Question

In December each year, Eleanor Young contributes 10% of her gross income to the United Way (a 50% organization). Eleanor, who is in the 28% marginal tax bracket, is considering the following alternatives for satisfying the contribution.

Fair Market Value (1) Cash donation $169,000 (2) Unimproved land held for six years ($25,350 basis) $169,000 (3) Blue Corporation stock held for eight months ($25,350 basis) $169,000 (4) Gold Corporation stock held for two years ($202,800 basis) $169,000

Eleanor has asked you to help her decide which of the potential contributions listed above will be most advantageous tax-wise. Evaluate the four alternatives and complete a letter to Eleanor.

Determine the amount of the charitable contribution for each option.

Charitable Contribution Cash donation $ Unimproved land held for six years ($25,350 basis) $ Blue Corporation stock held for eight months ($25,350 basis) $ Gold Corporation stock held for two years ($202,800 basis) $

Hoffman, Young, Raabe, Maloney, & Nellen, CPAs 5191 Natorp Boulevard Mason, OH 45040

December 5, 2017

Ms. Eleanor Young 2622 Bayshore Drive Berkeley, CA 94709

Dear Ms. Young:

I have evaluated the proposed alternatives for your current year-end contribution to the United Way. I recommend that you sell the Gold Corporation stock and donate the proceeds to the United Way. The four alternatives are discussed below.

A donation of cash, the unimproved land, or the Gold stock will result in a $ charitable contribution deduction. Donation of the Blue Corporation stock will result in only a $ charitable contribution deduction.

A direct contribution of the Gold Corporation stock will be a poor decision from a tax perspective in that the decline in value is not deductible and the amount of the charitable contribution would be $. If you sell the Gold stock and give the proceeds to United Way, the donation of the proceeds will result in a $ charitable contribution deduction. In addition, sale of the stock will result in a $ long-term capital loss. If you have capital gains of $ or more this year, you can use the entire loss in computing your current taxable income. If you have no capital gains this year, you can deduct $ of the capital loss this year and carry over the remaining $loss to future years.

You should make the donation in time for ownership to change hands before the end of the year. Therefore, I recommend that you notify your broker immediately so that there will be no problem in completing the donation on a timely basis.

Please let me know if you have any questions or would like to discuss my recommendation and the related analysis. Thank you for consulting our firm on this matter. We look forward to serving you in the future.

Sincerely,

Nora Oldham, CPA

Answer 1

Below points to be kept in mind before answering the question: -

Cash Donation: - if the donor is contributing cash to the charity, the general rule is that there is only one limitation on the total amount that he is entitled to deduct: He may only deduct his contribution to the extent that it does not exceed 50% of his adjusted gross income. Any amount not deducted in the year he makes the contribution may be carried forward and taken the next year for up to 5 years.

Property: - If a donor is contributing property that would have yielded a long-term capital gain in a sale, then the deduction for the contribution is limited to 30% of donor's adjusted gross income in the year of donation if the donee is a public charitiy, and limited to 20% if the donee is a private foundation. Contributions over the respective AGI thresholds may be carried forward for five years, and may be deducted in subsequent years pursuant to the same restrictions.

Short term / long term Capital Gains: - The premature gift forfeits deduction of the short-term gains. The asset can be deducted only up to the amount of its basis, and not up to the amount of its appreciated market value. Only an investor who holds the asset until the capital gains have become long-term is allowed to deduct the appreciated market value.

In view of above points, we can conclude that:

(a) Cash donation: - As $ 1,69,000 is only 10% of gross total income, entire amount will be available for deduction.

(b) Un improved land: - As $ 1,69,000 is only 10% of gross total income, entire amount will be available for deduction.

(c) Blue corporation stock: - As it gives rise to Short term capital gain and amount deductable would be only 25,350 basis.

(d) Gold corporation stock: - As $ 1,69,000 is only 10% of gross total income, entire amount will be available for deduction.

Below is the completed letter: -

Hoffman, Young, Raabe, Maloney, & Nellen, CPAs 5191 Natorp Boulevard Mason, OH 45040

December 5, 2017

Ms. Eleanor Young 2622 Bayshore Drive Berkeley, CA 94709

Dear Ms. Young:

I have evaluated the proposed alternatives for your current year-end contribution to the United Way. I recommend that you sell the Gold Corporation stock and donate the proceeds to the United Way. The four alternatives are discussed below.

A donation of cash, the unimproved land, or the Gold stock will result in a $ 1,69,000 charitable contribution deduction. Donation of the Blue Corporation stock will result in only a $ 25,230 charitable contribution deduction.

A direct contribution of the Gold Corporation stock will be a poor decision from a tax perspective in that the decline in value is not deductible and the amount of the charitable contribution would be $. If you sell the Gold stock and give the proceeds to United Way, the donation of the proceeds will result in a $ 1,69,000 charitable contribution deduction. In addition, sale of the stock will result in a $ 33,800 long-term capital loss. If you have capital gains of $ 33,800 or more this year, you can use the entire loss in computing your current taxable income. If you have no capital gains this year, you can deduct $ 33,800 of the capital loss this year and carry over the remaining $loss to future years.

You should make the donation in time for ownership to change hands before the end of the year. Therefore, I recommend that you notify your broker immediately so that there will be no problem in completing the donation on a timely basis.

Please let me know if you have any questions or would like to discuss my recommendation and the related analysis. Thank you for consulting our firm on this matter. We look forward to serving you in the future.

Sincerely,

Nora Oldham, CPA