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"There is no such thing as Art. There are only artists." E.H. Gombrich’s epigram, written at the beginning of his 1950 classic text The Story of Art, is still true today. Art capitalized does not exist. Only through the actions of artists themselves does art achieve an identity.

Similarly, there is no such thing as an Art Collection. There are only individuals who have the desire to collect art. They are driven by passion, status, curiosity, financial gain, or a tax deduction. But all of them will be affected by the inevitable forces of the three D’s: division, divorce, and death. Some will also experience the additional D: dollars.

It is therefore important for collectors who wish to become donors, to plan properly for the lifetime and testamentary disposition of their art collections. Before making firm plans, however, collectors should first consult with their legal counsel and financial advisor. If there is agreement from a trust, estate, and tax standpoint that the collection should be donated, finding an appropriate recipient related-use charity to display the art properly is crucial. To achieve those objectives, collectors would be wise to use the services of a fundraiser and an independent art advisor.

The Importance of the Relationship between Fundraiser, Art Advisor and Donor

Most major museums will reject a work of art unless it fills a gap in its permanent collection. For donated art collections, the likelihood of rejection is even higher. The art, alas, will be homeless, except if it’s a masterpiece.

To avoid this dilemma, fundraisers and their art advisors should work with donors in creating a realistic comprehensive plan. Those arrangements will ensure the acceptance of their donation by the charity of their choice, while offering them a fair market value tax deduction. Caveat Donor. "All gifts have to be unconditional," according to Glenn D. Lowry, director of the Museum of Modern Art, before they will be considered for acceptance. This is standard practice for museums and charities alike.

Nonetheless, the fundraiser and art advisor can be valuable by explaining to donors the elements of the program. Those elements include the percentage of the charity’s collection on permanent display, the criteria for displaying works of art, if an endowment will be required with the donation, and the charity’s policy on selling art after it has been put to a related use. Finally, donors should understand the importance of having an independent art advisor who represents their interests only, not those of museums, auction houses, dealers, or artists.

Most important, the art advisor should be independent. He or she should not be beholden to museums, auction houses, dealers, or artists. His or her compensation should be fee-based — not determined by commissions. Those arrangements will promote trust, stewardship, and clarity between the art advisor and the collectors.

Identifying Charities, Other Than Museums, that are Suitable for Art Donations

The Union Rescue Mission, dedicated to reducing homelessness in Los Angeles, believed it could accept donations of art by creating an art program for its constituents, while increasing its endowment. Under the part-time curatorial direction of John D’Elia, a one-time Presbyterian minister, the Mission has received over 400 donations of art that is presently valued in excess of $1,500,000.

How did the Mission find new donors and create an art education program using a person working part-time? They put the word out on the street that donations of art would be welcome. Soon, wealthy neighbors and businesses responded by offering their art to the Mission. Reflecting on the program’s success, Mr. D’Elia suggested that "people learned something about how their gifts of art could help poor families."

The Mission put the donations of art to a related use by creating an art education program, which is offered in addition to its existing rehabilitation and vocation programs. Thereafter, it added 60 volunteer teachers on art, offered an annual exhibition of all art donations, and produced a photo essay on the Mission itself.

Their art acceptance program continues to grow, as wealthy residents from the west side of Los Angeles donate art that include paintings, drawings, prints and photographs. According to Mr. D’Elia, "The art program helped an old-fashioned Skid Row Mission find new donors in communities which had largely ignored us before."

Across the country in the New York City section of Riverdale, the Hebrew Home for Aged, located on 19 acres that overlook the picturesque Palisades, has assembled an art collection over the last 30 years that today exceeds 4,500 works of art. The collection includes paintings, sculpture, drawings, prints, and photographs of artists such as Pablo Picasso, Marc Chagall, Alexander Calder, Andy Warhol and Frank Stella.

The Hebrew Home’s long term residents have little opportunity to visit museums and benefit from the aesthetic and therapeutic experience of viewing works of art. But with the Hebrew Home’s expansive collection, the art has come to them, allowing residents to recapture this lost experience. Residents can view the art in public areas, lounges and dining rooms. Interactive displays have recently been added to the collection, resulting in resident participation with the artworks.

"Art has the ability of enhancing and enriching a space, of creating a more beautiful and nurturing environment that affects the lives of the residents that live here," according to Susan Putterman, curator of the Hebrew Home collection. Staff members and visitors benefit as well.

The City University of New York (CUNY) is one of the largest universities in America. With over 350,000 students, including those enrolled in adult and continuing education programs, the University has many alumni who have made donations of art to colleges from which they graduated.

