Art and other tangible property gifts

My day started with a call about a donated work of art, already in possession of the charity (not a good sign), at significant moving expense (another not good sign), from a donor with no previous giving history (a 3rd not good sign!) who is demanding that the charity provide a dollar figure for deduction purposes in the acknowledgment letter and refused to get his own appraisal (but wants a deduction - the worst of all signs). This is a really common situation and it would be easy for me to suggest that they just go with their standing gift acceptance policy - no valuations provided for gifts of art.

Problem with that advice is that in the real world, development professionals are in the business of keeping donors happy, making friends (not enemies), and exploring development opportunities when they arise (and not everyone has many of those today).

My first question - is it worth $5,000 or less? Answer: donor thinks its worth up to a $100,000; development officer has no idea what it is worth. (read part II below to see why that is important)

Second question: what are you planning to do with it? Answer: permanently place it in a new building - no intentions of selling. (read part I below to why that is important)

In case you are wondering if I am going to discuss the related use rule - the answer is no (this case doesn't involve the related-use rule - they have a museum, the piece completely fits in with theme of the institution)

The question here is about acknowledging art and other tangible personal property when the donor is not cooperating the way we would always like. Seeing that the development officer was in a bind, we came up with the following:

Let's find out about adding this piece of art to the institution's insurance policy - maybe they require some sort of appraisal. Find out the cost of obtaining an appraisal for insurance purposes. And then make a decision. If the cost is relatively low and the institution would get one anyway - to insure the piece - then get the appraisal. Then we draft a letter that carefully states the facts very accurately so that it is clear in the letter that the appraisal and value we came up with is for our own purposes and that he should seek his own counsel to determine the deductibility of the gift.

Or, the decision is not to spend anything on the appraisal and stick with the gift acceptance policies "come hell or high-water" (i.e. live with the consequences that not every donor can be made happy).

The lawyers and lawyer-ly minded people reading this blog are probably screaming in their heads - how can I even suggest putting any dollar amount in the letter? Well, firstly, anyone reading this blog needs to seek their own legal counsel - my own caveat. Besides being a lawyer myself, I seek legal counsel too and the advice I got was that if forced, just describe where you got the valuation from and put in the CYA caveats in the letter. It is not ideal and I told the caller that they may just want to hold their ground and accept the consequences.

This situation probably would not have reached me if the charity knew of the donor's demands BEFORE accepting the gift. It shows you how important it is to have a gift acceptance policy that "ties your hands" before accepting such gifts.

Anyway, I am including two short pieces below I wrote earlier this year about tangible property gift rules. These will all be chapters in my book! My blog book that I am writing and will somehow compile as a guide to planned giving.

And, don't forget to forward links of these blog posts around! I am still in the proving phase of this blog and the more readers, the better chance it will survive and get better.

Part I - Selling Donated Art and Other Tangible Property Gifts

In light of recent stories in the press about some universities selling donated works of art to replenish endowments, we thought this would be a good opportunity to revisit this thorny question. Many of us may have missed an important change to charitable giving laws in the 2006 Pension Protection Act (“PPA”) regarding gifts of tangible personal property like artwork or even equipment.

Generally, donors receive a fair market value deduction if their tangible property gifts have a “related” use to your institution – otherwise the deduction is limited to the donor’s adjusted cost basis (in other words – the original purchase price of the item). Many of us recall that a separate rule requires a charitable recipient of such gifts to file a form (Form 8282) with the IRS when your institution sells or otherwise disposes of the property within 2 years (the IRS’ way of red flagging overvaluations or improper related use gifts).

That was generally the law prior to the PPA. But, the PPA significantly changed both rules, in effect melding both the related use rule and the Form 8282 requirement together. Now, the rule is that any gifted tangible property that is sold or otherwise disposed of within 3 years of the date of gift requires the filing of Form 8282 AND creates a presumption that the donor’s gift was NOT for a related use. In fact, the statute calls for the donor to retroactively lose their deduction taken above their original purchase price.

Part II – Gift Acknowledgment Letters and Qualified Appraisals

Acknowledging gifts of tangible property, including art and in-kind gifts (excluding automobiles which have special rules), can be very challenging and some of the rules are easily forgotten or misunderstood.

There are two general categories: those tangible property gifts valued at or less than $5,000 and those above $5,000. (All gifts less than $250, cash or otherwise, technically do not require even a receipt.)

Tangible property gifts valued at or below $5,000 will require a receipt from your foundation but the donor is not required to obtain a qualified appraisal outside of describing the method used to determine value on his or her tax return.

The second category of tangible property gifts is for gifts valued over $5,000. The donor in these cases is required to obtain a qualified appraisal to claim a charitable deduction for. The appraiser must "hold himself or herself out to the public as an appraiser." The qualifications of the appraiser also must include the ability to appraise the specific type of property involved, and he or she must be independent. The appraiser must not be a party to the gift, and may not be the charitable donee or an employee of either the donor or donee. The appraisal must specifically address the physical condition of the property and the factors appropriate for valuing that type of asset. These are just a summary of the rules involved with qualified appraisals which you can provide to your donor as long as you also include written language urging your donors to seek legal or tax counsel to determine the legal effectiveness of any appraisal obtained for deduction purposes.

As most should know, the qualified appraisal requirement is the responsibility of the donor. You should not attempt to obtain one on behalf of the donor. If pressed, you may need to help your donor find an appropriate appraiser. In such cases, try to provide three appraisers and always include caveat language in writing stating that your donor’s legal or tax counsel should assist the donor in making a final determination as to the qualifications of an appraiser.

Another challenge fundraisers face is when donors request a specific dollar amount in their gift acknowledgment letters, whether for gifts above or below $5,000. In no way should your institution be seen as providing gift valuations. There are potentially serious consequences for your donor and your institution should a fraudulent gift valuation be found by the IRS. Rather, your institution should consider adopting a policy of never providing a dollar amount value in the gift acknowledgment letters of tangible personal property. A full, non-monetary description of the property should suffice.

If your donors are adamant that a dollar amount should be in the letter, then your gift acknowledgment letter can describe the property and then state a value “as provided by your own valuation” or something to that effect. Stating in the letter that the valuation was provided by the donor is an option several attorneys have suggested in these situations – your own charity’s legal counsel should be consulted on this question. Additionally, it is always important to include language in your gift acknowledgment letters that strongly urges donors to seek “independent legal or tax counsel in determining the amount deductible for federal tax purposes.”