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Wednesday, May 1, 2024
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Case Studies |
Wild Bill Russell Donates to the Cowboy Museum
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Case:
Bill Russell grew up on the Great Plains. During his youth, he was a rodeo bull rider and gained fame as “Wild Bill” for his daring exploits. But Wild Bill was an artist at heart and soon decided to move on to his artistic pursuits. He traveled throughout America and Europe and studied all of the great modern and classical artists. In France he was greatly impressed by the delicate works of Impressionist painters Monet and Manet and the bold colors and brush strokes of Van Gogh. Upon his return to his beloved Great Plains of the West, Wild Bill combined the subtlety of the Impressionists, the colors of Van Gogh and his own unique skills. His Impressionist western landscapes and paintings of cowboys and life on the ranch became treasured by art collectors nationwide.
Wild Bill was rapidly gaining a national reputation. His western Impressionist art exhibits would draw art lovers from America and the world. He was finally selling his paintings for $75,000 or more, and now had another new experience – paying large income taxes.
One day Bill received a call from Wolf Point, Montana. A local attorney told him that a distant relative had passed away and Bill had inherited a sketch done many years ago. Bill asked about the sketch and was told that it was done by his great-great-great uncle Charles Russell. While it is a small sketch, the attorney thought that it might be quite valuable.
Question:
After inheriting the Russell sketch, Bill admired it for a year. But the Cowboy Western Museum called and suggested that the sketch would be a great addition to their Charles Russell collection. So Bill called his CPA Helen Swenson and asked about donating the painting. He thought, “Maybe I could receive a large tax deduction and save taxes. But how does this work? What do I need to do to give my Russell to the museum and get a large deduction? I don’t want to get into any trouble with the IRS.”
Solution:
Gifts of tangible personal property to a charity qualify for a fair market value deduction if there is a related use by the charity. The charity certifies its intent to use the tangible personal property for a purpose related to its exempt mission. The Cowboy Museum must state in writing that it will display the Russell painting or use it in a manner related to its exempt purpose.
But what if the Cowboy Museum later sells the Russell painting? If the charity disposes of the painting in the year of the gift, Bill’s deduction generally is basis and not fair market value. If the charity sells in subsequent year prior to the fourth year, there is also recapture of benefits and Bill will include ordinary income for the excess of the deduction claimed over his basis.
In effect, there is a three year holding period for tangible personal property claimed to be used for a related use. However, there is an exception that allows the Cowboy Museum to make a statement under penalty of perjury that the related use has become impossible and therefore the painting has been sold. The statement must certify that the use of the property by the Cowboy Museum was related to the purpose or function constituting the basis for its exemption and describe how the property was used and how such use furthered such purpose or function. It must also state the intended use of the painting by the Cowboy Museum at the time of the contribution and certify that such use became impossible or infeasible to implement. The Museum must furnish a copy of the certification to the donor (for example, as part of the Form 8282).
The Form 8282 requirement for the Cowboy museum is to report sales within three years. The charity must provide a description of its use of the property and a statement of whether use of the property was related to the purpose or function constituting the basis for its exemption.
The Cowboy Museum must be careful about the TPP certification. A penalty of $10,000 applies to a person who identifies applicable property as having a use that is related to a purpose or function constituting the basis for the Cowboy Museum’s exemption, while knowing that it is not intended for such a use.
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