Charitable contributions of artwork: an important primer.

• Author: Carney, Vicki R.

A number of tax planning opportunities are available when gifting artwork. How- ever, for donors who have not done their tax homework, several surprising results can occur.

Know Your Donee: Related-Use Concerns

The donor's knowing the donee is a critical component to a successful and tax-advantaged transfer of appreciated artwork. A critical step to achieving the desired result hinges on the concept of "related use." Because faltering on the related-use rule can unwind even the best tax planning, it is vital that the donor know the donee organization.

When first established, a charitable organization has to apply to the IRS for approval of its tax-exempt status. This application states the reason or purpose for the charitable organization's existence. This reason or purpose can dictate whether the donor contributing property to the charity receives a deduction equal to the fair market value (FMV) of the property or receives a deduction limited to the cost basis of the property. Specifically, Sec. 170(e)(1)(B) states that the amount of a charitable contribution of tangible personal property is reduced if the donee's use is unrelated to the purpose or function constituting the basis for its exemption under Sec. 501.

Example: A purchased a piece of artwork several years ago at a fire sale price. Over the years, the artworks value grew substantially. If A donates the artwork to a public charity that operates with a purpose of saving endangered wildlife or if A donates it to a private charity, the deduction would be limited to the price originally paid for the artwork. On the other hand, if A donates it to an art museum that houses a number of similar artistic pieces,^ would be able to deduct the full FMV of the piece.

Knowing details about the donee is critical to maximizing the charitable deduction.

Some interesting related-use IRS rulings have addressed the donation of an antique car to a university (unrelated use) and the contribution of a stamp collection to a college with engraving in the curriculum (related use) (Letter Ruling 8009027 and Letter Ruling 8208059, respectively).

In some instances, a charitable contribution of artwork can lead to income recapture if the donation to the charitable organization exceeds $5,000 and the organization disposes of the artwork within three years of the donation (Sec. 170(e) (7)). The donor can avoid this harsh penalty by requesting a specific written certification from the donee organization, under...