A Qualified Appraisal: The Key to Effective DAF Giving

Private stock gifts can be an excellent way to fulfill your giving plans, but cutting corners on
the appraisal can prove costly.

One of the greatest rewards of wealth is the joy of giving it away to help others. For many business owners, making a large gift of a private business interest to a donor advised fund is an excellent way to achieve their giving goals.

When done right, not only can a donor deduct the value of the gift, the capital gain on any subsequent sale of the business interest may also be minimized or avoided altogether.

This can be an incredibly powerful way to put a lot of money to work for charity. But, as the saying goes, with great power, comes great responsibility. There are strict requirements for substantiating such a gift, and the consequences for getting it wrong can be severe.

One of the key requirements is that the donor must include a Qualified Appraisal with their tax return. There are very specific requirements for what qualifies as a Qualified Appraisal prepared by a Qualified Appraiser.

In the event of a potential sale, timing of the gift is also critical. Unlike the criteria for a Qualified Appraisal, there is no bright line set of rules for when a gift can be made relative to the timing of a subsequent sale.

In the recent case of Estate of Scott M. Hoensheid et al V. Commissioner, the donors cut corners on both requirements, with disastrous consequences. Rather than engage a Qualified Appraiser to perform a Qualified Appraisal, the donors obtained an appraisal from the investment banker that was handling the sale of the company. The Tax Court found that neither the appraiser nor the appraisal fit the required qualifications, and for this reason, disallowed the entire $3.3 million deduction.

That wasn’t the end of the bad news for the donor. The Tax Court also found that the donor had waited until the sale of the company was nearly certain to make the gift. Because of this, the Tax Court considered the donation to be an anticipatory assignment of income and ruled that the donors retained the capital gain tax liability on the donated shares.

The good news, however, is that this nightmare scenario can easily be avoided with proper planning. Talk with one of our experts to learn more about how Adamy works with donors, their tax and legal advisors, and charities to properly substantiate a charitable gift of private business interests.