Giving percentage

One kind of noncash charitable contribution.

From the Tax Adviser:

Giving Percentage Interests in Art

M any individual taxpayers make use of trusts when coordinating their charitable contributions with their other financial objectives; depending on the type of trusts used and their tax advisers skills, individuals can reach many of the goals they seek and in a manner that benefits them from a tax perspective.

However, special problems arise when setting up charitable trust arrangements using tangible personal property such as artwork. One way to avoid some of these problems and achieve the same tax results is to make a gift of a percentage interest in the artwork.

A percentage interest in a work of art usually is of value to a museum or other institution. The institution has the right to show the work at certain times, to include it in special exhibits or to otherwise make it available for the public to enjoy. If the work is sold, the museum gets to share in the proceeds (which enables it to fund acquisitions of other works). And, most important, by acquiring some interest in the work, the museum may be able to forge a relationship with the works other current and future owners, which might lead to their donating the artwork to the museums permanent collection.

Not all museums accept percentage interests in artwork. Given the work and time needed to receive and care for the art, some museums do not find it worthwhile. And even those that do accept such percentage gifts usually consider only major works that are consistent with their collections.

The actual procedure to make a percentage gift in a work of art is fairly straightforward. First, the donor prepares a deed (or similar document) specifying exactly what is going to the museum—the percentage, a description of the work and any terms and conditions imposed. The museum then executes an acceptance, closing the transaction. (Museums accepting such gifts frequently have standard form gift documents, which can be starting points in donor-institution negotiations.)

When an individual gives a work of art to a museum, the donor generally can deduct its fair market value. Deductions for contributions of personal property are limited to 30% of an individuals adjusted gross income, with any excess carried forward and used in the five succeeding years.

The gifts must be reported on Form 8283, Noncash Charitable Contributions . Appraisals are needed for objects exceeding $5,000 in value. Extreme care must be taken in selecting an appraiser, who must be independent of both the donor and the museum and paid by the donor (not the museum).

Appraisal issues . Many issues arise in connection with the valuation of artworks:

  • The manner in which the work will be sold (for example, at auction, through a gallery, in a private sale or in a specified country or countries).
  • The appraisers contact with the actual work.
  • The level and type of expertise of the appraiser, who should have convincing knowledge of the specific markets in which an artists work is most commonly sold.
  • The role of the Internal Revenue Service. For a fee, the IRS will review an appraisal before the donor files his or her tax return and will give its opinion of the value of art valued at more than $50,000. Note that, for challenged deductions of more than $20,000, the IRS maintains an Art Advisory Panel in Washington, D.C., that consults with experts in all fields of art, reviews appraisals submitted and ultimately decides the services position on the value of a piece of art.
  • The value of the donation. If a percentage interest in a work of art is being donated, the issue is whether the percentage should be multiplied by the total value of the work or whether the value may need to be discounted. Closely tied to this issue is the question of the exact rights a museum has when it holds a percentage interest in art—the answers to which should be found in the specific terms of the deed or instrument.

For a detailed discussion of this and other developments, see the Tax Clinic, edited by Gary Zwick, in the August 1997 issue of The Tax Adviser .

— Nicholas Fiore, editor
The Tax Adviser

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