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Thursday, May 2, 2024
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Case Studies |
Getting Back to the "Art of the Matter," Part 1
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Case:
Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as a particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied. In fact, during the past year, he painted a traditional 17th century landscape piece, sculpted a giant dolphin out of a 2000 pound marble block and created a modern abstract piece out of used car parts.
Not surprisingly, Paulo strongly supports the arts in his community. He frequently gives workshops and tours at the local art museum. In addition, Paulo also is fond of the local art college where young new talent is groomed and developed everyday.
Paulo desires to make a substantial contribution to charity this year. Specifically, he would like to give his three new pieces to charity. However, he wants to take full advantage of the tax benefits associated with charitable giving.
Question:
What are the tax consequences if Paulo gives the landscape painting to the art museum? Does it matter whether the art museum displays the painting? Why or why not?
Solution:
Gift of Landscape Piece to Art Museum: When dealing with gifts of artwork, the first step is to determine the type of asset being contributed as defined by the tax code. If a donor is the creator of the work of art, then it is an ordinary income asset to the donor. Alternatively, if a collector holds the work of art for investment purposes, then it is a capital asset.
Second, since art is tangible personal property, the charitable deduction for a gift of art will depend also upon whether the property is put to a "related" or "unrelated use." A related use gift occurs when the charity actually makes use of the property in a manner consistent with its exempt purpose.
In this case, Paulo created the landscape painting himself. Therefore, the painting is an ordinary income asset. The painting was appraised at $20,000 and its cost basis was $100 (i.e., for canvas, paints, and brushes). If Paulo were to sell the painting himself, he would have $19,900 of ordinary income to report.
Normally, gifts of property produce a charitable deduction equal to the fair market value of the property. However, if an ordinary income asset is donated to charity, there is a deduction only for the lesser of the fair market value or the artist's cost basis in the artwork. This reduction is attributable to the ordinary income element in the property. Thus, Paulo's deduction would be $100.
Because the ordinary income reduction rules lowered Paulo's deduction to cost basis already, the related/unrelated use rules will have no affect upon Paulo's $100 charitable deduction. Finally, since this deduction is limited to cost basis, the deduction is treated as equivalent to a cash-type deduction and may be used up to 50% of adjusted gross income.
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