Expert Advice on the Donations of Art to Charitable Organizations

Expert Advice on the Donations of Art to Charitable Organizations

Article posted in Tangible Personal Property on 19 July 2000| comments
audience: National Publication | last updated: 16 September 2012


The Planned Giving Design Center is dedicated to discussing "the art of giving." In this edition of Gift Planner's Digest, New York art consultant Laurence C. Zale and attorney Philip T. Temple discuss "the giving of art."

By Laurence C. Zale and Philip T. Temple

Art as an Asset and its Psychological Possibilities

"There is no such thing as Art. There are only artists." E.H. Gombrich's epigram, written at the beginning of his 1950 classic text The Story of Art, is still true today. Art with a capital "A" does not exist. Only through the actions of artists themselves does art achieve an identity.

Similarly, there is no such thing as an Art Collection. There are only individuals who have the desire to collect art. They are driven by passion, status, curiosity, financial gain, or a tax deduction. But all of them will be effected by the inevitable forces of the three D's: division, divorce, and death. Some will also experience the additional D as dollars.

It is therefore important for collectors to plan properly for the lifetime and testamentary disposition of their art collections. Before making firm plans, however, collectors should first consult with their legal counsel and financial advisor. If there is agreement from a trust, estate, and tax standpoint that the collection should be donated, finding recipient museums or other charitable organizations is crucial. To achieve those objectives, collectors would be wise to use the services of an independent art advisor.

The Importance of an Art Advisor

Most major museums will reject a work of art unless it fills a gap in its permanent collection. For art collections, the likelihood of rejection is higher. The art, alas, will be homeless, except if it's a masterpiece.

To avoid this dilemma, collectors should consult with an art advisor about prospective recipient museums or other charitable organizations to ensure their donation will be accepted under the most favorable terms. Caveat Donor. "All gifts have to be unconditional," accoring to Glenn D. Lowry, Director of the Museum of Modern Art, before they will be considered for acceptance. This is standard practice for many museums.

Nonetheless, the art advisor can be valuable by querying prospective recipient museums or other charitable organizations about the percentage of their collections on permanent display. What arrangements will they offer to display the work of art? Will an endowment be required with the donation? And what is their policy on selling art?

Most important, the art advisor should be independent. He or she should not be beholden to museums, auction houses, dealers, or artists. His or her compensation should be fee based on not determined by commissions. Those arrangements will promote trust, stewardship, and clarity between the art advisor and the collectors.

Finding Organizations that are Suitable for Art Donations

A collector who decides to donate works of art should create a realistic comprehensive plan in consultation with his or her legal counsel, financial advisor, and art advisor. The works of art to be donated should be professionally appraised. The appraised value of the art, together with its provenance, quality, size, condition, medium, rarity, historical importance, authenticity, subject matter and style, will determine what plan is best.

Many collectors mistakenly believe their donated works of art will find a permanent home in the museum of their choice. They assume once accepted their art will be displayed and promoted under favorable terms. Some also assume their art will become part of the museum's permanent collection and never deaccessioned. This is not the case.

Due to decreasing funding, limited storage space and highly selective art acceptance committees, major museums have limited their acceptance of works of art. Their best solution, short of deaccessioning art from the collection, is to expand. Few can.

A notable example of expansion is the Philadelphia Museum of Art. After years of searching for additional space, the museum contracted to buy a 100,000-square foot art deco building last year to satisfy their desperate need to display their collection of 300,000 works. Expressing satisfaction at the outcome, museum director Anne d'Harnoncourt, described the building as "almost too good to be true." The Philadelphia Museum of Art story is an exception. Most major museums remain full with no room for expansion.

Determine the Appropriateness of Art as a Charitable Contribution

Current tax laws favor collectors who donate art to museums or other qualified charitable organizations. Encouraged by the generosity of those laws, individuals, families, and corporations now donate in excess of $11 billion a year to the arts, culture, and humanities. According to the AAFRC Trust for Philanthropy, the not-for-profit arm of the American Association of Fund-Raising Counsel, the overwhelming majority of those donations went to the arts.

While every circumstance is different, there are legal and tax implications that apply generally to donations of art to charitable organizations. The basic tax rules, an invention unique in the world, are described below.

Basic Tax Rules

An income tax charitable deduction is allowed for a lifetime gift of a work of art to charity.1 The extent of the deduction depends on a number of factors:

  1. The type of charitable organization.2
  2. The kind of property.3
  3. Does the gift meet the related use rule?4
  4. Does the donor have a qualified appraisal?5

Type of Organization. Most donee institutions for art are museums or schools that are public charities. But, some may be private foundations. A donor should get a copy of the Internal Revenue Service determination letter given to the charity that states its status.

Generally, an art gift to a private foundation generates a deduction for cost basis only and not for full fair market value as is the case with a gift to a public charity.6 (But see below).

Type of Property. Generally, a work of art held by a collector is capital gain property. It is ordinary income property if (i) the donor created it, (ii) the donor received it as a gift from the creator, (iii) it is held as inventory by a dealer, (iv) its sale would generate short term capital gain because it was held for one year or less.7

If the work is capital gain property, the gift qualifies for deductibility at full fair market value if it meets the related use rule described below. The contribution is deductible up to 30% of adjusted gross income with any excess contribution deductible over the five following years - - up to 30% of adjusted gross income in each carryover year - - until exhausted.8

If it is ordinary income property, the deduction is for cost basis only but the ceiling for deductibility is 50% of adjusted gross income with a five year - 50% carryover for any excess.9

Related Use. To obtain a full market value deduction for a gift of art, the use by the donee institution must be related to its charitable purposes or functions. If not, the deduction is for cost basis only (or, if less, fair market value).10

A gift of a painting to a museum should clearly be a related use gift. A gift of a work of art to a school with a museum, or which uses it for art instruction, should also be a related use gift. However, if the work of art is contributed, for example, to The American Red Cross, which is a public charity, but which from the outset intends to sell and in fact promptly does sell the work of art, the deduction will be for cost basis only and subject to the 50% ceiling.

