Getting Back to the “Art of the Matter”
Return to Donor Scenarios
Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied. In fact, during the past year, he painted a traditional 17th century landscape piece and he sculpted a giant dolphin out of a 2000-pound marble block. In addition, he also purchased a modern abstract piece made entirely out of used car parts.
Not surprisingly, Paulo strongly supports the arts in his community. He frequently gives workshops and tours at the local art museum. In addition, Paulo also is fond of the local art college where young new talent is groomed and developed everyday.
Paulo desires to make a substantial contribution to charity. Specifically, he would like to give one of his works of art, but he also wants to receive retirement income. Paulo unfortunately has no savings yet and desires some security for his latter years. Furthermore, he wants to take full advantage of the tax benefits associated with charitable giving.
What are the tax consequences if Paulo gives the modern abstract piece in exchange for a deferred charitable gift annuity? Does it matter whether the art museum intends to display the piece? Why or why not?
Gift of Artwork to CGA: When dealing with gifts of artwork, the first step is to determine the type of asset being contributed as defined by the tax code. If a donor is the creator of the work of art, then it is an ordinary income asset to the donor. Alternatively, if a collector holds the work of art for investment purposes, then it is a capital asset.
Second, since art is tangible personal property, the charitable deduction for a gift of art will depend also upon whether the property is put to a "related" or "unrelated use." A related use gift occurs when the charity actually makes use of the property in a manner consistent with its exempt purpose.
In this case, Paulo purchased the modern abstract piece as an investment. Therefore, the artwork is deemed a capital asset. Assuming he purchased the property at least a year and one day ago, the art would further be classified as a long-term capital asset. Paulo purchased the artwork for $10,000 and, due to its creator's death, it has since appreciated in value to $100,000.
If the property qualifies as related use property, then the gift of an appreciated artwork produces a charitable deduction equal to its fair market value. However, a gift of tangible personal property for an unrelated use produces a deduction only for cost basis, so long as the cost basis exceeds fair market value.
In this case, the art museum desires the piece for its collection and agrees to display it. Therefore, the work of art is deemed "related use" property. Accordingly, Paulo's contribution would be based upon the fair market value of the piece or $100,000.
After considering his desire to help the museum, his income needs and his lack of retirement savings, Paulo decides to move forward with a deferred charitable gift annuity. Paulo chooses a lengthy deferral period which results in an ACGA payout of 20.2%. Therefore, upon reaching payout age, Paulo will retire and receive $20,200 each year for the rest of his life. Each payment will consist of $2,389 of capital gain and $257 of return of principal. Moreover, Paulo will receive a tax deduction of $47,173. Not surprisingly, Paulo is wonderfully pleased with this gift arrangement that benefits both charity and him. Furthermore, Paulo feels great comfort in knowing he has begun to create a retirement plan with a charity that he so dearly loves.
Return to Top or Donor Scenarios