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Saturday, April 27, 2024
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Case Studies |
Getting Back to the "Art of the Matter," Part 4
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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 and he sculpted a giant dolphin out of a 2000-pound marble block. In addition, he also purchased a modern abstract piece made entirely 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. In addition, Paulo knows the tax rules can be "tricky," and he wants to make sure his tax deductions could withstand an IRS audit.
Question:
What forms must Paulo file to substantiate his gifts? How does Paulo determine the value of his works of art? Does it matter who determines the value?
Solution:
As stated on Form 1040, non-cash charitable contributions in excess of $500 require the filing of Form 8283. On Part A of Form 8283, a taxpayer includes the description of the property transferred. However, if the value of the property exceeds $5,000, then an appraisal is required and Part B of Form 8283 must be completed.
There are specific requirements for the appraiser and substantial potential accuracy-related penalties. The appraiser will be qualified if he or she has an appraisal designation from a recognized organization, has otherwise met comparable education experience requirements, regularly performs and is paid for appraisals, has verifiable education and experience with the type of property appraised, has not been prohibited from practicing before the IRS and has not been excluded by Treasury regulations from serving as an appraiser. Sec. 170(f)(11)(E)(ii).
For gifts of art, the appraiser must fulfill three requirements. He or she must have completed "college or professional-level coursework" in art, must have two years of experience in buying, selling or valuing the type of gifted art and must thoroughly describe in the appraisal his or her education and qualifying experience.
The penalties for incorrect appraisals are the greater of $1,000 or 10% of the understatement from a substantial or gross valuation misstatement, with a cap of 125% of the appraiser's gross income from the appraisal. Sec. 6695A(b). The IRS may discipline appraisers after notice and a hearing. Disciplinary action may include suspending or barring an appraiser from preparing or presenting appraisals to the IRS.
If a deduction is claimed for a gift of artwork and the value is greater than $20,000, then the complete signed appraisal must be submitted with Form 8283. In addition, either an 8 X 10 color photo or a 4 X 5 color transparency of the art object must be provided.
If art with an appraised value of $50,000 or more has been contributed to a charity, it is permissible to obtain a "Statement of Value" from the IRS. This "Statement of Value" is available only after the art has been transferred. Thus, since many donors desire to know the deduction value prior to the gift, it may be preferable to rely on a valuation by an independent appraiser. There is a user fee of $2,500 for obtaining a "Statement of Value" from the Service.
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