By Steven A. Clark, Bohonnon Law Firm, LLC
We have recently experienced in our transactional practice an increase in the number of clients, with the guidance and input of their trusted brokers, seeking to donate their vessels. We believe the charitable contribution option has garnered increased attraction from our clients and their brokers in that it may ultimately present either (1) a better value for their yacht or (2) a more efficient disposition for their yacht.
For the yacht brokers that may be involved in such vessel donations (and especially for those that coordinate and complete the paperwork), we simply wanted to highlight herein some of the important considerations that should be made as well as potential issues that we have seen in our recent yacht donation transactions.
- Qualified Organizations: Although a simple concept, a vessel donor must donate its vessel to a qualified organization recognized by the Internal Revenue Service (“IRS”). A qualified organization generally includes the common non-profit 501(c) (3) organizations, but may also include foundations operated exclusively for educational purposes. The IRS publishes and maintains a current list of such qualified organizations – it is best to quickly check and verify that the organization with which you are dealing is in fact a recognized qualified organization.
- Qualified Appraisal by a Qualified Appraiser: Assuming that a vessel owner is donating a vessel that is valued at more than $5,000, the donor must obtain a qualified written appraisal of the vessel by a qualified appraiser. Although the IRS code expounds somewhat on the meaning of “qualified”, a vessel donor and their broker must carefully consider the qualifications of the surveyor and the quality of the resulting appraisal. We have seen in the very recent past a vessel donor’s deduction disallowed for this very reason.
- Vessel Donation Agreement and Requisite IRS Forms: A vessel donation agreement between the vessel donor and the charity is essential as it confirms each party’s responsibilities and terms and conditions under which the vessel donation is being effectuated. Further, several IRS forms and a charity generated form must be properly completed and filed with both the charity and the IRS; and there are filing deadlines on each of the forms which vary depending on the facts and circumstances of each vessel donation.
- Significant Intervening Use and/or Material Improvement: Invariably these terms are mentioned when talking about vessel donations, and rightfully so. Per IRS guidelines, if a donor donates a boat (a qualified vehicle) to a charity (qualified organization) and the donor claims a deduction of more than $500 (generally the case with yacht donations), then the donor can deduct the smaller of (1) the gross proceeds from the sale of the vessel by the charity or (2) the vessel’s fair market value on the date of the contribution, with the EXCEPTION that if the charity makes a significant intervening use of or a material improvement to the vessel before transferring it, then the donor can generally deduct the vessel’s fair market value at the time of the contribution.
The obvious question of course is: what constitutes a significant intervening use or a material improvement? The answer: it is a fact based analysis that hinges upon the unique facts and circumstances of each vessel donation and the charity’s plan for the vessel. You often hear of charities leasing (chartering) their donated vessels for a time certain and providing options to purchase upon/near the conclusion of the lease (charter). Depending on the leasing structure and operation of the vessel (i.e. activity/use during the charter), such a structure may draw scrutiny from the IRS, and could lead to an IRS audit and potential deduction disallowances.
Depending on the facts and circumstances, vessel donations can be a very attractive alternative to an outright sale (which, depending on the yacht, could take a measureable amount of time), and we commend the brokers presenting this option to their clients. As we have highlighted above, there are a number of considerations that must be made and details that cannot be overlooked.
Please feel free to give us a call to discuss the facts and circumstances of any potential vessel donations, and we are happy to answer any questions or queries generated by our summary above.
Steven A. Clark is a senior associate in the New Haven based Bohonnon Law Firm, LLC.