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Herderings

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Feb 8, 2015
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Thank you for all the great info on this forum! I am very close to owning a new-to-me, 1987 32' boat but have some concerns and hope to get some advice.

The owner (through the broker) wants to donate the boat to a non-profit at a much higher valued amount than the price the non-profit would agree to sell it to me for. Owner gets a big tax write off, non-prof. get a chunk and I get a good price. The IRS frowns on this so the (experienced in this) org. has a "charter agreement" of three years with me to make this legal (which they assure me it is.) Has anyone heard of this or done this?

Any info or light you can shed on all of this would be greatly appreciated.

Linda
 
Linda


If you can smell a rat, so can the IRS. No matter how you dress it up, it is still fraud against the IRS. You don't want to be part of that deal.
 
Yes, I've not only heard of it but in fact that is how the owner of the boat I'm currently running purchased it. It's not a scam.
 
Thanks to you both. They talk of it technically as not "fraud" --more like a legal loophole. The boat DOES have the higher value that the owner can write off... but the non-profit doesn't want to pay expenses to fix and store the boat for perhaps sometime waiting for a buyer...hence the lower sales price. But to sort of avoid this the IRS mandates some sort of three year waiting time... similar to divesting of assets three years before being eligible for medicaid nursing home benefits.
 
I was offered similar once. Found that during the first three years I could not sell the boat. I would not want to be financially tied to nearly any movable, fun item... for three years mandatory... a boat is near top of my list.

Ended up I did not like the boat well enough for purchase anyway.

Read the fine print carefully! :eek:
 
Do it backwards. Buy the boat for the lower amount, pay a cash payment of the difference to the charity, and get immediate title. The only one who suffers is the broker (via the lower agreed on price). BUT, you take the increased contribution as a write off for charity. a win/ win.
 
Thank you Art & Cappy.

Yikes--hadn't really thought about wanting to sell her during the next three years. That would make a huge difference... as I was thinking if she turned out to really be too small for comfort (one of my concerns) I could sell her easily. Not so!

And Cappy... wish that were possible. It is the owner who would lose his tax write off for the big amount--and who insists to donate it for that reason as the lower purchase price, should he outright sell it, would be less valuable to him (he must be in a super high tax bracket!) The broker gets commission on the lower price no matter who would sell it to me...
 
Thank you Art & Cappy.

Yikes--hadn't really thought about wanting to sell her during the next three years. That would make a huge difference... as I was thinking if she turned out to really be too small for comfort (one of my concerns) I could sell her easily. Not so!

And Cappy... wish that were possible. It is the owner who would lose his tax write off for the big amount--and who insists to donate it for that reason as the lower purchase price, should he outright sell it, would be less valuable to him (he must be in a super high tax bracket!) The broker gets commission on the lower price no matter who would sell it to me...

Herderings... My dealings with what seems to be similar procedure was several years ago. Like I said - read the fine print. Maybe in your instance the boat could be resold by you whenever desired. However, there nearly must be some sort of stipulations; especially due to the convoluted finance manner for your initial purchase.
 
Ask them both to provide you with a written legal opinion from the IRS, or tax attorney who they vetted it through. The non profit certainly would have done that if they are legit. My guess is you will get some kind of excuse as to why they can't provide it. Run...
 
Do it backwards. Buy the boat for the lower amount, pay a cash payment of the difference to the charity, and get immediate title. The only one who suffers is the broker (via the lower agreed on price). BUT, you take the increased contribution as a write off for charity. a win/ win.

This.
 
Greetings,
Mr. H. Screw him! If the seller is playing games trying to save a few bucks AND he's in that higher tax bracket he sounds like a cheap conniving SOB that should be looking for another sucker. I wouldn't play his games. It may come back to bite you and YOU would be the loser not the "charity" or the cheap seller. Just my $0.1.5 (after taxes).
 
Like he said. Sounds dodgy. There are a lot of other boats out there.
 
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The arrangement that "Herderings" describes (donate / three year hold / interim charter ) with a tax advantage to the initial seller, revenue to the non-profit, and eventually solid title for the end buyer, is not unusual. On its face, it is not a scam. However, it's tempting for some people to cut corners and game the system, getting themselves and others in trouble. So, yeah, read everything closely, ask lots of questions, and know who you are dealing with.

As for handcuffing a short term sale, the kinds of boats that most of us on this Forum own or are considering are frankly not highly liquid investments anyway. IOW, if you seriously think you need to evaluate a boat with the flexibility to sell it within a short time frame, maybe you should consider chartering instead of buying.

In mandating a three-year hold, I think the IRS's motive is to discourage insider-trading situations, where a well-connected "friend" of the non-profit organization swoops in and skims off fast profits by flipping donated boats.
 
Do I understand correctly that during the three years the charity holds title to the boat? If so they would have to insure it and retain all sorts of legal obligation. Surprising they would do that.
 
