Charitable Donations of Works of Art: A Primer for Donors and Prospective Donors
Americans are the most generous donors of art to non-profit institutions in the world. This is due in large part to tax benefits for the donors making such gifts. In this article, we will discuss Charitable Donations of personal property, the computation of the tax benefit, and the various IRS rules and regulations regarding Charitable Donations.
Although many Charitable Donations are motivated at least in part by altruism, in most instances, they can also provide substantial income tax benefits to the donor. Donations of art for which no tax benefits are sought do occur, but they are few and far between and outside the scope of this article. Donations made by will or testamentary trust after the donor has died are also outside the scope of this article. For purposes of this article, we are discussing only donations of works of art to museums. Similar considerations apply to charitable donations of other personal property to other qualifying non-profit organizations.
Charitable Donations are gifts of personal property made by an owner to a duly qualified non-profit organization. These are institutions which have 501(c)3 status for IRS purposes. The donated property must be directly related to the stated purpose and mission of the non-profit institution.
Specific IRS rules determine when a gift is complete. In general, the donated art must be in the physical possession of the museum on or before December 31st of the tax year in which the donor claims the income tax deduction for the gift. This needs to be verified by the signature of a ranking museum officer on the IRS Form 8283 (discussed below).
Income Tax Benefits
In general, the donor may deduct the fair market value of his donation from his gross income for federal income tax purposes. It is the role of an independent, professional, and IRS Qualified Appraiser to determine fair market value in accordance with IRS standards.
Selecting an IRS Qualified Appraiser
The IRS requires a Qualified Appraisal from a professional, independent, and IRS Qualified Appraiser for any Charitable Donation in excess of $5,000. in fair market value. The IRS sets forth the requirements for Qualified Appraisers to assure that the quality of the analysis and the documentation of the value conclusion are presented in the most reliable, independent, and professional manner possible. The IRS was compelled to adopt these standards by the fact that up to 40% of the Charitable Donation Appraisal Reports submitted annually were revised or rejected by the IRS Art Advisory Panel for inaccuracy, incompetence, and even intentional fraud.
The best course for the donor, his lawyer, and tax adviser is to a select a member in good standing of one of the national appraisal organizations [the American Society of Appraisers (ASA), the Appraisers Association of America (AAA), and the International Society of Appraisers (ISA)]. While non-certified appraisers may self-qualify, they and their reports are subject to later IRS determination that they do not, in fact, satisfy the requirements of an IRS “Qualified Appraiser” and “Qualified Appraisal.”
The national appraisal organizations and USPAP impose strict ethical requirements on the Appraiser, including independence. Unlike a lawyer in an adversary proceeding in court, the appraiser acts as an impartial arbiter of value who can be relied upon by both the IRS and the Donor as an accurate and independent determiner of value.
It goes without saying that any gallery or dealer in works of art by the artist whose work is the subject of donation are excluded because of the inherent conflict of interest. Additional exclusions apply to individuals, galleries, or other art professionals who have an ongoing relationship by blood, marriage, or prior commercial/professional connections with the donor of the work.
Your best guarantee of an audit-free charitable donation transaction is to select an appraiser who is a Qualified Appraiser, well-versed in and compliant with the applicable IRS regulations and the rules set forth by USPAP and the national appraisal organizations. Failure to do so will likely result in a modification or rejection of the claimed income tax deduction and a full blown audit of the entire federal income tax return for the year in which the deduction is claimed. Most individuals find this to be only slightly less terrifying than a sentence to a permanent residence in hell.
The Appraisal Report
In addition to properly valuing the donated artwork, the Qualified Appraiser must provide a properly prepared Qualified Appraisal to be filed with the donor’s income tax return. Rules and regulations governing the procedure and methodology of the valuation process and the content and format of the Appraisal Report, including photo documentation, are set forth not only in the IRS Code and Regulations but also in the Standards of USPAP, which are revised biannually. The valuation and and the preparation, format, and presentation of the Appraisal Report require the professional education and up-to-date skills and experience of an independent, professional, and certified appraiser.
IRS Form 8283 and the Filing of the Claim for Deduction
Once the fair market value of the donation has been determined and the Appraisal Report has been completed, the IRS requires the completion of Form 8283. This document can be filled out in part by the donor – or preferably his tax preparer or advisor – and the by the Qualified Appraiser. A properly prepared Form 8283 requires the signatures of both the Qualified Appraiser and a ranking officer of the museum which is the recipient of the gift. The completed Form 8283 and the Appraisal Report must be filed together with the donor’s Form 1040 annual federal income tax return for the year in which the gift was completed.
The foregoing set forth a brief and sequential explanation of the principal elements of the Charitable Donation process. There are, of course, additional nuances and complexities involved in the finalization of the process. Because there are limitations on the percentage of a deduction which can be claimed in any tax year, donors contemplating a gift of art to a museum should consult their accountants or tax advisors to determine that the tax deduction anticipated from the fair market value of the donated work will be of financial benefit to him in the tax year in which the donation is made. An excess deduction can be carried forward to future tax years, but doing so will delay the value of the benefit.
James Corcoran JD, AAA, ASA, RICS is the Senior Appraiser at Corcoran Appraisal Group International (CAGI), an a international appraisal firm with over 40 years of experience in fine art and personal property appraisals for IRS purposes. He is an IRS Qualified Appraiser with an unblemished record of success with Charitable Donations and Federal Estate Tax appraisals. He regularly performs appraisals for domestic and international insurances companies and museums. He is a Harvard Law School educated lawyer with Bar Admissions in 4 states and is a long-standing Certified Member of two major national appraisal organizations, the Appraisers Association of America and the American Society of Appraisers. He is also a Fellow and Certified Member of the Royal Institution of Chartered Surveyors, a London-based international society of valuers.
Corcoran Appraisal Group International
12610 Larchmere Boulevard
Cleveland, Ohio 44120
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