1. Which of the following is an example of an immediately deductible charitable gift?
a) I own a building and allow a charity to use it rent free
b) I inherit a time share in a vacation rental property and I give all of it (all of my interests in the property) to a charity
c) I own an automobile and sign a contract promising to give it to the charity in ten years
d) I give land to a charity, but retain the mineral rights in the land
e) I give the right to use a farm for 20 years to a charity, and retain the reversionary interest that directs that it will become owned by me again at the end of the 20 years
2. Which of the following would constitute a deductible gift of an undivided interest in an office building that I own?
a) I give a charity a 10% ownership interest as a tenant in common including the right to 10% share of all net operating income
b) I give a charity the right to use the top floor of the office building without charge
c) I give a remainder interest in the property giving the charity a right to own the property after my death
d) I give the charity the right to 10% of all profits from the building for a ten year period beginning in 12 months
e) I give the charity the right to lease out any open office space to paying clients and receive half of all rent collected from those clients
3. What is the general rule for partial interest gifts where the donor retains some interest in the gifted property?
a) They are deductible, but only up to 20% of adjusted gross income
b) They are not deductible unless accompanied by a qualified appraisal
c) They are not deductible unless the gift fits into one of the specific exceptions
d) They are not deductible unless given to a qualified 501(c)3 organization
e) They are generally deductible
4. What is the primary motivation behind the rule against deducting partial interest gifts?
a) Partial interest gifts are unnecessarily complex, and this complexity suggests an attempt to defraud the IRS
b) Charities must receive a minimum of 5% per year in benefits for the gift to qualify
c) If a donor keeps part of the interests in a piece of property, it is often possible to manipulate the circumstances such that the donor receives a much higher share of the benefit than is reflected by the initial deduction
d) The value of future interest gifts is not ascertainable until such time as the all intervening rights are removed and the charity is the sole owner
e) Gifts of less than the entire ownership interest in a piece of property are inherently difficult to correctly value
5. An example of a non-deductible divided share gift would be
a) Giving a wheel from a car that I own
b) Giving 10 acres from a 1,000 acre farm that I own
c) Giving the right to use my entire 1,000 acre farm for 10 years for free
d) Giving a 10% ownership right as tenants-in-common in my 1,000 acre farm
e) Giving one painting out of a collection of 200 that I own
The following options apply to the next 3 questions
I. A gift of farmland where the donor retains the right to later place a limited number of billboard signs or wind turbines on the property
II. An undivided 15% ownership in farmland given by a donor where the donor retains all underlying mineral rights to the farmland
III. An undivided 15% ownership right in a condominium owned by the donor where the donor has never resided, but has used exclusively as rental property
IV. A gift of the use of a time share interest for ten years
V. A gift of the reproduction rights to a work of art where the donor never owned any rights in the art other than the reproduction rights
6. Which of the options qualifies as a deductible gift that gives away only part of the donor's ownership interests?
a) II
b) III
c) II & III
d) III & IV
e) None of the above
7. Which of the options are not deductible because of the retention of an ownership right by the donor?
a) I, II, & IV
b) I, II, III & IV
c) I, II, & V
d) II, III & IV
e) I, I, IV & V
8. Which of the options describes a deductible gift where the donor gave up all of his or her rights in the property being donated?
a) III & V
b) I only
c) I, IV, & V
d) V only
e) III and V
9. How many of the following charitable gifts could generate an income tax deduction?
I. Donor gives a West Texas cotton farm, but keeps all mineral rights
II. Donor gives a valuable painting to an art museum, but keeps all digital and reproduction rights
III. Donor gives all ownership rights in a painting that he painted himself which, although it has great sentimental value, does not have any fair market value
IV. Donor gives to charity the right to receive his automobile after his death
V. Donor gives a local church the right to farm his highly productive land for the next 10 years without any rent charge
a) 0
b) 1
c) 2
d) 3
e) 4
10. How many of the following charitable gifts could generate an income tax deduction?
I. Donor gives a 5% interest as tenants in common in a West Texas cotton farm without the mineral rights because the donor never owned the mineral rights
II. Donor gives a 10% interest as tenants in common in an Iowa corn farm where a billboard company (unrelated to the donor) owns the rights to place billboards on the farmland where the interstate highway adjoins the farmland.
