Florida Banking March 2024

Five Lessons, Continued from page 17

IRC Section 170(f)(8) – Substantiation Requirements

had the option to purchase the shares. To the extent not invoked, the company was obligated to redeem all of the (remaining) shares of the deceased shareholder. For pricing, the agreement provided two methodologies for establishing the shares’ value. First, it would be at the value that the shareholders annually agree and set forth on the agreement’s schedule. Second, the shareholders were authorized to hire two or more appraisers, and average their valuations. As is often the case in such matters, neither method was utilized. Thomas, who owned 77.18 percent of the shares, passed with no set valuation. Michael did not purchase the shares, so the company did. Thomas’ son, Michael’s nephew, was executor of the estate, and he and Michael agreed to a redemption value of $3 million, without any support such as of an appraisal. The company had purchased life insurance with a death benefit of $3.5 million: $500,000 was added to operating capital, and the remaining $3 million used to purchase the shares from Thomas’ estate. It is possible to fix value for estate tax purposes under Section 2703. To do so, the following requirements must be met: a. Three statutory requirements (i) must be a bona fide business arrangement, (ii) the agreement must not be a device to transfer property to the family for less than full adequate consideration, and (iii) the agreement must be comparable to similar agreements negotiated at arm’s length between unrelated parties. b. There must be a fixed and determinable offering price, the agreement must be binding both during life and after death. c. There must be a bona fide business reason. d. There must not be a testamentary disposition for less than full and adequate consideration. The first issue for the court was whether the agreement by the estate and surviving brother satisfied these requirements and thus bind the IRS. The court found in favor of the IRS that the buy-sell agreement was ineffective to fix the price as, among other things, the price was not fixed and determinable. Fixed would have been set; determinable would have been based on a formula ( Connelly v. United States, No. 21-3683 (8th Cir. 2023)). Valuing a Company that Owns Life Insurance to Redeem Shares We are not done learning from the above discussed Connelly case but getting to perhaps the more important issue to the IRS, the valuation of a company that owns life insurance to fund a mandatory stock redemption. The IRS appraiser valued Thomas Connelley’s shares at slightly less than $3 million excluding $500,000 of the insurance death benefit because these funds were used for capital to operate the company.

1. Less than $250. Must keep adequate records to substantiate the contribution. If the contribution is in cash, you must have a bank record or a receipt from the charity identifying the name of the charity, the date of the contribution, and the amount of the contribution. 2. Between $250 - $500. Must keep adequate records and obtain a receipt, called a Contemporaneous Written Acknowledgment (CWA)*, from the charity. 3. Greater than $500, but less than $5,000. All substantiation previously stated plus additional information as the Treasury may require. This essentially means meeting the requirements of the specific IRS form for income tax reporting and its instructions. For example, Form 8283 provides taxpayers with instructions on the information that must be provided for property donations, including basis in the property, and dates when the property was acquired and donated, and the method used to determine the fair market value. There are also specific substantiation requirements for vehicle, boat and airplane donations that are above $500, including a CWA and a 1098-C, if sold by the charity. 4. Greater than $5,000. All substantiation previously stated as well as a qualified appraisal that supports the value claimed for the donated property. Generally, the taxpayer must provide a summary of the appraisal. 5. Greater than $500,000 ($20,000 for artwork). Must attach a qualified appraisal and obtain the signature of an authorized official of the charity on Form 8283. Note: An appraisal must be attached for a gift of a qualified conservation easement regardless of value. * Indicates the amount of the cash and a description of any property other than cash contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. It must be received by the earlier of the filing of the tax return or the due date for the return, including extensions.

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