First of all, my experience and the premise I took in writing my previous response, is that charitable organizations accept gifts of property because they need and will use them, not to sell them.  Second, since I received one response off-list and one on, I will address what I think are the issues presented.

   

    When someone makes a donation of property to a qualified 501(c)(3) organization, one of the key questions they confront is how much of the value of the property they can deduct on their personal income tax return.  To answer that question, the donor must consider the nature of the property donated and the length of time it is held. 

                "The amount of the reduction (if any) depends on whether the property is

                  ordinary income property or capital gain property....Ordinary income property

                  is property that would result in ordinary income or short-term capital gain if it

                  were sold at its FMV [fair market value] on the date it was contributed.  Examples

                  of ordinary income property are...capital assets held for 1 year or less....Capital

                  gain property is property that would result in long-term capital gain if it were sold

                  at is FMV on the date it was contributed.  It includes...depreciable property generally

                  held for more than 1 year."  IRS Form 8283 Instructions, p2; also see Tax Code section 170.

 

     "The deduction for a gift of ordinary income property is limited to the FMV minus the amount that would be ordinary income or short-term capital gain if the property were sold." (Ibid)  For example, say I purchased a painting six months ago at a cost of $10,000.  Due to favorable market forces, the painting is now worth $15,000.  I decide to donate the painting to a museum.  Because I have not held the painting for at least one year, any increase in value over what I paid is considered a short-term capital gain.  Therefore, my tax deduction is limited to my investment in the painting, or $10,000.

 

    "You usually may deduct gifts of capital gain property at their FMV." (Ibid)  Same facts as above except this time I hold the painting for two years.  It is now worth $40,000.  I donate it to a qualified museum.  I may be entitled to deduct the FMV of the painting, or $40,000 as long as the museum puts the painting to a use that is consonant with its charitable purpose; it's a museum, it hangs the painting on the wall or uses it for purposes of study, etc.  According to Form 8283 instructions, "[h]owever, you must reduce the FMV by the amount of any appreciation if...[t]he contributed property is...put to an unrelated use." 

 

    An unrelated use would include selling it, since if sold, it would not be available for study or observation by museum goers.  Therefore, if I donated the painting and the museum immediately sold it, my tax deduction would again be limited to my original investment of $10,000.

 

    Now as to FMV.  The IRS defines FMV as, "the price a willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell."  The emphasis here is on the word "has."  Someone desperate and determined to purchase an item would likely spend more than someone who is not.  Likewise, if a person is in need of fast cash, they may be willing to part with an item for far less than it is worth; see pawn shops. 

 

    IRS Form 8283 requires appraisals for gifts of property.  The appraisal must be conducted by a person who holds themselves out to the public as an appraiser.  It is the job of the appraiser, because of his/her qualifications and experience, to set the FMV of the property, not the museum.  If a museum disposes of the gift of donated property within two years of the gift, it is required to report this fact to both the donor and to the IRS.  This may or may not immediately trigger a reconfiguration of the donor's tax return.  Form 8283 specifically states:

       

                "Furthermore, this organization affirms that in the event it sells, exchanges, or

                 otherwise disposes of the property described in Section B, Part 1 (or any portion

                 thereof) within 2 years after the date of receipt, it will file Form 8282, Donee

                 Information Return, with the IRS and give the donor a copy of that form.  This

                 acknowledgement does not represent agreement with the claimed fair market

                 value." (Form 8283 p2.)

 

    The museum may donate the work to another qualified organization without tax complications to the donor; sell it in a bargain sell, meaning less than it's worth, if it is in desperate need of money, etc.  Again, the museum does not set the item's FMV, the original appraisal does.  The IRS' Art Advisory Panel, first established in 1968, was created to review the accuracy of appraisals submitted for gifts of works of art, antiques, etc donated to museums.  The panel has the power to impose penalty taxes on returns where inaccurate appraisals either under value or over value the FMV.  In reality, the FMV of items rarely fluctuates beyond a modest increase or decrease from year to year.  There are instances where there is suddenly a run in a particular period/style of art; I'm thinking most recently of the 1980's Impressionist boom that hit is height and rapid decline with the purchase of Van Gogh's "Portrait of Dr. Gachet" for $82.5 million.

 

    For anyone who has made it this far and is truly interested in learning more about art, taxes and deductions, you may want to refer to an article I co-authored in the September 1977 issue of Trusts & Estates magazine,  "A Collector's Guide to Art, Taxes and Charitable Deductions."  Again, there are more complex answers than what I have written, for instance, the amount of a donor's deduction also depends upon whether they itemize.  

 

Best,

--- 

Terry Peeler, Esquire
Art & Entertainment Law
215-575-1180-p
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