In principle this scheme is no different from the "offshore delivery" scheme that high end new boat purchasers use to avoid California sales tax. It is technically legal, but it puts a big burden on the buyer who cannot sell it for three years. I would expect a substantial discount off of market pricing if I was going to do this deal.

I would also seek legal/tax counsel to make sure that you are not participating in anything illegal. Also have legal counsel review the charter/purchase agreement.

David
 
Bayview wrote: "If so they would have to insure it and retain all sorts of legal obligation."

Correct. NPOs who enter into these deals are typically cautious about who they "charter" or lease their donated boats to. The contract lays in liability protections for the owner and passes as much responsibility as possible through to the user of the boat. E.g., the insurance policy names the charterer plus the NPO as insured parties, similar to the way a bank requires auto-loan customers to buy insurance, adding the bank as an additional named insured.

Even with that, it's sometimes just not possible for the NPO to find a new boat user who is sufficiently financially responsible to make the NPO's administrators comfortable. In those cases, the donated boats lay at the NPO's docks or in a marina, slowly deteriorating while the three-year clock ticks. I have seen this happen several times. It's sad to watch, but I get why it happens.
 
And .... hopefully the tax laws and legal considerations do not change within the 3 years waiting period leaving a situation which is less advantageous. I just watched a couple planning to use the SS rules of 'file and suspend' as they begin their retirement next year see them being reversed last week.
These 'rules' can change quite swiftly during these political times.
 
Herderings.

A wise fella here on T.F. has said this about buying a vessel when things are in question.

"There is always another deal around the corner!"

This same Fella has given you some great input thus far. Art!

So I would look at the whole deal and think about it as well and see if it is really worth it.

Remember, There is always another deal around the corner!:thumb:


Happy cruising to you.

Cheers.

H. Foster
 
H - Irish is as Irish does! :D :thumb:
 
H - Irish is as Irish does! :D :thumb:


That is why we have the luck Art.

I am astonished that you did not give Herderings that wonderful quote Art.:rofl:

Cheers and happy cruising to you and yours mate.

And best of luck to you Herdering.

H. Foster
 
Not an attorney here but it seems to me there is no need for you to charter unless you have doubts about the boat. The IRS issues should be between the donor and the non-profit. If you are doing the 3 year charter to help out the donor in getting the big write off, well that is up to you.
 
The "as-is/where-is" meant that they would not bicker nor lower the price should a survey find anything wrong. If there were big things wrong I could always back out... but again, after the cost of said survey. Guess they are confident. I would surely do a good survey.

NOW... very interesting... there is a non-profit who handles boat donations for non-profits! (And would handle this.) Maritime Funding Association of Maine & Block Island Maritime Funding - Boat Donations
 
Reading the tax publications on charitable donations will make this clear. Basically it come down to this.

1. If a boat is donated to a charity and then sold the deduction is limited to the actual procedes of the sale. The deductioncan't be claimed until the boat sells.

2. If the boat is donated to a charity and the charity makes substantial use of the boat as part of its normal operations and then sells the boat after that use, the deduction is the fair market value of the boat at the time of the donation and can be taken for the tax year of the donation.

Basically #2 is the case you are looking at. When the charity charters the boat to you they are arguing that that constitutes substantial use of the boat so the donator gets the higher deduction. If the charity you are dealing with charters boats as part of its normal operations (even if those charters are part of sales of donated boats), you are likely safe. I didn't read the details, but I think the three years is part of the definition of substantial use. Actually you are safe in most cases. the only loser is the person who donated the boat who might get a lower deduction if they are audited and the IRS finds that the chartering of the boat to you does not constitute substantial use in the normal business of the charity.

Just my reading of the tax pubs. I looked into this a few years ago when I was interested in buying a boat in the same situation. I decided not to go through with it.
 
Heredering-as a tax attorney, I cant give you advice, but can clarify. TDunn has it basically correct. This may be more ifo than you want or really need, but here goes: The only IRS issue in the value of the boat to be deducted by the donor on his tax return. You are not a party to that transaction and there are o legal issues that involve you. If the value is found to be wrong, the donor loses the deduction and, if the valuation was fraudulent, the charitable organization can be hit with a penalty. As TDunn noted, the Internal Revenue Code and Regs define the value of the donation as the lesser of FMV at the time of the donation, or the price at which the charity sells the property, if sold "with no intervening use or improvements to the donated property by the donee". So, if they sell to you having not used the boat in any way themselves, the donor's charitable deduction is the price you paid. That is what they are trying to avoid. They need to show an intervening use by the charitable organization before selling to you. Two interesting points-(1) for a boat, beyond a small boat, the charitable org is required to have the value of the boat supported by a survery or formal appraisal So, they should have this and could make it available to you. (2) The charitable org has to give the donor a statement that is will use the boat, the duration of the use, the description of the use, and certify that the boat will not be sold during that period. Thus the charter. Since there is no stated period in the Code or Regs the 3 year charter is something I suspect their tax attorney has told them will be safe in almost every circumstance. You haven't mentioned how the charter works. Do you agree on a sale price up front. And then is the charter fee the sales price divided by the 36 months? With perhaps some interest component thrown in? Or, do you truly charter and then purchase for some stated value at the end of the charter? I presume if you walk during the charter period, you simply lose whatever you have paid for the charter. If you are really interested, you may have some negotiating room on the term of the charter, i.e. 12 months, 18 months or 24 months.

