Interest in a Business

The FMV of any interest in a business, whether a sole proprietorship or a partnership, is the amount that a willing buyer would pay for the interest to a willing seller after consideration of all relevant factors. The relevant factors to be considered in valuing the business are:

1. The FMV of the assets of the business,
2. The demonstrated earnings capacity of the business, based on a review of past and current earnings, and
3. The other factors used in evaluating corporate stock, if they apply.

The value of the goodwill of the business should also be taken into consideration. You should keep complete financial and other information on which you base the valuation. This includes copies of reports of examinations of the business made by accountants, engineers, or any technical experts on or close to the valuation date.

Annuities, Interests for Life or Terms of Years, Remainders, and Reversions

The value of these kinds of property is their present value, except in the case of annuities under contracts issued by companies regularly engaged in their sale. The valuation of these commercial annuity contracts and of insurance policies is discussed later under Certain Life Insurance and Annuity Contracts.

To determine present value, you must know the applicable interest rate and use actuarial tables.

Interest rate.    The applicable interest rate varies. It is announced monthly in a news release and published in the Internal Revenue Bulletin as a Revenue Ruling. The interest rate to use is under the heading Rate Under Section 7520 for a given month and year. You can call the local IRS office to obtain this rate.

Actuarial tables.    You need to refer to actuarial tables to determine a qualified interest in the form of an annuity, any interest for life or a term of years, or any remainder interest to a charitable organization.

Use the valuation tables set forth in IRS Publications 1457 (Alpha Volume) and 1458 (Beta Volume). Both of these publications provide tables containing actuarial factors to be used in determining the present value of an annuity, an interest for life or for a term of years, or a remainder or reversionary interest. For qualified charitable transfers, you can use the factor for the month in which you made the contribution or for either of the 2 months preceding that month.

Publication 1457 also contains actuarial factors for computing the value of a remainder interest in a charitable remainder annuity trust and a pooled income fund. Publication 1458 contains the factors for valuing the remainder interest in a charitable remainder unitrust. These are available for purchase by phone at (202)512-1800 or by mail from the:

Superintendent of Documents
United States Government
Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954

If you call in your order, you can pay by VISA or MasterCard.

Tables containing actuarial factors for transfers to pooled income funds may also be found in Income Tax Regulation 1.642(c)-6(e)(5), transfers to charitable remainder unitrusts in Regulation 1.664(e)(6), and other transfers in Regulation 20.2031-7(d)(6).

Special factors.    If you need a special factor for an actual transaction, you may ask for it by writing a request for a letter ruling to the:

Internal Revenue Service
Associate Chief Counsel (Domestic)
Attn: CC:DOM:Corp:T
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Be sure to include the date of birth of each person, the duration of whose life may affect the value of the interest, and copies of the relevant instruments. IRS charges a user fee for providing special factors.

For information on the circumstances under which a charitable deduction may be allowed for the donation of a partial interest in property not in trust, see Partial Interest in Property Not in Trust, later.

Certain Life Insurance and Annuity Contracts

The value of an annuity contract or a life insurance policy issued by a company regularly engaged in the sale of such contracts or policies is the amount that company would charge for a comparable contract.

But if the donee of a life insurance policy may reasonably be expected to cash the policy rather than hold it as an investment, then the FMV is the cash surrender value rather than the replacement cost.

If an annuity is payable under a combination annuity contract and life insurance policy (for example, a retirement income policy with a death benefit) and there was no insurance element when it was transferred to the charity, the policy is treated as an annuity contract.

Partial Interest in Property Not in Trust

Generally, no deduction is allowed for a charitable contribution, not made in trust, of less than your entire interest in property. However, this does not apply to a transfer of less than your entire interest if it is a transfer of:

1. A remainder interest in your personal residence or farm,
2. An undivided part of your entire interest in property, or
3. A qualified conservation contribution.

Valuation of a remainder interest in real property, not transferred in trust.    The amount of the deduction for a donation of a remainder interest in real property is the FMV of the remainder interest at the time of the contribution. To determine this value, you must know the FMV of the property on the date of the contribution. Multiply this value by the appropriate factor. Publications 1457 and 1458 contain these factors.

You must make an adjustment for depreciation or depletion using the factors shown in Publication 1459 (Gamma Volume). You can use the factors for the month in which you made the contribution or for either of the two months preceding that month. See the earlier discussion on Annuities, Interests for Life or Terms of Years, Remainders, and Reversions. Publication 1459 is available free by writing to the IRS address given under Special factors earlier.

