Charitable Deduction for Artwork

 

Charitable Deduction for Artwork

News story posted in Letter Rulings on 17 August 1998| comments
audience: National Publication | last updated: 18 May 2011
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Summary

The Service has ruled privately that: 1) contributions of artworks to a community center will be charitable contributions if substantiation requirements are met, and 2) the donors' charitable contributions will not be reduced under Code Section 170(e)(1)(B)(i), which relates to reductions for tangible personal property put to an unrelated use, as long as the donors establish that the artwork is not put to an unrelated use or reasonably assume that it will not be.

Ltr. Rul. 9833011

PGDC Summary:

In response to a request by a Code Section 501(c)(3) community center regarding possible solicitations for gifts of artwork, the IRS rules as follows: (i) Contributions of artworks to the community center will be charitable contributions if substantiation requirements are met. (ii) The donors' charitable contributions will not be reduced under Code Section 170(e)(1)(A), which relates to reductions for gain that would not have been long-term capital gain if the property had been sold for its fair market value, as long as the artwork is long-term capital gain property in the hands of the donors. (iii) The donors' charitable contributions will not be reduced under Code Section 170(e)(1)(B)(i), which relates to reductions for tangible personal property put to an unrelated use, as long as the donors establish that the artwork is not put to an unrelated use or reasonably assume that it will not be.

Points to Ponder:

Consider the viability of a gift of an undivided interest in the artwork or the consequences of a loan of the artwork. What constitutes a "related use"?

Full Text:

Date: May 14, 1998
Refer Reply To: CC:DOM:IT&A:B3:PLR-101512-98
EIN: * * *
DO: * * *
TY: * * *
LEGEND:
Taxpayer = * * *

Dear * * *

This is in response to the December 26, 1997 letter from Taxpayer's representative requesting rulings on Taxpayer's behalf. That letter requests rulings that donations of certain types of appreciated tangible personal property will be eligible for a charitable contribution deduction equal to the fair market value of the property and that the property donated to Taxpayer will be put to a use not unrelated to the purpose or function constituting the basis for Taxpayer's exemption from tax under section 501(c)(3) of the Internal Revenue Code.

RULINGS REQUESTED

Taxpayer requests the following rulings:

1. A donor's contributions of works of art to Taxpayer during 1998 will qualify as charitable contributions under section 170(c).

2. The amount of a donor's charitable contribution deduction will not be reduced under section 170(e)(1)(B)(i) because the works of art will be put to a use not unrelated to the purpose or function constituting the basis for Taxpayer's exemption from tax under section 501.

3. The amount of a donor's charitable contribution deduction will be the fair market value of the work of art on the date of the contribution, subject to the limitations of section 170(b)(1)(C) applicable to capital gain property.

FACTS

Taxpayer is a community center. Taxpayer represents that it is tax exempt under section 501(c)(3) of the Code and is a charitable organization as described in sections 170(b)(1)(A) and 170(c)(2).

Taxpayer provides, fosters, promotes and develops Jewish traditions, culture and identity through recreational, educational and social services and through cultural activities. Taxpayer represents that some of its existing programs utilize artwork for display and educational purposes in an arts wing and a library. For example, Taxpayer represents that a creative arts program utilizes art exhibits that focus on biblical scenes, Jewish modern art or unique well-known Jewish artists to teach and enlighten those who use Taxpayer's facilities.

Taxpayer proposes to solicit contributions of works of art. Works of art will be evaluated by a group of volunteers from the local community and selected for acceptance based on estimated appraised value and appropriate artistic value, including subject matter, artist, and religious or cultural significance. However, the works of art selected will not be restricted to Jewish artists and/or Jewish themes. Taxpayer represents that it will accept only works of art that it reasonably expects to use in a manner related to the purpose or function constituting the basis for Taxpayer's exemption under section 501(c)(3) of the Code. Taxpayer intends to accept works of art for display in its facilities and for specific exhibits at the facilities of nearby affiliated charitable organizations including a day school, a home for the aged, and an administration building. Taxpayer represents that contributed works of art will be loaned to, or displayed at, an affiliated charitable organization only when such activity will further Taxpayer's exempt purpose under section 501(c)(3).