The regulations11 provide that a donor may treat a contribution of a work of art as meeting the related use rule if:

  1. The donor establishes that the work of art is not in fact put to an unrelated use by the donee institution, or
  2. At the time of the gift, it is reasonable to anticipate that the work of art would not be put to an unrelated use by the donee organization.

A number of situations are not so black and white. And, there have been few litigated cases but some private letter rulings:

For example, Ltr. Rul. 7751044 where the Service held that the rule was met when lithographs were displayed in a camping center devoted to handicapped and retarded children because the lithographs were used in connection with an art appreciation program. Also see Ltr. Ruls. 7911109 and 7934082. In Ltr. Rul. 8208059, the Service held that the related use rule was met when a donor gave his stamp collection to a college because the college would exhibit the collection and had, as part of its curriculum, a course in engraving skills.

These matters are fact specific. It is important that a donor obtain from the donee institution a clear indication of how it intends to use the gift property.

Qualified Appraisal. Regulation Section 1.170A-13 issued on May 4, 1988, provides that a gift of property (other than money or readily marketable securities) that has a claimed value exceeding $5,000 requires that the donee (i) obtain a qualified appraisal for the property and (ii) attaches a fully completed appraisal summary to the income tax return on which the deduction is claimed.

A qualified appraisal is an appraisal by a qualified appraiser dated not more than 60 days before the date of the gift.12 It should contain the following information:

  1. A detailed description of the property.
  2. The property's physical condition.
  3. The date or expected date of the gift.
  4. The terms of any agreement or understanding entered into or expected to be entered into by or on behalf of the donor that relates to the use, sale or other disposition of the gift property.
  5. The appraiser's name, address and taxpayer identification number.
  6. A detailed description of the appraiser's background and qualifications.
  7. A statement that the appraisal is prepared for income tax purposes.
  8. The date on which the property was appraised.
  9. The property's appraised fair market value.
  10. The appraiser's method of valuation.
  11. The specific basis for the valuation such as comparable sales and
  12. A description of the fee arrangement between the donor and the appraiser.

Because a qualified appraisal must be detailed and must be performed by someone with the appropriate qualifications, it is likely to be expensive. Keep careful records; that will immensely help the appraiser.

Form 8283 contains the Appraisal Summary.13

If the work of art is sold within two years from the date of gift, the donee institutions must report that sale on Form 8282 and furnish a copy of the form to both Internal Revenue Service and the donor.14

Clearly, this is designed to let the Service know when a work of art or other gift property is sold at a price significantly less than its appraised value dating from when the donation was made. This should have a chilling effect, both on the appraiser and the donor, on highly overinflated appraisals.

Gifts in Trust. What if a donor wishes to transfer the work of art to a qualified charitable remainder trust (a unitrust or annuity trust described in Internal Revenue Code Section 664)?

Some commentators believe the gift should be treated like a gift of any other capital gain asset. The Service maintains, first, that there is no charitable contribution deduction until the work of art is sold and, second, the deduction is for cost basis only because it is clearly a gift for an unrelated use.

Testamentary Gifts. The estate tax charitable deduction is unlimited15 and the related use rule does not apply.16 The valuation issue still exists and, therefore, an appropriate appraisal should be obtained and attached to the estate tax return.

Summary. The rules are complicated. A donor should get competent professional counsel in structuring any gift of works of art to charity.

  1. IRC §170(c)back

  2. IRC §§170(b)(1)(A)(i)-(viii), 170(b)(1)(B), (E)(i)-(iii), 509(a); Treas. Reg. §1.170A-9back

  3. IRC §§170(b)(1)(C)(iv), 1221; Treas. Reg. §§1.170A-8(d)(3), 1.170A-4(b)(2); IRC §§1221(d), 170(e)(1)(A); Treas. Reg. §§1.170A-8(d)(3), 1.170A-4(b)(2)back

  4. IRC §170(e)(1)(B)(i); Treas. Reg. §1.170A-4(b)(3)back

  5. Treas. Reg. §1.170A-13back

  6. IRC §170(b)(1)(C)(i)back

  7. IRC §§1221(d), 170(e)(1)(A); Treas. Reg. §§1.170A-8(d)(3), 1.170A-4(b)(2)back

  8. IRC §170(b)(1)(C)(i)back

  9. IRC §170(d)(1)(A), (b)(1)(B) last sentenceback

  10. IRC §170(e)(1)(B)(i); Treas. Reg. §1.170A-4(b)(3)back

  11. Treas. Reg. §1.170A-4(b)(3)(i), (ii)back

  12. Tax Reform Act of 1984, §155(a)(2); Treas. Reg. §1.170A-13(c)(3)(i)back

  13. Treas. Reg. §1.170A-13(c)(4)back

  14. Treas. Reg. §1.6050L-1back

  15. IRC §2055(a)back

  16. IRC §170(e)(1)(B)(i); Treas. Reg. §20.2055-1(a)(4)back

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