For this purpose, the term depreciable property means any property subject to wear and tear or obsolescence, even if not used in a trade or business or for the production of income.

If the remainder interest includes both depreciable and nondepreciable property, for example a house and land, the FMV must be allocated between each kind of property at the time of the contribution. This rule also applies to a gift of a remainder interest that includes property that is part depletable and part not depletable. Take into account depreciation or depletion only for the property that is subject to depreciation or depletion.

For more information, see section 1.170A-2 of the Income Tax Regulations.

Undivided part of your entire interest.    A contribution of an undivided part of your entire interest in property must consist of a part of each and every substantial interest or right you own in the property. It must extend over the entire term of your interest in the property. For example, you are entitled to the income from certain property for your life (life estate) and you contribute 20% of that life estate to a qualified organization. You can claim a deduction for the contribution if you do not have any other interest in the property. To figure the value of a contribution involving a partial interest, see Publication 1457.

If the only interest you own in real property is a remainder interest and you transfer part of that interest to a qualified organization, see the previous discussion on valuation of a remainder interest in real property.

Qualified conservation contribution.    A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization to be used only for conservation purposes.

Qualified organization.    For purposes of a qualified conservation contribution, a qualified organization is:

1. A governmental unit,
2. A publicly supported charitable, religious, scientific, literary, educational, etc., organization, or
3. An organization that is controlled by, and operated for the exclusive benefit of, a governmental unit or a publicly supported charity.

Conservation purposes.    Your contribution must be made only for one of the following conservation purposes:

1. Preservation of land areas for outdoor recreation by, or for the education of, the general public.
2. Protection of a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem.
3. Preservation of open space, including farmland and forest land. The preservation must yield a significant public benefit. It must be either for the scenic enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy.
4. Preservation of a historically important land area or a certified historic structure. A historically important land area includes an independently significant land area, any land area in a registered historic district, and any land area next to a property listed in the National Register of Historic Places if its physical or environmental features contribute to the historic or cultural integrity of the listed property. A certified historic structure is any building, structure, or land area that is listed in the National Register, or is located in a registered historic district and is certified by the Secretary of the Interior as being of historic significance to the district.

   There must be some visual public access to the property. Factors used in determining the type and amount of public access required include the historical significance of the property, the remoteness or accessibility of the site, and the extent to which intrusions of privacy would be unreasonable.

Qualified real property interest.    This is any of the following interests in real property:

1. Your entire interest in real estate other than a mineral interest (subsurface oil, gas, or other minerals, and the right of access to these minerals).
2. A remainder interest.
3. A restriction (granted in perpetuity) on the use which may be made of the real property.

Valuation.    A qualified real property interest described in (1) should be valued in a manner that is consistent with the type of interest transferred. If you transferred all the interest in the property, the FMV of the property is the amount of the contribution. If you do not transfer the mineral interest, the FMV of the surface rights in the property is the amount of the contribution.

If you owned only a remainder interest or an income interest (life estate), see Undivided part of your entire interest, earlier. If you owned the entire property but only transferred a remainder interest (item (2)), see Valuation of a remainder interest in real property, not transferred in trust, earlier.

In determining the value of restrictions, you should take into account the selling price in arm's-length transactions of other properties that have comparable restrictions. If there are no qualified sales, the restrictions are valued indirectly as the difference between the FMVs of the property involved before and after the grant of the restriction.

The FMV of the property before contribution of the restriction should take into account not only current use but the likelihood that the property, without the restriction, would be developed. You should also consider any zoning, conservation, or historical preservation laws that would restrict development. Granting an easement may increase, rather than reduce, the value of property, and in such a situation no deduction would be allowed.

Example.    You own 10 acres of farmland. Similar land in the area has an FMV of $2,000 an acre. However, land in the general area that is restricted solely to farm use has an FMV of $1,500 an acre. Your county wants to preserve open space and prevent further development in your area.

You grant to the county an enforceable open space easement in perpetuity on 8 of the 10 acres, restricting its use to farmland. The value of this easement is $4,000, determined as follows:

FMV of the property before granting easement:
$2,000 × 10 acres		$20,000
FMV of the property after granting easement:
$1,500 × 8 acres	$12,000
$2,000 × 2 acres	4,000	16,000
Value of easement		$4,000

If you later transfer in fee your remaining interest in the 8 acres to another qualified organization, the FMV of your remaining interest is the FMV of the 8 acres reduced by the FMV of the easement granted to the first organization.

