To many families and individuals, donating high value artwork to an art-related charitable organization, such as a museum, is a worthwhile legacy strategy as it can offer meaningful philanthropic gratification along with income tax advantages.[1] However, such benefits are placed in jeopardy if the donor fails to meet the rigorous requirements for reporting these contributions and their associated charitable deductions. In some cases, not only will a donor’s failure to comply with IRS requirements eliminate the ability to take a charitable deduction on the donation, but it can, at worst, result in penalties.
Generally, donations to public charities or private operating foundations may qualify the donor for a full fair market value income tax deduction so long as certain conditions are met.[2] For noncash donations, such as pieces of art, if the claimed deduction is $5,000 or more, the donor must obtain a “qualified appraisal” to retain for their records. If the claimed deduction is $20,000 or more, the donor must also attach the appraisal to the tax return. In each instance, the valuation is used to support and confirm the value of the charitable deduction claimed on the donor’s income tax return. Additionally, for all noncash charitable contributions valued over $500, a Form 8283 must be filed with the IRS. This form must be signed by the taxpayer, the appraiser and the charity recipient receiving the donated property.
Despite a somewhat circular definition, relevant sections of the Internal Revenue Code and related Treasury Regulations confirm a key feature of the “qualified” appraisal is that it must be completed by a “qualified” appraiser. Among other criteria, a qualified appraiser must possess specific education and certification credentials that evidence the appraiser’s ability to evaluate and analyze the artwork’s value and must regularly be hired and paid to prepare appraisals.
In addition to being prepared by a qualified appraiser, a qualified appraisal must include particular information about the property donated, the terms and conditions of the contribution, details about the valuation and method, and facts about the appraiser. The report must contain detailed analysis of the method of determining the property’s fair market value and the specific basis for the valuation, such as relevant comparable sale transactions or statistical sampling. It must also be signed and dated by the appraiser no earlier than 60 days before the contribution date and no later than the due date of the taxpayer’s income tax return.
For art valued at $50,000 or more, for a fee, taxpayers can submit art valuations prepared for income, estate and gift returns to the IRS Art Advisory Panel for an advance review of the appraisal prior to filing the return. The donor can also obtain a Statement of Value from the panel, which can be attached to the return. The statement can be relied on by the donor to support the amount of deduction claimed on the return, offering some assurance that the service is more likely to accept the identified amount based on prior review.
It should be noted that donations of valuable art to charity may have a higher likelihood of being audited given the strict requirements for reporting and the complex nature of valuing artwork. Steep penalties may be assessed in cases where the service determines donated art has been overvalued, resulting in taxpayer donors claiming an inflated deduction on their income tax return. The donor may also be subject to interest and additional fines. In short, valuation blunders can create costly consequences.
In certain circumstances, defects in a qualified appraisal can be excused – and donors can be protected from these repercussions – if it is determined they were acting with reasonable cause and in good faith. Such relief requires there be no willful neglect on the part of the donor.
Importantly, a donor’s history of involvement with or support of a particular charity or an earnest desire to support cultural growth in the community by donating works of art to a charitable organization does not excuse compliance with the reporting requirements. If a taxpayer seeks the benefit of taking a charitable deduction, he or she must satisfy all disclosure obligations.
Because compliance with these strict requirements is mandatory to yield the benefit of an income tax deduction for such donations, families and individuals considering donating valuable art collections or pieces to charitable organizations should consult with a member of our Private Client and Family Office or their Warner attorney for specific direction and guidance early in the consideration process.
[1] This blog post’s content is specific to donations of artwork to charitable entities that retain possession of the artwork as part of the charity’s mission (for example, a museum or art department in a university,). In circumstances where art is donated to a charity to be promptly sold by the charity, different rules and regulations apply.
[2] The actual amount deductible in a tax year may be limited by the taxpayer’s adjusted gross income, with the remaining deduction carried forward for up to five future tax years.
