Thursday February 2, 2023
Case of the Week
Wild Bill Enjoys a "Russell" Art Deduction
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. 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 moved 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, paintings of cowboys and depictions of 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 selling his paintings for $75,000 or more and, as a result, he was facing a much higher income tax bill.
One day, Bill received a call from Wolf Point, Montana. A local attorney told him that a distant relative had passed away and that Wild Bill had inherited a sketch drawing created many years ago. Bill asked about the sketch and was told that it was created 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 Charles Russell sketch, Bill admired it for over a year and mentioned his inherited art to the Western Museum. The Western Museum suggested that the sketch would be a great addition to their Charles Russell collection. Bill called his CPA, Helen, and asked about donating the painting. He said, "Maybe I could receive a large tax deduction and save taxes. What do I need to do to give this sketch to the museum?"
Solution:Helen explained to Bill the benefits of giving his uncle's sketch drawing to charity. With a gift of inherited art to a museum for a related use gift, Bill could receive a deduction equal to the artwork's fair market value. Helen determines that Wild Bill would be treated as an art collector for purposes of the inherited sketch. Bill did some research on the value of the sketch and determined it may be worth more than $100,000. Since this is a valuable drawing worth potentially over $100,000, Form 8283 would be filed with the IRS to substantiate Bill's gift. Part A of Form 8283 includes the description of the property. Because the gifted property exceeds $5,000, an appraisal would be required. An individual must earn "an appraisal designation from a recognized professional appraiser organization" or meet education and experience requirements for the type of property being appraised to be a qualified appraiser. Sec. 170(f)(11)(E).
A description of the property must be sufficiently detailed so that a person not generally familiar with the property could ascertain that the contributed property is the same as the property being appraised. Reg. 170A-17(a)(3)(i)(A). The appraisal must state the date of the appraisal report, that the property was valued as of the gift date and the appraisal was done for income tax purposes. Reg. 1.170A-17(a)(3).
The appraisal must disclose the methodology used in deriving the property value and must state the specific basis for the valuation. Reg. 1.170A-17(a)(3)(ix). The appraisal must include the specific declaration found in Reg. 170A-17(a)(3)(vi).
Further, this art gift has a value greater than $20,000. Therefore, the complete signed appraisal must be submitted with the Form 8283. In addition, either an 8x10 color photo or a 4x5 color transparency of the art must be provided with his tax return.
The qualified appraiser valued the Russell drawing at $110,000. The IRS Art Advisory Panel reviews art gifts with a value in excess of $50,000. Because the Charles Russell sketch is worth more than $50,000, Bill could seek a "Statement of Value" from the IRS for $7,500 to avoid review from the IRS Art Advisory Panel, but it is available only after the art has been appraised and transferred to charity. After reviewing art gifts, the Art Advisory Panel often reduces charitable income tax deductions on the gifts. Bill decided against getting a Statement of Value and let the art proceed to the Art Advisory Panel. The Panel reviewed the appraisal and an 8x10 color photo that were sent in with Bill's tax return. Fortunately, the comparables used by Bill's appraiser were valid and his $110,000 deduction was permitted.