All that said, although you have only described the boat as 32', I am assuming a somewhat older boat, certainly not one in the multiple $100K range. If that is the case, I cant imagine that the difference between the donor's value and your purchase price can really be all that much. If you want the boat, my inclination would be to simply tell the funding outfit that you will buy the boat at your price and if the donor wants to get rid of it, he will have to accept that as his charitable deduction. The reason whoulf be pretty straightforward, you want complete ownership now to be able to do what you want with the boat. If they won't agree, walk.
 
What should be clear to everyone now is that the NPO will continue to own the boat for the 3 years and the OP will charter it, then buy at the end. So basically a charter agreement with a buyout at the end, or a lease-to-buy arrangement.

There might be simple solutions to the concerns raise by simply structuring the charter agreement accordingly. For example, if you want to be able to get out of the deal over the course of the agreement, negotiate to make it cancellable by you with some notice, or on annual boundaries. If you cancel, you will lose your charter payments made up to the cancellation point, which would otherwise have been payments towards the purchase. So you lose some and the NPO gains some, but you get out of the boat and the NPO has to go find another buyer. If you can get such an arrangement, I actually think it has some real advantages. Who wouldn't want to buy a boat on a try-and-buy basis, or with a return policy which is basically what you would be getting.
 
The owner (through the broker) wants to donate the boat to a non-profit at a much higher valued amount than the price the non-profit would agree to sell it to me for. Owner gets a big tax write off, non-prof. get a chunk and I get a good price.


The only IRS issue in the value of the boat to be deducted by the donor on his tax return. You are not a party to that transaction and there are o legal issues that involve you.


Linda, you are only party to a transaction between the "owner" -- no matter whether it's the current owner in a straightforward sale direct to you, or the "charity" if it's been donated to them in the meantime.

I don't see any reason why you should care at all about the current owner's/donor's tax issues.

The boat is worth to you what it's worth to you. Pay that much, no more, and take immediate ownership.

Get on with enjoying boating. :)

-Chris
 
Whole thing sounds like a can o' worms. That's the reason I walked on similar situation years ago. Soooo... Unless the boat cost would come out exceptionally low in comparison to its currently presumed exceptionally good condition - I'd walk quickly away. There are plenty of good boats at good prices available on the market without having to go through these shenanigans; and, possible catastrophe - legal or otherwise. Don't forget it's winter and many boat owners are ready to dicker - If you know how to get to a best price.
 
Thanks everyone. I am waiting for their contract to be sent this afternoon which will, of course, explain much more. Meanwhile, I'll detail a little more of what I know for those interested. First of all, the NPO who's mission it is to handle boat donations for other maritime NPOs handles all of this--quite experience. They are flexible on the contract, and usually it is as described above--a lease to purchase type agreement. In my case, they will accept a much lower than-the-value price for two reasons: 1) I will pay cash up front, vs them financing (they hold the title and they are listed as insured on my policy; and 2) They do not have to move the boat from Annapolis to Rhode Island, fix it, slip it, etc etc. In fact, they won't even have to survey it for my survey will do.

This came about this way for the owner originally put it on the market with a broker... then found 1) he could be a philanthroper (sp); 2) he could be rid of it fast by donating; and 3) a NPO would actually take it on with a buyer (charterer) in place.

We are talking a $60 to $80k survey value for a (cash) price of $35 -- listing price ("for quick sale") was $49k.

I would be sort of stupid not to do it. I cannot sell it for three years--but this is okay. One of my other hesitations is that it is smaller than I would like for "condo slip living." But I decided the good deal, and likely easy to sell when I can/want to (as it is unique to the market & good rep) would make up for the living space difference.

Of course--all based on the survey. I plan to negotiate an end to the "as is/where is" no bickering on the price stipulation because my original offer was $30k--the donation co said $35k bottom line.
 
"We are talking a $60 to $80k survey value for a (cash) price of $35 -- listing price ("for quick sale") was $49k."

The price of any boat is what it would sell for . "Survey value" is pure BS.

Depending on make and condition $35K might be spot on.

Paint (condition) sells da boat .Not bogus dream values.
 
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