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.