Friday April 26, 2024
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4.1.3 Related or Unrelated Use Gifts of Art
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Related Use Definition
Since art is tangible personal property (TPP), the charitable deduction for a gift of art will depend upon a categorization of the property as a "related" or "unrelated" use asset. A related use gift occurs when the charity actually makes use of the property in a manner consistent with its exempt purpose. Sec. 170(e)(1)(B)(i).
Most related use examples are reasonably straightforward. A gift of art to an art institute for use by art students is related. Furnishings given to a charity used for offices and buildings are related. A collection of rare books given to a library and used for reference purposes would be related. Reg. 1.170A-4(b)(3)(i).
Charitable Deductions
If the gift qualifies as related use property, the gift of an appreciated artwork produces a charitable deduction equal to its fair market value. This deduction is usable up to 30% of adjusted gross income. This rule is similar to the deduction limit for a gift of appreciated stock or land.
However, a gift of tangible personal property for an unrelated use produces a deduction only for the lesser of cost basis or fair market value. For example, assume that an antique piece of furniture has a value of $10,000 and a basis of $6,000. This gift for an unrelated use produces a deduction equal to $6,000, since it is unrelated. Thus the deduction is limited to the lesser of basis or fair market value. Sec. 170(e)(1)(B)(i). Since the deduction is limited to cost basis, it is treated as equivalent to a cash-type deduction and may be used up to 50% of adjusted gross income. In both cases, there is the customary five-year carry forward for any charitable contribution not deductible under the current year limits.
Example 4.1.3A Painting Given to the Art Institute
Mary Smith owns a painting that she purchased several years ago for $50,000. It now has increased in value and she obtained an appraisal from a qualified independent appraiser in the amount of $100,000. Mary gave the painting to the art institute and it is used as part of its display for that category of art.
This gift of the painting is a related use gift. Mary qualifies for an appreciated charitable deduction in the amount of $100,000, usable to 30% of adjusted gross income, with a five-year carry forward if needed.
Example 4.1.3B Painting Given to the Food Bank
Mary Smith has a second painting that she also purchased for $50,000 and is now valued at $100,000. Since she also supports the local food bank, Mary gives the second painting to the food bank. The food bank sells the painting for $100,000 and uses the funds to provide food supplies for the hungry. It also sends Mary a very nice thank you letter. Mary appreciates the thank you letter, but is permitted a charitable deduction of only her $50,000 cost basis. The gift of the art to the food bank is for an unrelated use, since the art was sold and the cash used for food supplies. Therefore, her deduction is $50,000, but it is a cash-type deduction usable to 50% of adjusted gross income. Any unused deduction over the 50% AGI limit may be carried forward for the next five years.
Actual or Expected Use
For a related use charity will give a letter to the donor. The letter should identify the property, state the date of the gift, indicate that the contemplated charitable use is "substantial" and describe briefly the use and the reasons why that use is related to the exempt purpose of the charity.
At one time, it was permissible to take a related use deduction for a gift to a charity if the donor had a "reasonable anticipation" that the gift will be used for an exempt purpose. However, actual use is now required. Reg. 1.170A-4(b)(3)(ii)(b).
Recapture of Tangible Personal Property Charitable Deductions If No Related Use
Gifts of tangible personal property to a charity qualify for a fair market value deduction if there is a related use by the charity. Charities must provide written confirmation to donors of appreciated related use property gifts that describes the intended use and its relationship to the nonprofit's exempt purpose. However, some tangible personal property may be transferred to charity and the charity will subsequently sell the property rather than using it in furtherance of its exempt purpose.
There is a recapture of tax benefits if a charitable organization disposes of related-use tangible personal property within three years of the gift. Recapture applies to related-use appreciated tangible personal property for which a deduction of more than $5,000 is claimed. In effect, there is a three year holding period for tangible personal property valued over $5,000 that is claimed to be used for a related use. If the property is sold in the first year, the charitable deduction is reduced to basis. Sec. 170(e)(1)(B)(i). If the property is sold after the first year and within three years of the gift date, the donor will include in taxable income the difference between the basis and the claimed deduction. Sec. 170(e)(7)(A).
There is an exception that allows the charity to make a statement under penalty of perjury that the related use has become impossible and therefore the tangible personal property had to be sold. The statement must either describe how the property was used in a manner related to its exempt purpose or state the intended related use at the time of the contribution and certify that such use became impossible or infeasible to implement. The organization must furnish a copy of the certification to the donor (for example, as part of Form 8282, a copy of which is supplied to the donor). Sec. 170(e)(7)(D).
The Form 8282 requirement of reporting the sales of Form 8283 property applies to sales within three years of the gift date. The donee organization must also provide a description of the donee's use of the property, a statement of whether use of the property was related to the purpose or function constituting the basis for the donee's exemption and, if applicable, a certification of any such use (described above).
A penalty of $10,000 applies to a person who identifies tangible personal property as having a use that is related to a purpose or function constituting the basis for the donee's exemption knowing that it is not intended for such a use. Sec. 6720B.
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Case Studies on Related or Unrelated Use Gifts of Art
Getting Back to the "Art of the Matter," Part 3:
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.
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