Advising the Collector

Ralph E. Lerner’s “Advising the Collector”

Summary: In this article, Ralph E. Lerner discusses and advises on the transfer of art between donors and organizations, appraisers, and collectors.

Excerpt: The lifetime transfer of a work of art to a charitable organization saves the donor income taxes because of the allowable income tax deduction. For example, a painting that cost the collector $1,000 some years ago may have a fair market value of $10,000 today. A contribution of the work of art to a public charity (not a private foundation) that properly satisfies all the tax rules produces an allowable charitable deduction of $10,000. For someone in the 35.0 percent tax bracket, such a contribution saves $3,500 in federal income taxes. Since the donor’s out-of-pocket cost was only $1,000, the taxpayer has made a $2,500 tax-free economic profit and has enjoyed the use of the work of art through its years of ownership.

Generally, a deduction is allowed for the full fair market value of a work of art that is donated to a charitable organization if the following four requirements are satisfied:

  1. The work of art must be contributed to a public charity, not a private foundation.
  2. The work of art must be long-term capital-gain-type property and not ordinary-income-type property.
  3. The work of art must satisfy the related-use rule — that is, the use of the work of art by the donee charity must be related to the tax-exempt purpose of the charity.
  4. The donor must obtain a qualified appraisal of the work of art by a qualified appraiser.

The amount of the contribution is subject to an overall 30% limitation; that is, the amount of the allowable deduction in any one taxable year can not exceed 30% of the donor’s adjusted gross income. Any excess above the 30% limitation can be carried forward for five (5) years and deducted in those years until the deduction is used in full. A public charity is one that generally receives a substantial part of its support from the general public.


Appraising Works of Art for Tax Purposes

Ralph E. Lerner’s “Appraising Works of Art for Tax Purposes”

Summary: 2011, Ralph E. Lerner discusses the importance of correctly evaluating a work of art for tax purposes, including gifts, donations, and estate ownership.

Excerpt: As important as the concept of fair market value is for tax purposes, there is no simple rule or answer. Although, as discussed below, the Internal Revenue Service (IRS) has by regulation attempted to create rules of valuation, those rules are not workable in all situations and are most difficult to apply when it comes to unique items of tangible personal property. The difficulty is that the determination of fair market value of a work of art is in large part subjective, that is, the opinion of the person making the appraisal. Since it is the taxpayer who bears the burden of proof, proving the value of a work of art short of litigation can be difficult once the IRS takes a contrary opinion. The IRS, being a large government agency, likes to have the determination of fair market value based on a sale of similar property close in proximity in time to the valuation date. When dealing with a unique work of art this determination is rarely possible. The best approach is to know and understand what the IRS wants and choose the best possible appraiser to furnish the opinion that will meet the requirements of the IRS.