction will be allowed only to the extent that the aggregate of the amounts that are calculated under the sliding-scale system exceed the deduction claimed on the contribution of the patent. No additional deduction will be permitted for income received or accrued by the charity after the expiration of the patent's legal life or after the tenth anniversary of the date the contribution was made. The additional charitable deductions will not be available to private grantmaking foundations. The donor will be required to inform the charity at the time of the contribution of the patent that the donor intends to treat the contribution as a gift governed by the additional charitable deduction rules. The donor must obtain written substantiation from the charity of the amount of any qualified donee income allocable to the patent during the charity's taxable year. The charity will be required to file an annual information return with the IRS that reports the qualified donee income and other specified information relating to the gift of the patent. The new law is effective for gifts of patents made after June 3, 2004.
The Jobs Act also contains provisions extending the substantiation requirements to C corporations and requiring that if a gift is worth more than $500,000, the donor must attach a qualified appraisal to his tax return.
Editor's Note: For a look at the significant impact the American Jobs Creation Act has on expatriation rules, see “The New Price of Expatriation,” p. 32.