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Wednesday, May 1, 2024
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Case Studies |
Getting Back to the "Art of the Matter," Part 2
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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 any one 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, he sculpted a giant dolphin out of a 2,000 pound marble block and he 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 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 marble sculpture to the art museum? Does it matter whether the art museum displays the sculpture? Why or why not? Does it matter that his cost basis exceeds the fair market value?
Solution:
Gift of Marble Sculpture 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 of 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 marble sculpture himself. Therefore, the sculpture is an ordinary income asset. The sculpture was appraised for only $15,000 because of its lack of marketability. However, the large, expensive imported marble block cost Paulo $20,000.
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 for the lesser of the artist's cost basis or fair market value of the artwork. This reduction is attributable to the ordinary income element in the property. In this case, Paulo's cost basis exceeds the fair market value. Thus, the charitable deduction will not equal his cost basis but instead will equal the fair market value of the artwork, or $15,000.
Because of the lowered fair market value deduction, the related/unrelated use rules should have no affect upon Paulo's $15,000 charitable deduction. Finally, since this deduction does not have an appreciation element to it, 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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