Wednesday September 23, 2020
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. But Wild Bill was an artist at heart and soon decided to move on to artistic pursuits. He traveled throughout America and Europe and studied all of the great modern and classical artists. In France, he was moved by the delicate works of Impressionist painters Monet and Manet and the bold colors and brush strokes of Van Gogh. Upon return to his beloved Great Plains, 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.
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 a year. Then, the Cowboy Western Museum called and suggested that the sketch would be a great addition to their Charles Russell collection. Bill called his CPA, Helen Swenson, and asked about donating the painting. He said, “Maybe I could receive a large tax deduction and save taxes. But how does this work? What do I need to do to give this sketch to the museum and get a large deduction? I don’t want to get into any trouble with the IRS.”
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, Bill could receive a deduction equal to the artwork’s fair market value. Since this is a valuable drawing worth potentially over $100,000, Form 8283 would need to be filed with the IRS to substantiate Bill’s gift. Part A of 8283 includes the description of the property. Because the gifted property exceeds $5,000, an appraisal would be required. The appraisal must be conducted by a qualified person who "holds himself or herself out to the public" as an art appraiser.
The art appraiser must state the date of the appraisal, that the property was valued as of the date of the gift, that the appraisal was done for income tax purposes and must disclose the methodology used in deriving the property value. Reg. 1.170A-13(c)(3).
Furthermore, 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.
Because the Russell sketch is worth $50,000 or more, there is one other option. Bill could ask the IRS for a "Statement of Value." This "Statement of Value" is available only after the art has been appraised and transferred. Since Bill wanted to know the value of the deduction, he decided to rely on a valuation by an independent qualified appraiser.
The qualified appraiser valued the Russell drawing at $110,000. The appraisal and an 8x10 color photo were sent in with Bill’s tax return. The IRS Art Advisory Panel reviews art gifts with a value in excess of $50,000. After reviewing art gifts, the Art Advisory Panel often reduces charitable income tax deductions on the gifts. Fortunately, the comparables used by Bill’s expert appraiser were valid and his $110,000 deduction was permitted.