Thursday January 26, 2023
Case of the Week
The Gas Guzzler's Deduction, Part 3
Case:Brandon Bigtop loves his truck, which he affectionately named "the Beast." It was a gift for Brandon's 18th birthday. It is painted bright red and is two tons of metal, muscle and noise. Indeed, many neighbors would grumble as Brandon drove by because the rumbling engine could be heard three blocks away. As you can imagine, 18-year-old Brandon was in truck heaven.
Brandon is now 20 years older and a university professor, but he never could part with his beloved truck. So, the Beast now sits quietly in the driveway collecting dust and serving as merely an "eye sore" according to his wife. Every once in a while, Brandon will take the truck out for a spin but its low gas mileage makes it a costly joy ride. Plus, Brandon still receives glares from neighbors as he passes through the neighborhood, something he does not relish anymore.
After much deliberation, Brandon decides to donate his truck to a local charity. It is time to part ways with his old companion. Before deciding to contribute the truck to charity, Brandon checked with his tax advisor regarding the tax benefits of his gift and how to structure his donation. To his surprise, Brandon's tax advisor suggested contributing the truck into Brandon's existing $100,000 charitable remainder unitrust (CRUT). While there would be no capital gains bypass benefit, there still should be a charitable income tax deduction and increased CRUT income.
Question:Can a truck or other tangible personal property be contributed to a CRUT? Are there any rules of which Brandon should be aware?
Solution:Tangible personal property (TPP) may be transferred to a CRUT. However, there are two rules that require close attention. First, there is no charitable deduction for a future interest in tangible personal property. The deduction applies only after all "intervening interests" have expired. See Section 170(a)(3).
Thus, there is no charitable deduction for Brandon when he initially transfers his truck into a CRUT. Instead, the charitable deduction is delayed until the year when the truck is sold by the CRUT. At that time, the "intervening interest" in the TPP has expired and a charitable deduction is allowed. This means that Brandon's contribution may not qualify for the current tax year unless the CRUT can sell the truck by December 31.
The second rule relates to "cost basis deductions" for gifts of tangible personal property for an unrelated use. Unrelated use gifts of TPP are usually deductible at cost basis only. If, however, the cost basis is greater than fair market value, then the lower fair market value is the deductible amount. Gifts of vehicles usually produce a charitable deduction equal to the fair market value of the vehicle because vehicles are usually worth less at the time of donation than the original purchase price. Thus, the traditional "cost basis deduction" for gifts of tangible personal property generally do not apply to gifts of vehicles. As a result of the vehicle deduction rules, the charitable deduction is limited to the gross proceeds of the sale multiplied by the unitrust remainder factor.
Brandon likes the idea of receiving a greater income from his CRUT. He also likes the charitable deduction, even though it is modest. Consequently, Brandon decides to contribute his truck into the CRUT. In the end, Brandon's dearly departed truck provided nice tax savings, an eventual charitable gift and great memories to last a lifetime.
Published November 25, 2022