Taxes: What's Your Donation Really Worth?
Last year Bruce Duncan, a Chicago specialist in appraising museum-quality items, got an unusual call. A private collector said he had Abraham Lincoln's bed from the family home in Springfield, Ill. Duncan appraised the bed at $2 million. Finding a buyer for the bed--even a Presidential one--could be tough at that price, but as a donation to charity, the unidentified collector could reap a hefty tax deduction. As it happened, Lincoln's home is now a museum and was delighted to accept the gift. Says Duncan: "A $2 million bed put $1 million in the donor's pocket."
Whether you're making donations to museums and charities to keep valuables out of your estate, or you're the executor of someone else's estate, valuing tangible assets is crucial to gaining hefty tax deductions. It's not hard to find out the value of a Picasso print. But what about more unusual items--say, a Martin guitar played by the Kingston Trio's Nick Reynolds, or a polo shirt worn in space by Colonel Eileen Collins, the first woman to command a space shuttle flight? Both items were donated to the Smithsonian Institution last year, as was a collection of 100 vintage Pillsbury Bake-Off recipes. For the donors to earn their tax breaks, the items had to be appraised first, of course. Indeed, virtually every estate comes with books, jewelry, and vehicles, as well as old clothes and mundane household items that, properly assessed, can maximize the estate's value and minimize taxes.
To claim deductions, though, you have to carefully follow complex rules laid down by the Internal Revenue Service. The key word is "carefully," because the IRS is scrutinizing deductions for gifts of tangible assets more closely than ever. The attention results in part from an IRS crackdown on unrealistically high deductions donors have claimed when giving used cars to charities. But it's also arising because of tax cases like those involving Paul Brown and the Herman family of Mountain City, Tenn.
When their local hospital went into Chapter 11 bankruptcy reorganization in April, 1987, Brown and his partners, Daniel and Barbara Herman, paid $40,000 for its medical equipment. After the hospital was reorganized, they donated the equipment back and claimed a tax deduction of $1 million, which they maintained was the equipment's fair market value. The IRS challenged the deduction, arguing that $1 million was too much. Brown and the Hermans paid up, but then brought separate suits against the IRS to get their money back. Last September, the U.S. District Court for the Eastern District of Tennessee decided the donors had followed IRS rules and were entitled to deduct the equipment's full value--no matter what they had paid.
BURDEN OF PROOF. Even the IRS concedes that determining a fair price can be more art than science. But the tax code does have some guidelines. In the simplest instance, the donation, say, a Rolex watch, is an item that is still on the market. To determine its current value, you would find the price of a similar new model, estimate how much yours had depreciated, and take your deduction.
This is where people donating cars have been getting in trouble. An estimate from the charity, based on figures in a used-car price guide, won't do. The burden is on the taxpayer to prove the car was in the condition that matches the claimed value. If you assign your car the guidebook's "mint" price, you've got to support that claim. Pictures might help, along with a letter from the organization receiving the car certifying that it is in the condition shown in the photos. "Or videotape the car when you give it away," suggests IRS spokesman Don Roberts.
Value becomes even more complex when dealing with antiques or collectibles that may have appreciated in value. One typical strategy is to find out what comparable items sell for. A good source for such information is auction houses such as Christie's or Sotheby's, which sell wide varieties of artworks and collectibles and will draw up valuations for a fee.
Although it might seem an obvious solution to go on an Internet auction site, such as eBay, to see what your asset is bringing, that usually won't stand the IRS test. Online bidders have not personally examined the item they are buying and may overpay, establishing a false value, says Roberts. Or a bidding war could send the price beyond the level a reasonable buyer might pay. The price determined at a live auction, where the item can be inspected by potential buyers, is more likely to hold up to IRS scrutiny. One exception to the online exclusion: If an item sells repeatedly on online auctions for a steady price, the IRS may consider that to be a fair value.
But what if you're donating great grandma's silver? You'll need an expert, especially if you plan to deduct more than $5,000. Deductions of $5,000 or more require a written estimate from a qualified appraiser--and the appraisal must take place fewer than 60 days before the donation. A summary of that appraisal must be attached to IRS Form 8283. If the deduction is more than $20,000, you must send the entire appraisal report.
The IRS has an 11-item laundry list for an appraisal to pass muster. It includes a detailed description of the object, condition, method of valuation, how the number was reached, and terms of any agreement related to the donation. For art objects, such as paintings and statues, there is a second, equally detailed list. An appraiser has to perform assessments regularly and be knowledgeable about the item. The appraiser also must not be related to or employed by anyone involved in the deal. The IRS will appraise paintings valued at more than $50,000, but few donors take the offer. Not only does it charge $2,500, "they come in with a low price, it's not binding, and it's not helpful," says Lawrence Katzenstein, a tax lawyer in St. Louis.
In some cases, an appraiser may advise you to look at the income an object can generate, not its purchase value, says John Lanterman, a fellow with the American Society of Appraisers. For instance, the value of astronaut Collins' polo shirt may depend on the fees it would bring in at the National Air & Space Museum.
You can find an appraiser through the American Society of Appraisers (table), which trains members to meet IRS standards.
The agency asks four questions in examining your assessment. How similar is your item to the one whose price you're citing? How recently was the other item sold? What were the market conditions? Were buyer and seller knowledgeable and not forced into the deal?
If the charity sells your donated item in less than two years, and the sale price reported to the IRS is below the appraised value, you may owe tax. The stakes are high: The penalty can run as much as 40% of your deduction. It's great to donate--but be sure to get the value right when you do.
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