RTS #076 I’m sure I’m biased but…

Anytime I see the same topic coming across my desk or my feed multiple times in a short span, I know it’s something I need to look into. One of those recent topics revolves around donating assets to charity that were purchased at a really steep discount. These “opportunities” come in a lot of different flavors, but the general idea comes back to buying an asset that is then donated at a value that is some multiple of the original purchase price so that the tax deduction exceeds the purchase price…

And if your immediate reaction is, “Well, that doesn’t seem right”, then we have that in common. The first time I came across something like this, I was very dismissive and thought it was more in the realm of a scam, but there seem to be more and more of them popping up, and there is a lot of legal firepower behind them. I’ve dug deep on multiple situations and as far as I can tell (but no this does not count as a legal opinion) these opportunities can be supported by the tax code. So, what does this look like in practice?

The general framework looks like this:

• Step 1 – buy the product for $10,000
• Step 2 – have the product appraised (depending on the specific situation, this might be a year later) for something significantly more than the purchase price; I’ve seen as much as 10x
• Step 3 – donate the product to a qualified charity
• Step 4 – deduct the much higher appraised value on your tax return

While I have read some pretty persuasive marketing pieces that cite IRS cases that are adjacent to the topic, I have yet to see a situation where the strategy has been successfully defended in an audit. For me personally, when I come across a new strategy that appears to operate in the gray, “What happened when this went through audit?” is one of my first questions, and I don’t love it when the answer is “Well, it hasn’t been audited”.

That might just be my bias and my own risk profile. It’s altogether possible I’m missing an opportunity because I’m not willing to be on the leading edge of pushing the tax boundaries, but for me, the best valuation of a product is what someone is willing to pay for it and if I paid $10,000 why would I claim a deduction for anything over $10,000? Or, if I can get it appraised for $100,000 why wouldn’t I just sell the product for the $100,000 (and why didn’t the person who sold it to me just sell it for $100,000)?

My biggest takeaway from this topic is a reminder that the only tax planning that should ever be done (even Roth conversations) is tax planning that the person recommending and the person implementing the planning understands well enough to accept the risk that comes along with it. If it sounds too good to be true, make sure you dig deep before moving forward.

Happy Tax Planning!