Wednesday, November 17, 2004 Posted: 10:21 AM EST
Donating Art: Ten TIPs Every Planner
Should Know
Cash
donations, as long as the actual amount of the donation is substantiated, will
not result in an IRS challenge. But donations of objects such as fine art and
collectibles have always been problematic. In this article from Leimberg Information Services,
by Joy Gibney
Berus
Edited by Steve Leimberg
Introduction
Cash donations, as long
as the actual amount of the donation is substantiated, will not result in an
IRS challenge. But donations of objects such as fine art and collectibles have
always been problematic.
This commentary will
provide you with ten TIPs on donating personal
property items such as art, antiques and collections so that you may assist
your clients in maximizing all of the benefits to which they are entitled.
Why Donating Makes Sen$e
Donating art, antiques
and other collectible objects to appropriate qualified organizations may
provide your clients with possible benefits such as:
- An immediate income tax deduction
- Avoidance of the tax on capital gains on appreciated
assets
- An estate and gift tax deduction
- The creation of a lasting legacy with their
organization of choice
TIP #1: Donate Appreciated Objects
Your
clients generally will receive a higher income tax deduction if they donate an
art object or collection that has appreciated in value over the time they have
owned it. This is called capital gain property. Generally, property is capital
gain property if its sale at fair market value on the date of the contribution
would have resulted in long-term capital gain. Capital gain property includes
capital assets held more than one (1) year. The general rule is that a client
can usually deduct the full fair market value of the donation as of the date of
the contribution.
TIP #2: Donate Long-Term Capital Gain Objects
The amount your client can deduct for a contribution
of ordinary income property is generally only the client's basis (cost) in the
property, not the full fair market value. Property is ordinary income property
if its sale at fair market value on the date it was contributed would have
resulted in ordinary income or in short-term capital gain. Examples of ordinary
income property are business inventory, works of art created by an artist
donor, manuscripts prepared by the donor, and capital assets held one (1) year
or less.
The deduction for appreciated long-term capital gain property is its full fair
market value. The deduction for ordinary income property is the lesser of fair
market value or its basis.
TIP # 3: Donate to a Public Rather Than Private Charity
In order to maximize your client's charitable deduction benefits, the qualified
organization must be a public, not private, charitable organization.
In general, qualified public charitable organizations include nonprofit groups
that are religious, charitable, educational, scientific, or literary in
purpose, or that work to prevent cruelty to children or animals. You can ask
the organization whether it is a qualified organization, and most will be able
to tell you. Or, you can check IRS Publication 78, which lists most
qualified organizations.
In most cases, your client will only receive a deduction of his or her cost for
a contribution of appreciated art objects to a private charity. However, that
same donor client would be allowed a deduction of the full fair market value if
the contribution was made to a public charity.
TIP #4: Make Sure the Public Charity meets the "Related Use Rule"
The "related use rule" applies to capital gains property that is
tangible personal property (objects) contributed to a public charity. The
related use rule requires that the use of the art object by the organization be
related to the purpose or the function constituting the basis for the
organization's charitable exemption under IRC Section 501.
This means that the donated object must be of a type normally retained and
exhibited by that charitable organization, such as a museum or educational
institution that normally has a collection of similar paintings, or silver, or
sports memorabilia. All of the appreciated value of the donated art object will
be lost as a charitable deduction if the related use rule is not satisfied.
Let's look at Mr. Donor Client's donation, and the tax deduction benefit he
would have received if he had made his donation to three different
institutions:
Example:
Mr. Client purchased a sculpture by an unknown artist for $1,000.00 fifteen
years ago. It has appreciated over the years as the artist has gained
notoriety. Mr. Client obtains a qualified appraisal by a qualified appraiser.
The fair market value on April 1, 2004, the date of his donation, is appraised
at $15,000.00.
Donation #1: Mr. Client donates the sculpture to a private charity. He will
only be able to receive a deduction for his cost, $1,000.00.
Donation #2: Mr. Client donates the sculpture to a public charity, but
the charity's charitable exemption purpose was unrelated to his donated
sculpture. He will only be able to receive a deduction for his cost, $1,000.00.
Donation #3: Mr. Client donates the sculpture to a public charity, and
the use of the sculpture by the organization is related to the purpose or the
function constituting the basis for the organization's charitable exemption.
(It is an art museum with a collection of similar type sculptures). He will be
able to receive a deduction for the full fair market value of the sculpture as
of the date of donation, $15,000.00.
TIP # 5: Verify Acceptance of the Donation by the Qualified Organization
Make
sure your client's designated public charity wants the object. The organization
should provide a written acceptance indicating that the organization is a
qualified public charity, and that it satisfies the
related use rule regarding the particular donation and intends to use the gift
in a manner related to its tax exempt status.
TIP #6: Consider a Partial Interest Donation
In certain circumstances, a gift of a partial interest in an art object or
collection may be desirable to your client. Here, as an example, Ms. Donor
donates a percentage of ownership of her painting, while retaining the
remaining portion of ownership for herself, with the promise that full
ownership will ultimately go to the charitable organization at a future date of
her choice, such as the donor's date of death.
