From: Grand Rapids, MI
Hi Tax Mama, You have done a great job with your newsletter
with your warmth and personableness. Fair market value is
the value of an item when a buyer is not compelled to buy
nor the seller compelled to sell. If the fair market value
of an item is virtually always no more than what one paid
for it (no matter how rare the "fire sale" deal),
how is there ever a situation in which either buyer or seller
are "compelled"?
Isn't going out of business being compelled? Or liquidating
the last of an inventory that sells normally for much more,
to make space for new production? Short of a gun to one's
head, buying or selling seems never to be compelled if the
fair market value is always what one paid for it or less
(except in the rare case of something like an antique, etc.).
Also, Don Morris is under the impression that one must pay
capital gains tax on donated items that have appreciated
in value. I have commonly seen touted as a tax strategy the
giving of appreciated assets such as stocks or real estate
precisely in order to avoid paying capital gains and maximizing
the benefit to the charity. Is this not correct? I really
do need to know this one, as I like to give and am committed
to giving as a life activity. And finally, what if my cost
basis is zero, as in someone gave the items to me? And do
I need to keep track of every single garage sale purchase
I make to show cost basis in case I should donate? Thanks,
Sarah
Dear Eva,
"Fair market value is the value of an item when a buyer
is not compelled to buy nor the seller compelled to sell."
Almost, but not quite. Fair Market Value (FMV) is defined
as: "The price at which property would change hands
between a willing buyer and a willing seller, neither being
under any compulsion to buy or sell." CIR v. Homer H.
Marshman, 5 AFTR 2nd 1528, 60-2 USTC 9217 (6th Cir., 1960).
See also Reg. Sec. 1.170A-1(c)(2) The operative word here
is "willing" and I believe that compulsion could
be read as coercion which would render the "willingness" null
and void.
I can think of a few ways in which a buyer or seller could
be compelled; blackmail, racketeering, and ransom leap to
mind
[ TaxMama interjects - "unwilling sellers would include
those whose properties have been condemned, or are forced
to liquidate due to a lien or other threat." ]
The selling below market value of inventory because the
goods are shopworn, obsolete, or slow-moving does not constitute
compulsion; it is reasonable and standard business practice.
These are "transfers in the normal course of business".
The transaction must be bone fide, at arms length, and free
from donative intent. see Reg. Sec. 25.2512-8
Speaking of donating appreciated property, a charitable
gift is one made to a qualified organization. Gifts to individuals,
regardless how needy, are generally not deductible.
For purposes of charitable contributions capital gain property
is defined as property held over one year on which a capital
gain would be recognized if it were sold at its FMV on the
date of the contribution. So, if the gift is made to a qualifying
organization there is no gain recognized.
In the case of ordinary income property the rules are different.
The charitable deduction is equal to the property's adjusted
basis. Ordinary income property includes inventory, capital
assets held for less than one year, and §1231 property
to the extent that ordinary income would be recognized due
to depreciation recapture.
"What if my cost basis is zero, as in someone gave
the items to me?" The donation is its FMV.
Example: Your mother gave you publicly traded stock worth
$10,000. You donate the stock a year later to the burn unit
at your local hospital when the stock is worth $15,000. The
contribution is $15,000. You pay no tax on the gain, and
deduct the $15,000 as a charitable contribution.
"Do I need to keep track of every single garage sale
purchase I make to show cost basis in case I should donate?"
You do not need to, but if you want to take a charitable
deduction it is advisable.
Roger A. Adams, EA TaxOverseas.com (coming soon)
