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Charitable Deductions for Artists and Collectors
The gift of a work of art to a charity can be (depending on a variety of factors) a good way of obtaining a charitable deduction. Unfortunately, the current statutory scheme disfavors gifts by artists during their lifetimes, while offering substantial lifetime benefits to collectors. At death, both artists' and collectors' estates can benefit.
LIFETIME GIFTS BY ARTISTS:
The deductibility of a lifetime gift by an artist is limited to the costs of the materials used by the artist. For the vast majority of works of art, this is a nominal value. The true value, in a work of art, is the concept conceived in the mind and executed by the hand (sometimes not even the artist's hand). Is this deduction limitation fair? If an artist sells a painting in 1980 for $1,000 to a collector and 25 years later the collector donates the painting to an art museum, the collector will get a charitable deduction, to apply against income, (assuming all other criteria are met) equal to the current fair market value of the painting, say $100,000. The artist holding onto a similar painting and making a gift to the same institution, would only get a deduction equal to the value of the materials used in creating the work 25 years earlier. Needless to say, this discourages lifetime donations by artists.
A caveat: Anyone who has a basis in a work of art which is a carryover basis from an artist, has a similar limited deduction.
TESTAMENTARY GIFTS:
There is no distinction between artists and collectors when it comes to testamentary gifts. In each case, it is the estate that acquires the asset from the decedent before passing it on to the charity. Both are entitled to a deduction based on the fair market value of the art work.
LIFETIME TRANSFERS FOR THE COLLECTOR (QUALIFYING FACTORS FOR FULL DEDUCTABIITY):
For the collector who has the opportunity to take an income tax deduction for a gift of a painting, it is important to take into consideration the following:
1. The status of the charitable organization.
A gift to a public charity is entitled to the fair market value deduction. The deductibility of a gift to a private charity, typically a private foundation, is limited to the collector's basis in the work (typically his/her cost).
2. The type of property being transferred (capital gain v. ordinary income).
Only works of art that would be eligible for long term capital gain treatment, if sold, qualifies for the full deduction. The deductibility of other property is limited to its basis.
3. The use of the painting by the charity.
To be fully deductible, the use must be related to the purposes or function constituting the basis for the charity's exemption under Section 501 of the Internal Revenue Code. A gift to an art museum of a painting, which it intends to display, is deductible. A gift to a local public television station of the same painting, for a fundraising auction, would not be deductible at its value, only at the donor's basis.
4. The need for a qualified appraisal.
A charitable transfer of a single item for aggregate collection exceeding $5,000 in value requires that a qualified appraisal by a "qualified appraiser" accompany the tax return claiming the deduction. Finally, detailed records, as outlined in Treasury Regulations, must be kept.
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