III. A donor pays for a ten year lease to the top floor of an office building in downtown Seattle. (The lease represents her only rights in the building.) She then gives the right to use the office building during the entire period of the ten year lease to a local charity at no charge to the charity.
IV. A donor has a life estate giving her the right to use a vacation property for the remainder of her life. The donor gives an 11/12 interest in the life estate as tenants in common to the charity. The donor retains a 1/12 interest including the right to use the property for one month out of each year during the remainder of her life.
V. Donor owns a cotton farm in West Texas including all mineral rights. Donor simultaneously gives half of the mineral rights to charity A, the other half of the mineral rights to charity B, the right to use the property for the next 5 years to charity C, the right to use the property for years 6-10 to charity D, and all remaining interests following the 10 year period one-half to charity E and one-half to charity F.
a) 1
b) 2
c) 3
d) 4
e) 5
11. A donor gives a 1/12 undivided interest in all his rights in a painting to a public charity art museum (including the right to display the painting for one month per year). The donor gives an additional 1/12 undivided interest each year for 10 more years to the same art museum. The donor retains the final 1/12 interest to be kept by his family so that the art work can be displayed for one month out of the year in his family home. The painting is valued at $120,000 at the time of the initial 1/12 interest gift. Each year it increases by an additional $12,000 by the time of the transfer of each subsequent 1/12 interest gift. What is the total value of the deduction for this gift?
a) $10,000 (year 1)+ $11,000 (year 2)+ $12,000 (year 3)+ $13,000 (year 4)+ $14,000 (year 5)+ $15,000 (year 5)+ $16,000 (year 6)+ $17,000 (year 7)+ $18,000 (year 8)+ $19,000 (year 9)+ $20,000 (year 10)+ $21,000 (year 11).
b) $10,000 x 11
c) $22,000 x 11
d) $120,000
e) $0 (or less depending upon interest and penalties)
12. A donor gives a 1/10 undivided interest in all his rights in a painting to a public charity art museum (including the right to display the painting for 1/10 of each year). The donor gives an additional 1/10 undivided interest each year for 9 more years to the same art museum, completing a gift of the entire work of art in 10 years. The painting is valued at $100,000 at the time of the initial 1/10 interest gift. Each year it increases in value by an additional $10,000 by the time of the transfer of each subsequent 1/10 interest gift. What is the total value of the deduction for this gift?
a) $10,000 (year 1)+ $11,000 (year 2)+ $12,000 (year 3)+ $13,000 (year 4)+ $14,000 (year 5)+ $15,000 (year 5)+ $16,000 (year 6)+ $17,000 (year 7)+ $18,000 (year 8)+ $19,000 (year 9)+ $20,000 (year 10)
b) $10,000 x 10
c) $20,000 x 10
d) $150,000
e) $0 (or less depending upon interest and penalties)
13. A donor gives a 1/12 undivided interest in all his rights in a vacation home to a local charity (including the right to use or rent out the property for one month per year). The donor gives an additional 1/12 undivided interest each year for 10 more years to the same charity. The donor retains the final 1/12 interest to be kept by his family so that they can use the vacation home for one month out of each year. The property is valued at $120,000 at the time of the initial 1/12 interest gift. Each year it increases by an additional $12,000 by the time of the transfer of each subsequent 1/12 interest gift. What is the total value of the deduction for this gift?
a) $10,000 (year 1)+ $11,000 (year 2)+ $12,000 (year 3)+ $13,000 (year 4)+ $14,000 (year 5)+ $15,000 (year 5)+ $16,000 (year 6)+ $17,000 (year 7)+ $18,000 (year 8)+ $19,000 (year 9)+ $20,000 (year 10)+ $21,000 (year 11)
b) $10,000 x 11
c) $22,000 x 11
d) $120,000
e) $0 (or less depending upon interest and penalties)
14. Which of the following gifts will NOT qualify for a current income tax deduction?
a) Artie signed and delivered a deed conveying his beach house residence to the American Cancer Society.
b) Benjamin executed a new will which gives 200 acres of his farm to the Boy Scouts of America for use as a campground.
c) Carrie irrevocably transfers an undivided 1/3 interest as tenants in common in a rental house to the American Red Cross.