Taxpayer represents that it does not intend to sell or otherwise dispose of any of the donated works of art, except on a limited and infrequent basis. For example, Taxpayer may determine that a particular work of art should be sold because its collection exceeds the space available to provide an appropriate display, or it is no longer relevant for display, or it becomes too costly to provide adequate maintenance or security for that particular work of art.

LAW AND ANALYSIS

Section 501(c)(3) of the Code, in part, provides for exemption from federal income tax for organizations organized and operated exclusively for religious, charitable, scientific, or educational purposes if no part of the organizations net earnings inures to the benefit of any private shareholder or individual.

Section 170(a)(1) of the Code permits a deduction for any "charitable contribution," as defined in section 170(c).

Section 170(c) of the Code defines a charitable contribution as a contribution or gift to or for the use of certain donees.

Under section 170(e)(1)(A) of the Code, the amount of any charitable contribution of property is reduced by the amount of gain that would not have been long-term capital gain if the property had been sold by the taxpayer at its fair market value, determined at the time of the contribution. Furthermore, under section 170(e)(1)(B), in the case of a charitable contribution of tangible personal property, if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501, then the charitable contribution must be reduced by the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value.

Section 1.170A-1(c)(1) of the Income Tax Regulations provides that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e)(1) of the Code and section 1.170A-4(a) of the regulations. Section 1.170A-1(c)(2) provides, in part, that "fair market value" is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of the relevant facts.

Section 1.170A-4(a) of the regulations provides, in part, that if an individual or corporation contributes ordinary income property, as defined in section 1.170A-4(b), the amount of the charitable contribution is reduced by the gain that would have been recognized as ordinary income if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization.

Section 1.170A-4(b) of the regulations defines the term "ordinary income property" to mean property, any portion of the gain on which would not have been long-term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization. Such term includes property held by the donor primarily for sale to its customers in the ordinary course of its trade or business and works of art created by the donor. Therefore, if any work of art is held by the donor primarily for sale to its customers in the ordinary course of its trade or business, or if any work of art was created by the donor, the work of art will be ordinary income property. Consequently, the amount of the charitable contribution deduction will be reduced by gain that would be ordinary income if the work of art were sold by the donor.

Section 1.170A-4(b)(3)(i) of the regulations defines "unrelated use" for purposes of section 170(e)(1)(B) of the Code as:

A use which is unrelated to the purpose or function constituting the basis of the charitable organizations exemption under section 501. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use.

Section 1.170A-4(b)(3)(i) of the regulations allows a taxpayer who makes a charitable contribution of tangible personal property to or for the use of a charitable organization to treat such property as not being put to an unrelated use by the donee if --

(a) The taxpayer establishes that the property is not in fact put to an unrelated use by the donee, or

(b) At the time of the contribution or at the time the contribution is treated as made, it is reasonable to anticipate that the property will not be put to an unrelated use by the donee. In the case of a contribution of tangible personal property to or for the use of a museum, if the object donated is of a general type normally retained by such museum or other museums for museum purposes, it will be reasonable for the donor to anticipate, unless he has actual knowledge to the contrary, that the object will not be put to an unrelated use by the donee, whether or not the object is later sold or exchanged by the donee.

So long as the works of art donated to Taxpayer are used to provide, foster, promote and develop Jewish traditions, culture and identity through recreational, educational and social services and through cultural activities, such use will be not unrelated to Taxpayer's purpose or function constituting the basis for its exemption under section 501(c)(3). Furthermore, so long as any loans to, or displays of, works of art at an affiliated charitable organization further Taxpayer's exempt purpose or function such activities will be not unrelated to Taxpayer's exempt purpose or function. However, Taxpayer may not rely on the exempt purpose or function of an affiliated charitable organization to satisfy the requirement that the works of art be put to a use not unrelated to Taxpayer's exempt purpose or function.

A donor may treat a donation of a work of art as not being put to an unrelated use by the donee under two circumstances. First, a donor may establish that the work of art is not in fact put to an unrelated use by the Taxpayer. Second, based upon Taxpayer's representations, a donor may reasonably assume that Taxpayer will use the works of art in its exempt activities and has no intention of selling the works of art except on a limited and infrequent basis, so long as the donor knows of Taxpayer's policy to only accept works of art for use in its exempt activities and has no knowledge to the contrary at the time of contribution.

Section 170(f)(8) of the Code disallows a deduction under 170(a) for any contribution of $250 or more unless the donor substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization.

