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Monday, April 29, 2024
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Case Studies |
Wild Bill Russell Donates Art – Qualified Appraisal
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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.
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 there is another important requirement – for Bill to receive his full benefit from the gift, there needs to be a qualified appraisal. Since the Russell sketch is worth over $5,000, a qualified appraisal and IRS Form 8283 will be required. Reg. 1.170A-13(c). The appraisal must be made not earlier than 60 days prior to the gift and not later than the date the return is due (with extensions). Form 8283 must include a description of the property. For artwork, this description should include the general condition of the property. Any restrictions on use of the art should be disclosed.
The appraisal document also should include the name, address and other applicable information about the appraiser. The appraiser must affirm that the appraisal was done on a specific date, that the property was valued as of the date of the gift, that the appraisal was done for income tax purposes and the appraisal must disclose the methodology used in deriving the property value. Reg. 1.170A-13(c)(3).
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.
But there are potential penalties for both the appraiser and Bill if the appraisal is too high. The appraiser penalties for incorrect appraisals are the greater of $1,000 or 10% of the understatement for a substantial or gross valuation misstatement, with a cap of 125% of the appraiser’s gross income from the appraisal. Accuracy related penalties for Bill are potentially also applicable. A substantial valuation misstatement exists with overvaluation of 150%. A gross valuation misstatement exists with valuation of 200% of correct value.
For gifts of property over $5,000 in value ($10,000 for closely-held stock), Part B of Form 8283 must be completed. In addition, both the appraiser and the charitable donee must sign Form 8283.
Bill and his CPA secure the services of an independent appraiser who regularly values western art for tax purposes. She determines that the Russell sketch has a fair market value of $89,000. Since 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 Russell sketch object must be provided.
The signature of the Cowboy Western Museum is merely to acknowledge that it has received the property. Furthermore, when the museum signs Form 8283, it incurs an obligation to file Form 8282 within 125 days of sale of the asset, if that sale date is within three years of the date of the gift.
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