d) All of these gifts qualify for a current income tax deduction
e) None of these gifts qualify for a current income tax deduction
15. Alvin and Amy own a ski chalet outside of Taos, New Mexico. When the chalet is not being used by Alvin and Amy or their close friends and family, they rent the property through an agent and they earn $1,000 per week. This year, Alvin and Amy signed a written authorization for their minister to use the chalet for one month each year for three years to host a series of marriage retreats where young married couples would get away and recommit to each other and to God. The authorization letter was signed by Alvin and Amy and placed into the donation plate that was passed around the congregation during a Sunday service at their church. Which of the following amounts is closest to the deduction that will be allowed this year?
a) $12,000
b) An amount between $4,001 and $11,999
c) $4,000
d) An amount between $0 and $3,999
e) $0
16. Which is NOT an exception to the rule that gifts of partial interests generate no income tax deduction
a) a qualified conservation easement
b) a "qualified percentage" of the donor's partial interest in property
c) an "undivided portion" of the donor's entire interest in property
d) an interest transferred in the form of a Charitable Lead Trust or Charitable Remainder Trust
e) a remainder interest deed in a personal residence or farm
17. Which one of the following qualifies for an income tax deduction:
a) Owner of a building allows a charity to use it rent free for 10 years
b) A painter giving his highly valued painting to charity but keeps the copyright interests
c) A donor puts his office building in an IRREVOCABLE trust that will transfer the land to the charity at his death.
d) A local art gallery receives a 1/12 interest in a painting owned by a donor. The donor never makes any other gifts of the remaining interest in the painting to any charity.
e) A person donates an office building to his church with the provision that all proceeds from rent for the first 10 years must be given to the Red Cross.
Answers
1/ Answer: B. Explanation: Giving all of one's interest in the property will generally qualify for a charitable deduction (unless the donor has previously divided the interests for the purpose of defeating the tax rule against deducting partial interest gifts, which is not likely in a situation where the donor inherits and gives all of his inherited interest). All other examples are partial interest gifts that do not fall into one of the exceptions, thus making them non-deductible gifts. Note that the gift of the automobile in ten years may be deductible when it is actually transferred in ten years, but there is no immediate deduction based on the irrevocable, enforceable commitment to gift the property because of the donor's retained interest.
2/ Answer: A. Explanation: An ownership share as a tenant in common is considered to be an "undivided portion" of the donor's entire interest and is thus deductible. All other gifts are partial interest gifts that do not fall into any particular exception to the general rule against deducting partial interest gifts. Giving a remainder interest is not deductible because this property is not a farm or home. Giving the right to 10% of all profits is a non-deductible partial interest gift.
3/ Answer: C. Explanation: The general rule is that partial interest gifts where the donor retains some interest in the gifted property are not deductible. Exceptions to this rule include giving all or an undivided portion of one's entire interest, giving a remainder interest in a home or farm, giving by Charitable Remainder Trusts or Charitable Lead Trusts, or giving a qualified conservation easement. Unless the gift falls into one of these exceptions, giving with a qualified appraisal or to a 501(c)3 organization does not make the gift deductible.
4/ Answer: C. Explanation: The primary motivation for the general rule is that donors can manipulate the circumstances following the gift (and deduction) such that they will be able to receive a much greater share (and the charity receive a much smaller share) than was reflected in the deduction. The exceptions to the rule are circumstances in which this potential is much less because of the specific requirements of each exception. Gifts of future interests and partial interests are ascertainable and, in the case of the exceptions to the rule, are regularly ascertained. The complexity of the partial interest gifts is not the problem as the exceptions to the rule show that enormous complexity, in the form of charitable trusts, is welcome. The 5% rule does not apply to all exceptions of deducting partial interest gifts (e.g., remainder interests in homes or farms), and is thus not the motivation for the general rule.
5/ Answer: C. Explanation: A divided share gift occurs when the donor gives some ownership rights to a particular piece of property, but keeps some other ownership rights in the same piece of property. Physically separating property into different items, and giving one of those items is not a non-deductible divided share gift because the donor is keeping no ownership rights in the item of property that has been gifted. Consequently, giving a wheel from a car, 10 acres from a farm, or one painting from a collection is not a divided share gift as the donor is giving all ownership rights in the donated item of property. However, giving the use of one's farm does divide the ownership interests, and the donor does keep some ownership interests in the donated item of property. This makes it a non-deductible divided gift. Giving a 10% share in the farm as tenants-in-common is an "undivided share" as the charity has a share of all of the donor's rights, and there are no rights that the donor retains entirely for his own use.