Section 6115(a) of the Code requires a qualified charity that receives a quid pro quo contribution in excess of $75 to, in connection with the solicitation or receipt of the contribution, to provide a written statement that informs the donor that the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of goods or services provided by the organization, and to provide the donor with a good faith estimate of the goods or services.

Section 6115(b) defines a quid pro quo contribution as a payment made partly as a contribution and partly in consideration for goods or services provided to the payor by the donee organization. Thus, if any contribution of a work of art is a quid pro quo contribution Taxpayer will be required to provide the donor with the written statement described above.

Section 1.170A-13(c) of the regulations provides certain substantiation requirements for deductions by an individual in excess of $5,000 for noncash charitable contributions. Specifically, a donor must obtain a qualified appraisal and attach to the donor's income tax return a fully completed appraisal summary (Form 8283, Noncash Charitable Contributions). A qualified appraisal includes an appraisal by a qualified appraiser that is made not earlier than 60 days prior to the date of the contribution of the appreciated property nor later than the due date of the donor's return on which the deduction is claimed.

Section 1.170A-13(c)(5) of the regulations generally describes a qualified appraiser as an individual who includes on the appraisal summary a declaration that the individual holds himself or herself out to the public as a appraiser or performs appraisals on a regular basis and is qualified to make appraisals of the property being valued. Furthermore, neither the volunteers who evaluate the works of art for the Taxpayer, nor any members or employees of the Taxpayer can be a qualified appraiser with respect to a donation of works of art to Taxpayer.

Finally, as explained on Form 8283, if a donor's total deduction for art is $20,000 or more, the donor must attach a complete copy of the signed appraisal and, if an individual work of art is valued at $20,000 or more, a photograph must be provided upon request.

Section 170(b)(1)(C)(i) of the Code describes a special limitation to the deductibility of certain capital gain property. In the case of charitable contributions described in section 170(b)(1)(A) (that is, to an organization described in section 170(b)(1)(A)) of appreciated long-term capital gain property to which section 170(e)(1)(B) does not apply, the total amount of contributions of such property for any taxable year is limited to 30 percent of the donor's contribution base for such year. However, section 170(b)(1)(C)(iii) allows a donor to elect to have section 170(e)(1) apply to all contributions of long-term capital gain property made by the donor during the taxable year. If such election is made, a contribution of long-term capital gain property will instead be limited to 50 percent of the donor's contribution base for such year. If the aggregate of such contributions exceeds the donor's limitation described above, such excess shall be treated as a charitable contribution in each of the five succeeding taxable years.

In this case contributions of works of art will be of the type described in section 170(b)(1)(A) of the Code because the Taxpayer is an organization described in section 170(b)(1)(A). If the works of art are long-term capital gain property in the hands of a donor, they will not be subject to the limitation in section 170(e)(1)(A). Furthermore, a donor's charitable contribution deduction will not be reduced under section 170(e)(1)(B) if the donor either establishes that the work of art is not in fact put to an unrelated use by the Taxpayer, or reasonably assumes, as provided above, that Taxpayer will use the works of art in its exempt activities and has no intention of selling the works of art except on a limited and infrequent basis. When these requirements are satisfied, a donor may deduct the fair market value of works of art at the time of the contributions, subject to the percentage limitations of section 170(b).

CONCLUSIONS

Based on the representations made, we conclude as follows.

1. Contributions of works of art to Taxpayer will qualify as charitable contributions under section 170, assuming the substantiation requirements are satisfied.

2. For a contribution of long-term capital gain works of art that the donor reasonably assumes will be used by Taxpayer in its exempt activities, as described above, the donor's charitable contribution deduction will not be reduced under section 170(e)(1)(A) or (B).

3. When 1 and 2 are satisfied, a donor may deduct the fair market value of works of art at the time of the contribution, subject to the percentage limitations of section 170(b).

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer(s) requesting it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Assistant Chief Counsel
(Income Tax & Accounting)
By: Michael D. Finley
Chief Branch 3

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Every individual is obliged

Every individual is obliged to pay for their taxes. I for one believes that abiding by our laws makes an individual responsible for something. Paying our own taxes is like a motivational factor that every one should study hard and get a decent job so as to avoid conflicts and problems in life.
 
 

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