Appraisals

Appraisals are not necessary for items of property for which you claim a deduction of $5,000 or less, or for which the value can easily be determined, such as securities whose prices are reported daily in the newspapers. However, you generally will need an appraisal for donated property for which you claim a deduction of more than $5,000. See Deductions of More Than $5,000, later.

The weight given an appraisal depends on the completeness of the report, the qualifications of the appraiser, and the appraiser's demonstrated knowledge of the donated property. An appraisal must give all the facts on which to base an intelligent judgment of the value of the property.

The appraisal will not be given much weight if:

1. All the factors that apply are not considered,
2. The opinion is not supported with facts, such as purchase price and comparable sales, or
3. The opinion is not consistent with known facts.

The appraiser's opinion is never more valid than the facts on which it is based; without these facts it is simply a guess.

Membership in professional appraisal or dealer organizations does not automatically establish the appraiser's competency. Nor does the lack of certificates, memberships, etc., automatically disprove the competency of the appraiser.

The opinion of a person claiming to be an expert is not binding on the Internal Revenue Service. All facts associated with the donation must be considered.

Cost of appraisals.    You may not take a charitable contribution deduction for fees you pay for appraisals of your donated property. However, these fees may qualify as a miscellaneous deduction, subject to the 2% limit, on Schedule A (Form 1040) if paid to determine the amount allowable as a charitable contribution.

Deductions of More Than $5,000

Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, other than money and publicly traded securities, you must get a qualified appraisal made by a qualified appraiser, and you must attach an appraisal summary (Section B of Form 8283) to your tax return. You should keep the appraiser's report with your written records. Records are discussed in Publication 526. For special rules that apply to publicly traded securities and nonpublicly traded stock, see the discussions later in this section.

The phrase similar items means property of the same generic category or type (whether or not donated to the same donee), such as stamps, coins, lithographs, paintings, photographs, books, nonpublicly traded stock, nonpublicly traded securities other than nonpublicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver. For example, if you give books to three schools and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. You must get a qualified appraisal of the books and for each school you must attach a fully completed appraisal summary (Section B of Form 8283) to your tax return.

Publicly traded securities.    Even if your claimed deduction is more than $5,000, neither a qualified appraisal nor an appraisal summary is required for publicly traded securities that are:

• Listed on a stock exchange in which quotations are published on a daily basis,
• Regularly traded in a national or regional over-the-counter market for which published quotations are available, or
• Shares of an open-end investment company (mutual fund) for which quotations are published on a daily basis in a newspaper of general circulation throughout the United States.

Publicly traded securities that meet these requirements must be reported in Section A, Form 8283.

A partially completed appraisal summary (Parts I and IV of Section B, Form 8283) signed by the donee, but not a qualified appraisal, is required for publicly traded securities that do not meet these requirements, but do have readily available market quotations. Market quotations are readily available if:

1. The issue is regularly traded during the computation period (defined later) in a market for which there is an interdealer quotation system (defined later),
2. The issuer or agent computes the average trading price (defined later) for the same issue for the computation period,
3. The average trading price and total volume of the issue during the computation period are published in a newspaper of general circulation throughout the United States, not later than the last day of the month following the end of the calendar quarter in which the computation period ends,
4. The issuer or agent keeps books and records that list for each transaction during the computation period the date of settlement of the transaction, the name and address of the broker or dealer making the market in which the transaction occurred, and the trading price and volume, and
5. The issuer or agent permits the Internal Revenue Service to review the books and records described in paragraph (4) with respect to transactions during the computation period upon receiving reasonable notice.

An interdealer quotation system is any system of general circulation to brokers and dealers that regularly disseminates quotations of obligations by two or more identified brokers or dealers who are not related to either the issuer or agent who computes the average trading price of the security. A quotation sheet prepared and distributed by a broker or dealer in the regular course of business and containing only quotations of that broker or dealer is not an interdealer quotation system.

The average trading price is the average price of all transactions (weighted by volume), other than original issue or redemption transactions, conducted through a United States office of a broker or dealer who maintains a market in the issue of the security during the computation period. Bid and asked quotations are not taken into account.

The computation period is weekly during October through December and monthly during January through September. The weekly computation periods during October through December begin with the first Monday in October and end with the first Sunday following the last Monday in December.

Nonpublicly traded stock.    If you contribute nonpublicly traded stock, for which you claim a deduction of $10,000 or less, a qualified appraisal is not required. However, you must attach to your tax return a partially completed appraisal summary (Parts I and IV of Section B, Form 8283) signed by the donee.

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