One alumnus from Baruch College, Sidney Mishkin, (1913-1991), chose to express his philanthropy, just before his death, by giving the College $2 million that included works of art and unrestricted funds for student scholarships. Mr. Mishkin’s gift was the second largest ever received by the College, bested only by the munificence of the College’s famous alumnus, Bernard Baruch. The University Board of Trustees, in accepting his gift, decided to rename their gallery the Sidney Mishkin Gallery. Presently, the gallery collection continues to receive donations from alumni and friends alike.

Other CUNY colleges have been the beneficiaries of art donations from alumni and faculty. These donations often reflect the mission of their collections and Art Department programs. Matching donor art with each college collection is crucial. We would "welcome gifts that are important to the work of the school," says Tracy Adler, curator of CUNY’s Hunter College Art Galleries.

Determine the Appropriateness of Art as a Charitable Contribution

Current tax laws favor collectors who donate art to museums or other qualified charitable organizations. Encouraged by the generosity of those laws, individuals, families, and corporations now donate in excess of $11 billion a year to the arts, culture, and humanities, according to the AAFRC Trust for Philanthropy, the not-for-profit arm of the American Association of Fundraising Counsel. The majority of those donations have gone to the arts.

While every circumstance is different, there are legal and tax implications that apply generally to donations of art to charitable organizations. The basic tax rules, an invention unique in the world, are described below.

Basic Tax Rules

An income tax charitable deduction is allowed for a lifetime gift of a work of art to charity.1 The extent of the deduction depends on a number of factors:

a. The type of charitable organization.2

b. The kind of property.3

c. Does the gift meet the related use rule?4

d. Does the donor have a qualified appraisal?5

Type of organization. Most donee institutions for art are museums or schools that are public charities. But, some may be private foundations. A donor should get a copy of the Internal Revenue Service determination letter given to the charity that states its status.

Generally, an art gift to a private foundation generates a deduction for cost basis only and not for full fair market value as is the case with a gift to a public charity.6 (But see below).

Type of property. Generally, a work of art held by a collector is capital gain property. It is ordinary income property if 1) the donor created it, 2) the donor received it as a gift from the creator, 3) it is held as inventory by a dealer, 4) its sale would generate short term capital gain because it was held for one year or less.7

If the work is capital gain property, the gift qualifies for deductibility at full fair market value if it meets the related use rule described below. The contribution is deductible up to 30 percent of adjusted gross income with any excess contribution deductible over the five following years — up to 30 percent of adjusted gross income in each carryover year — until exhausted.8

If it is ordinary income property, the deduction is for cost basis only but the ceiling for deductibility is 50 percent of adjusted gross income with a five-year/50 percent carryover for any excess.9

Related use. To obtain a full market value deduction for a gift of art, the use by the donee institution must be related to its charitable purposes or functions. If not, the deduction is for cost basis only (or, if less, fair market value).10

A gift of a painting to a museum should clearly be a related-use gift. A gift of a work of art to a school with a museum, or which uses it for art instruction, should also be a related use gift. However, if the work of art is contributed, for example, to The American Red Cross, which is a public charity, but which from the outset intends to sell and in fact promptly does sell the work of art, the deduction will be for cost basis only and subject to the 50 percent ceiling.

The regulations11 provide that a donor may treat a contribution of a work of art as meeting the related use rule if:

• The donor establishes that the work of art is not in fact put to an unrelated use by the donee institution; or

• At the time of the gift, it is reasonable to anticipate that the work of art would not be put to an unrelated use by the donee organization.

A number of situations are not so black and white. And, there have been few litigated cases but some private letter rulings:

For example:

• Private Letter Ruling 7751044, where the Service held that the rule was met when lithographs were displayed in a camping center devoted to handicapped and retarded children because the lithographs were used in connection with an art appreciation program. Also see Private Letter Rulings 7911109 and 7934082.

• In Private Letter Ruling 8208059, the Service held that the related use rule was met when a donor gave his stamp collection to a college because the college would exhibit the collection and had, as part of its curriculum, a course in engraving skills.

These matters are fact-specific. It is important that a donor obtain from the donee institution a clear indication of how it intends to use the gift property.

Qualified Appraisal. Regulation Sec. 1.170A-13, issued on May 4, 1988, provides that a gift of property (other than money or readily marketable securities) that has a claimed value exceeding $5,000 requires that the donee 1) obtain a qualified appraisal for the property and 2) attaches a fully completed appraisal summary to the income tax return on which the deduction is claimed.

