Donation to Charity; Child as Joint Tenant; and Gift by Husband and Wife

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, January 9, 2000.

Copyright © 2000  Robert L. Sommers, all rights reserved.

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Question: My uncle gave me a watch which I donated to a museum. May I claim a charitable deduction and, if so, how much?

Answer: If the museum is a tax-exempt organization, then you are eligible for a charitable deduction, based on the watch’s fair market value at the time of donation.

If, however, your uncle gave you the watch with the understanding that you would immediately donate it to charity, then IRS could claim that your uncle was the actual donor, under the "step-transaction" doctrine. The step-transaction doctrine disregards the intermediate steps (i.e. your uncle’s transfer of the watch to you) when there is a series of economically meaningless pre-arranged steps designed to accomplish a tax result. Note: The step-transaction doctrine could apply to all tax-motivated transactions, not just those involving charitable deductions.

For gifts exceeding $250, you’ll need to retain written documentation of the value. For gifts worth more than $5,000 (other than money or publicly traded securities), the value must be substantiated with a qualified appraisal of the property. Attach the appraisal summary (Section B of Form 8283) to your Form 1040.

There are percentage limitations to your charitable deduction, generally 30% to 50% of the amount donated, depending on the charity and type of property. Any unused deduction may be carried forward for five years. However, you cannot carryback an unused deduction to prior tax years

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Question: If a sole parent adds her child’s name on her stock certificate as a joint tenant, upon the parent’s death, how is the stock’s basis determined?

Answer: In a joint tenancy, the surviving tenant receives the entire property. The general rule regarding joint-tenancy property is that the decedent paid the entire amount unless the survivor can prove they contributed to some or all of the purchase. Thus, the entire stock’s value, absent any survivor contributions, becomes part of the parent’s estate. If the dies during the year 2000 and her taxable estate exceeds $675,000, there will be estate tax liability. Conversely, if the estate is below $675,000, it is advantageous to include the property in the parent’s estate because the survivor receives the stock’s basis step-up to fair market value.

For example: Mother purchases stock for $10,000, places her daughter on title as joint tenant and dies while the stock is worth $20,000. Since mother paid for 100% of the stock, the entire amount is part of her estate and the stock’s basis is stepped-up to $20,000. A later sale by the daughter for $25,000 would produce a $5,000 long-term capital gain, regardless of the length of time the stock was held by the daughter.

In contrast, if mother and daughter contributed $7,500 and $2,500, respectively, to purchase the stock, then 75% of the stock ($15,000) would be included in the mother’s estate. A later sale of $25,000 would produce a taxable gain of $7,500 because the stock’s basis would be $17,500 ($15,000 stepped-up basis from mother’s estate + $2,500 of daughter’s original basis = $17,500).

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Question: Before marriage, I purchased stock for $2,000 is now worth $20,000. I want to gift this stock to our son. Am I limited to $10,000?

Answer: No. If your wife consents, you may give the entire stock interest worth $20,000 to your son. The annual gift tax exclusion allows a donor to give up to $10,000 per year ($20,000 for a married couple) per beneficiary. If only one spouse owns the property, the other spouse may join in the gift. File a gift tax return (Form 709), and make the spousal election to treat the gift as being made one-half by each spouse.

Note: You may file the short-form gift tax return (Form 709-A) if your gift does not involve closely held stock, partnership interests, fractional interests in real estate, or gifts for which the value has been reduced to reflect a valuation discount.