In cases like this, the receiving charitable organization would retain
possession of the painting based upon its percentage of ownership. If a gift of
a one-third (1/3) interest was given, and Ms. Donor retained the remaining
two-thirds (2/3) interest, then the charitable organization would have
possession of the painting for four (4) months of each year, and Ms. Donor
would have possession of the painting for the remaining eight (8) months. The
charitable organization would ultimately acquire the entire interest at the
designated future date.
Ms. Donor's benefit in gifting the partial interest would be the allowable
income tax deduction of one-third (1/3) of the fair market value of the
painting at the date of donation. Additionally, Ms. Donor would have the
continuing use and enjoyment of the painting for eight (8) months of each year.
Ms. Donor would also be able to make another additional partial interest
donation to the same museum in the future, such as a second donation of another
one-third (1/3) interest in the painting five years later. This time, the
second gift of another one-third (1/3) interest in the painting may have a
higher fair market value at the time of donation, not only because of the
passage of five years time, but also because the provenance of the painting now
includes its history as part of the collection of the museum!
This would now leave the museum with a two-thirds (2/3) interest in the
painting, and possession for eight (8) months of the year, and Ms. Donor with a
second income tax deduction and the use and enjoyment of the painting for four
(4) months of the year until the ultimate transfer of the entire remaining
interest at the designated date.
TIP #7: Consider a Charitable Bargain
A bargain sale of personal property to a qualified
charitable organization (a sale or exchange for less than the property's fair
market value) is partly a charitable contribution and partly a sale or
exchange.
With the bargain sale, your client sells his or her art object or collection to
the charitable organization at less than fair market value. The transaction
gives your client cash, plus a charitable income tax deduction for the
difference between the fair market value of the gift and the amount the charity
paid your client.
Generally, if the art object sold was capital gain property, your client's
charitable contribution is the fair market value of the contributed portion.
The bargain sale is the only donation plan that can give your client both a
lump sum of cash, and a charitable deduction.
TIP # 8: Retain a Qualified Appraiser to Prepare a
Qualified Appraisal
Contributions of art objects and other personal property are
reported on IRS Form 8283, Section A, for all contributions for the year over
$500.00.
For deductions of art objects and other personal property over $5,000.00, Form
8283 Section B must be completed. This is signed by the donor, the donee and the appraiser. The donor must also obtain a
separate qualified written appraisal of the donated property from a qualified
appraiser.
The weight given an appraisal depends on the completeness of the report, the
qualifications of the appraiser, and the appraiser's demonstrated knowledge of
the donated property.
The appraiser must include in his or her appraisal the qualifications of the
appraiser who signs the appraisal, including the appraiser's background,
experience, education, and any membership in professional appraisal associations.
The term "qualified appraisal" means an appraisal prepared by a
qualified appraiser not earlier than sixty (60) days before the date of the
contribution of the appraised property.
Any charitable contribution of an item of property, the claimed value of which
exceeds $5,000.00, requires the donor to meet the following requirements:
1. Obtain
a qualified appraisal for the property contributed which: Relates to an
appraisal made not earlier than 60 days prior to the date of contribution of
the appraised property, does not involve a prohibited appraisal fee, includes
certain information (covered in IRS Publication 561), and is prepared, signed,
and dated by a qualified appraiser.
2. Attach a fully completed appraisal summary to the tax return on which the
donor first claims the deduction for the contribution (Form 8283); and
3. Maintain records containing certain specific information about the
contribution.
Generally, the donor does
not need to attach the qualified appraisal itself, but the donor should keep a
copy as long as it may be relevant under the tax law.
If your client donates art objects valued at $20,000.00 or more, however, the
client must attach a complete copy of the signed qualified appraisal.
TIP #9: Recommend Requesting a Statement of Value if your Client is Considering Donating an Object of Art that has been
Appraised at $50,000.00 or More.
If your client is considering donating an object of art that has been appraised
at $50,000.00 or more, you can recommend that he or she request
a Statement of Value for that object from the IRS. The IRS user fee, which must
be submitted with the request, is $2,500.00.
The donor must request the statement before filing the tax return that reports
the donation. If the donor's request lacks essential required information, the
donor will be notified and given 30 days to provide the missing information.
This helps in avoiding penalties. For a request submitted, the IRS will issue a
Statement of Value that can be relied on by the donor of the object of art.
TIP #10: Obtain the Advice and Assistance of Attorneys and CPAs Experienced
in Charitable Donations of Personal Property Objects Such as Art, Antiques, and
Other Collectibles
The total value of your client's charitable contribution deduction and certain
other itemized deductions may be limited, depending upon your client's adjusted
gross income and the amount and type of donation.
There are many other estate planning options available which are beyond the
scope of this article, such as charitable remainder trusts, charitable
remainder unitrusts, pooled income fund trusts,
charitable lead trusts, and charitable lead unitrusts,
and charitable annuities.
The above illustrations are examples of just a few of the variety of issues to
be aware of when your client owns a valuable work or art, antique, or
collection which he or she may consider donating to a charitable organization.
There may be many options available to recommend to your clients so that they
may maximize their charitable deductions benefits. Both your client and a
qualified charitable organization may thank you.
CITE AS:
Copyright 2004 Leimberg Information Services, Inc. Reprinted by Planned
Giving