A qualified appraisal is an appraisal by a qualified appraiser dated not more than 60 days before the date of the gift.12 It should contain the following information:

1. A detailed description of the property;

2. The property’s physical condition;

3. The date or expected date of the gift;

4. The terms of any agreement or understanding entered into or expected to be entered into by or on behalf of the donor that relates to the use, sale or other disposition of the gift property;

5. The appraiser’s name, address and taxpayer identification number;

6. A detailed description of the appraiser’s background and qualifications;

7. A statement that the appraisal is prepared for income tax purposes;

8. The date on which the property was appraised;

9. The property’s appraised fair market value;

10. The appraiser’s method of valuation;

11. The specific basis for the valuation such as comparable sales; and

12. A description of the fee arrangement between the donor and the appraiser.

Because a qualified appraisal must be detailed and must be performed by someone with the appropriate qualifications, it is likely to be expensive. Keep careful records; that will immensely help the appraiser.

Form 8283 contains the Appraisal Summary.13

Form 8282. If the work of art is sold within two years from the date of gift, the donee institutions must report that sale on Form 8282 and furnish a copy of the Form to both Internal Revenue Service and the donor.14

Clearly, this is designed to let the Service know when a work of art or other gift property is sold at a price significantly less than its appraised value dating from when the donation was made. This should have a chilling effect, both on the appraiser and the donor, on highly overinflated appraisals.

Gifts in trust. What if a donor wishes to transfer the work of art to a qualified charitable remainder trust (a unitrust or annuity trust described in Internal Revenue Code Sec. 664)?

Some commentators believe the gift should be treated like a gift of any other capital gain asset. The Service maintains, first, that there is no charitable contribution deduction until the work of art is sold and, second, the deduction is for cost basis only because it is clearly a gift for an unrelated use.

Testamentary gifts. The estate tax charitable deduction is unlimited15 and the related use rule does not apply.16 The valuation issue still exists and, therefore, an appropriate appraisal should be obtained and attached to the estate tax return.

Summary

The rules are complicated. A donor should get competent professional counsel in structuring any gift of works of art to charity.u

Laurence C. Zale is president of the New York independent art advisory firm Laurence C. Zale Associates Inc. He was educated at Washington University, New York University and The Courtauld Institute of Art, University of London. He is a trustee on the executive committee of The Brookdale University Hospital Medical Center, and participates in the American Friends of the Courtauld Institute of Art. He teaches at the New York University Center for Philanthropy.

Philip T. Temple is a partner in the White Plains law firm of McCarthy, Fingar, Donovan, Drazen & Smith, LLP and a graduate of Columbia University Law School. He is former chair of the Committee on Non-Profit Organizations of the Association of the Bar of the City of New York and was a member of its counsel on taxation. He is also a member of the National Association of College and University Attorneys and is a member of the founding faculty of the American Institute for Philanthropic Studies in Long Beach, Calif.

ENDNOTES

1. IRC Sec. 170(c)

2. IRC Secs. 170(b)(1)(A)(i) – (viii), 170(b)(1)(B), (E)(i) – (iii), 509(a); Treas. Reg. Sec. 1.170A-9

3. IRC Secs. 170(b)(1)(C)(iv), 1221; Treas. Reg. Secs. 1.170A-8(d)(3), 1.170A-4(b)(2); IRC Secs. 1221(d), 170(e)(1)(A); Treas. Reg. Secs. 1.170A-8(d)(3), 1.170A-4(b)(2)

4. IRC Sec. 170(e)(1)(B)(i); Treas. Reg. Sec. 1.170A-4(b)(3)

5. Treas. Reg. Sec. 1.170A-13

6. IRC Sec. 170(b)(1)(C)(i)

7. IRC Secs. 1221(d), 170(e)(1)(A); Treas. Reg. Secs. 1.170A-8(d)(3), 1.170A-4(b)(2)

8. IRC Sec. 170(b)(1)(C)(i)

9. IRC Sec. 170(d)(1)(A), (b)(1)(B) last sentence

10. IRC Sec. 170(e)(1)(B)(i); Treas. Reg. Sec. 1.170A-4(b)(3)

11. Treas. Reg. Sec. 1.170A-4(b)(3)(i), (ii)

12. Tax Reform Act of 1984, Sec. 155(a)(2); Treas. Reg. Sec. 1.170A-13(c)(3)(i)

13. Treas. Reg. Sec. 1.170A-13(c)(4)

14. Treas. Reg. Sec. 1.6050L-1

15. IRC Sec. 2055(a)

16. IRC Sec. 170(e)(1)(B)(i); Treas. Reg. Sec. 20.2055-1(a)(4)

Access Mr. Zale's Web site: visualartsadvisory.com