14.9 Art Objects
You may claim a charitable deduction for a painting or other art object donated to a charity. The amount of the deduction depends on (1) whether you are the artist; (2) if you are not the artist, how long you owned it; and (3) the type of organization receiving the gift.
Caution
If you owned the art work short term, your deduction is limited to cost, under the rules applying to donations of ordinary income property (14.6).
If you owned the art work long term (14.6), your deduction depends on the way the charity uses the property. If the charity uses it for its exempt purposes, you may deduct the fair market value. However, if the charity uses it for unrelated purposes, your deduction is reduced by 100% of the appreciation. A donation of art work to a general fund-raising agency would be reduced because the agency would have no direct use for it. It would have to sell the art work and use the cash for its exempt purposes.
Deductions of over $5,000 for art donations (as well as other types of appreciated tangible personal property) may be limited or recaptured if the charity disposes of the property within three years (14.6).
Filing Instruction
Appraisals.
Be prepared to support your deduction with detailed proof of cost, the date of acquisition, and how value was appraised. The appraisal fee is treated as a “miscellaneous” itemized deduction subject to the 2% adjusted gross income floor (19.1). See the discussion of appraisal requirements later in this chapter (14.15).
The IRS has its own art advisory panel to assess whether the fair market value claimed for donated art works is reasonable.
Requesting advance valuation of art from the IRS.
To avoid a later dispute, you may ask the IRS for an advance valuation of art that you have had appraised at $50,000 or more. A request for an IRS Statement of Value (SOV) may be submitted for income tax, gift tax, or estate tax purposes. The IRS has the discretion to value items appraised at less than $50,000 if the SOV request includes at least one item appraised at $50,000 or more, and the IRS determines that the valuation is in the best interest of efficient tax administration.
A request for an SOV must be submitted to the IRS before filing the tax return reporting the donation. The request must include a copy of an appraisal for the item of art and a $2,500 fee, which pays for an SOV for up to three items of art. There is an additional charge of $250 for each item of art over three. It takes the IRS between six and 12 months to issue an SOV.
If the IRS agrees with the value reported on the appraisal, the IRS will issue an SOV approving the appraisal. If the IRS disagrees, the IRS will issue an SOV indicating its own valuation and stating the reasons it disagrees with the appraised amount. Regardless of whether you agree with the IRS appraisal, the SOV must be attached to and filed with the return reporting the donation. If you file the return before the SOV is issued, a copy of your request for the SOV must be attached to your return and on receipt of the SOV, an amended return must be filed with the SOV attached. For further SOV details, see IRS Publication 561 and Revenue Procedure 96-15.
Donating a fractional interest in an art collection.
You may deduct the value of a donated partial interest in an art collection, such as where you give a museum the right to exhibit the works for a specific period during the year. The deduction is allowed even if the museum does not take possession of the art works, provided it has the right to take possession. However, if you made a fractional donation after August 17, 2006, and later donate an additional fractional interest in the same property, the deduction for the later contribution is based on the fair market value of the property at the time of the initial fractional contribution where that is less than the value at the time of the later contribution. Furthermore, if you do not transfer your entire remaining interest to the same charity within 10 years of the initial fractional donation, or, if earlier, the date of your death, your charitable contributions will have to be recaptured, plus interest, and a penalty equal to 10% of the recaptured amount will be imposed. See Publication 526 for further details.
Keeping a reversionary interest.
The IRS may challenge a charitable deduction where you retain some control over the donated property. However, if the possibility of the property reverting back to you is considered to be remote, a deduction may be allowed. For example, a taxpayer who donated her art collection to a museum was allowed to claim a charitable deduction even though she retained the right to decide where and how the art would be displayed. Disputes concerning art displays would be settled by a mutually acceptable museum curator. If the museum breached a condition, it had a period of time to cure the violation. If the violation was not cured, the ownership would revert back to the donor. The IRS allowed the deduction; the retained rights were fiduciary in nature and the possibility of the art reverting to the donor was so remote as to be negligible.
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