By: Joy Berus, Esq.

Why do people donate?  Benefits can include an income tax deduction of the full fair market value of the object as of the date of donation, the avoidance of the tax on capital gains on appreciated assets, an estate and gift tax deduction, and the creation of a lasting Donor legacy with the Museum.

Donations of objects such as artworks, antiquities and collectibles have always been increasingly more problematic, and have often led to some not so “happily ever after” results for both Donors and Museums. Here are just two examples of problems for Donors which can also become problems for Museums.

Donors and “long-term capital gain” objects

The general rule is that a Donor can only receive a full fair market tax deduction for the donated object if it is “long term capital gain property,” which includes, among other things, objects owned at least one (1) year or more.

On the other hand, the Donor can only deduct his or her cost (“basis”) if it is “ordinary income” property such as business inventory, works of art created by an artist Donor, manuscripts prepared by the Donor, and objects owned one (1) year or less.

Example:  A client once called after he had donated an artwork to a Museum.  He asked how he could receive his full tax deduction.  He said the Museum had already “helped” him. They did, he was told he did not need legal assistance, and that they would take care of the donation process.  They prepared the deed of gift, had him sign it, and then they took the artwork.  Unfortunately, they helped him right out of his full fair market value tax deduction.  Why?  They had “helped’ him when he had owned the artwork only nine months, less than one year.    This meant that he could only deduct $60.00, the price he paid when he purchased the artwork.  What was the appraised value as of the date of donation?  $150,000.00.  Loss to the Donor in the tax deduction:  $149,940.00.

Donors and Related Use

Qualified museums must be a public “501(c)(3)” charitable organization.  That is no surprise.

However, the 501(c)(3) status of the Museum is not enough when the Donor donates an object.  Donor’s Museum of choice must also meet the “Related Use Rule” This means that the donated object must be of a type normally retained and exhibited by that Museum as a part of their purpose.  All of the Donor’s increased value in the donated art object will be lost as a tax deduction if the related use rule is not satisfied.  This means the Donor would only receive a tax deduction for what he or she originally paid for the work.

Example:  Donor donated an artwork to a Museum to be sold as a silent auction item at the Museum’s fundraiser event.  Donor had paid $1,000.00 for the artwork.  It sold at the silent auction for $5,000.00.  The artwork’s full fair market value would have been $10,000.00 in a retail gallery. Donor thought he was entitled to the full fair market value tax deduction.  Museum called wanting to know what Donor was entitled to deduct. Answer:  $1,000.00, what Donor initially paid for the artwork, because this was not a “related use” donation.

Museum Advocacy and Donors

Donors must navigate many steps in a qualified donation. Yet, I have seen over the years that most Donors do not know the requirements.  Donors are also unaware that they have a variety of available options in ways of donating.

Museum Advocacy should include education programs for Donors on current donation requirements and options, as well as education programs for Museum staff on donation requirements, donation acceptance and the risk mitigation process from the Museum’s perspective.  I think the result would be both an increase in donations as well as a decrease in disputes and the associated risks to Museums.

Joy Berus is Attorney at Law at Barth, Berus & Calderon, LLP in Orange, California. She assists clients in acquisitions, sales, charitable contributions,  charitable trusts, loans to museums, art as collateral loans, collection management, collection estate planning, and historical property both real and personal. Joy's clients include art and antique collectors, historical memorabilia collectors, corporate collectors, historical property owners, as well as artists, appraisers, gallery owners, and museums.

This article is © 2012 Joy Berus, Esq.  All Rights Reserved.