6/ Answer: B. Explanation: Only III is a deductible gift of an undivided share, because it gives a 15% share of all of the donor's ownership interests to the charity. The fact that it is not a personal residence would prevent a deductible remainder interest gift, but this is not a remainder interest gift. In I, II, and IV the donor also gives away less than his or her entire interest, but in each of these cases the donor keeps some ownership rights entirely for himself or herself, so the charity does not have an undivided share in all ownership rights, and the gift is thus not deductible. In V the donor gives away all of the donor's ownership interests and so, although it is deductible, it does not meet the criteria for the question.
7/ Answer: A. Explanation: In all but V the donor retains some ownership interests. However, in III the donor retains only an undivided share in all property rights (and gives an undivided share in all property rights to the charity). Consequently, III is a deductible gift and thus does not meet the criteria for the question, leaving I, II, & IV.
8/ Answer: D. Explanation: The donor retains some interest in the property in all examples except V. In V, the donor did not own all of the property rights but the donor gave up all property rights which he did own. Giving up all rights that one owns to the charity makes the gift deductible.
9/ Answer: A. Explanation: In all cases except III, the donor retains a separate, divided ownership interest and the gift is consequently not deductible. In III the donor gives a piece of property with no fair market value thus generating no deduction.
10/ Answer: E. Explanation: All gifts described are deductible. In I, II, & IV the donor gives an undivided share of all of the donor's rights to an item of property. In II the donor gives all ownership rights that the donor owns in the building to the charity. In V the donor does give partial interests, but because he/she retains no ownership interests for himself or herself, but instead gives away all rights to various charities, the gifts are deductible.
11/ Answer: E. Explanation: This gift violates the rules for fractional shares in tangible personal property because all of the donor's rights must be given to charity within 10 years and this was not done. As such, the gifts are not deductible and any deductions taken are subject to recapture including interest and a 10% penalty. If this gift had not been a gift of tangible personal property, the special rule wouldn't apply and answer A would have been correct. Note that these rules apply only to gifts of fractional shares in tangible personal property and do not apply to gifts in other kinds of property.
12/ Answer: B. Explanation: This gift of fractional shares in personal property meets the rules of giving an undivided share in all of the donor's property rights and giving up all rights to the tangible personal property within ten years. As such it is deductible. However, the special rules for tangible personal property require that the deduction be limited to the lesser of the value during the first or later transfers. Consequently, each gift is valued at 1/10 of the initial $100,000 value, even though the tangible personal property grew in value each subsequent year. Note that these rules apply only to gifts of fractional shares in tangible personal property and do not apply to gifts of other kinds of property.
13/ Answer: A. Explanation: This is not tangible personal property so there are no requirements to transfer the entire ownership of the property within 10 years. Further, there is no requirement to value each fractional interest at the lesser of the value during the first or later transfers, as with a fractional share gift of tangible personal property. As such, each separate gift is valued as a share of the entire property, which must be valued at the time of each fractional interest gift. (Recognize that it is possible the IRS may require a reduction in valuation of the first gift based upon the cost of partitioning the property, because converting the ownership interest to cash by a forced sale would require some additional cost.)
14/ Answer: B. Explanation: A is incorrect since this is a direct gift of a piece of property. B is correct. Since Benjamin could revoke his will at any time and execute a new one that does not include the gift, it is not deductible even though it involves an interest in a family farm. C is incorrect. Since this is a partial gift of an undivided interest, it qualifies for the exception to the partial interest rule and for the deduction.
15/ Answer: E. Explanation: A right to use property is a gift of a partial interest and is not deductible where the donor owns additional rights to the property.
16/ Answer: B. Explanation: B is not an exception.
17/ Answer: E. Explanation: The rent-free use of real or personal property is not deductible where the donor retains other interests in the property. The painter's gift is a divided share partial interest and because he retains interest in the property the gift does not qualify for a deduction. Although irrevocable, the gift of the office building in trust is not deductible for income tax purposes because it is a divided share partial interest gift. (In contrast, a remainder interest transferred by deed in a home or farm would be deductible because of a special exception.) The 1/12 interest in the painting is not deductible because fractional shares in tangible personal property are deductible only if the entire item is transferred to charity within ten years (or the donor's death if earlier). The final option is correct because, although the interests are divided, all interests in the building are going to charity while the donor keeps nothing.