The Challenges for Art Donation (Part 1 of 3): An Introduction

Among the many ways that Congress uses tax laws to influence taxpayers’ spending, encouraging donations to charitable causes is perhaps the least controversial. Section 170 of Title 26 of U.S. Code, for example, has outlined Internal Revenue Service (IRS) policy on charitable contributions and gifts for decades. For many taxpayers, such donations include small payments to their local religious institution or school. For some, however, such donations include much more substantial sums and involve valuations of property and various third parties to verify any possible valuations. Such is the case with real property and conservation easements, but also with less obvious property like works of art. As is ever the case, there are several hurdles involved in receiving tax breaks for donating art but, for those who can afford the paperwork, the benefits can be quite real.

As with conservation easements, the IRS has recently begun challenging art donations with more aggressive action and also a standard strategy. The following blog post, which is part 1 of 3 in a series, outlines the basics of charitable art donations and recent steps that the IRS has taken to crack down on those claiming art donations.

The value of donated art for the purposes of a charitable donation is the fair market value (FMV) of the art in question at the time of donation. Determining the FMV of property generally means identifying the price point at which a willing buyer and willing seller would agree when both parties have all relevant facts and no obligation to participate in the transaction. For works of art, finding the FMV of a given piece often involves finding comparable pieces with similar sizes, descriptions, conditions, etc., and using their sale prices as a benchmark. Finding such comparable items can be difficult when the piece in question is a unique work. As a result, the IRS depends on educated opinions, which can be further supported with additional details on documentation.

The IRS has outlined that valuations of art can be substantiated with a variety of information and documentation. Such information and documentation includes, for example, detailed descriptions of the piece in question; the cost, date, and manner of acquisition; history of the piece; a high resolution image of the piece; and the facts upon which an appraisal is based. Additionally, the taxpayer can obtain a statement of value before filing their tax returns to help get ahead of any dispute with the IRS. From the IRS’s end, the IRS has recently created an Art Appraisal Services division specifically for handling these issues.

The IRS’s Art Advisory Panel (the Panel), which was established in 1968 of a group of up to 25 experts, regularly meets to consider items submitted to the Art Appraisal Services for review and provide their opinion on individual items. These items typically have valuations of greater than $150,000.00, but the Art Appraisal Service has discretion for determining which items are submitted to the Panel for review. The Panel draws on their professional expertise to assess its aesthetic quality, its historical importance, and the FMV of the item. If the IRS determination differs from the taxpayer’s original assertion, the taxpayer can, in some cases, demand the basis for the IRS’s determination. In order to properly claim a tax deduction, the taxpayer must have, among other things, a qualified appraisal from a qualified appraiser, demonstrate that the receiving charity is a qualified organization, obtain a contemporaneous written statement acknowledging the donation, and complete Form 8283, Noncash Charitable Contributions. Doing all of the above-listed actions will anticipate the IRS’s claims to a different valuation, should one occur.

Again, as with conservation easement, there has been some questionable and outright illegal activity, including promotions with exaggerated or inflated appraisals. While taxpayers are entitled to donate art and seek the associated tax deductions, the IRS cautioned against “unscrupulous promoters” who persuade taxpayers to purchase art for a “discounted price” for the express purposes of seeking tax deductions. The promoters also often promise additional services, such as shipping, storage, and the appraisal of art, for which they charge fees. The promoters then claim that they can identify charities willing to accept the art, and offer guidance to the taxpayers to maximize their charitable donation and, what often entices the taxpayer, their tax deduction.

Typically, it is wealthier individuals who pursue and are able to receive tax deductions for art donations. They have the disposable income to spend on art in the first place. In response, and due in part to additional Inflation Reduction Act of 2022 funding, the IRS aims to increase compliance efforts on high-income and high-wealth individuals. And while “[t]axpayers should remember they are always responsible for the accuracy of information reported on their tax return,” the Art Appraisal Services and the Panel may use their professional expertise to crack down illegal schemes to avoid paying taxes. That being said, with careful planning and preparation, someone who wants to receive a tax deduction for their legitimate art donation should be able to anticipate the many hurdles the IRS may put in their way.