Donations, Deductions, and IRS Determinations, Oh My!

You’re a museum and a donor wants to gift you a piece of art? Great! You can accept the gift and the donor receives a tax deduction, right? Not so fast! Though this arrangement can have benefits for both the museum and the donor, not every donation is treated equally. Several technical requirements must be met to maximize the benefits for the parties involved.

Donors will likely want to structure their donation in a way that maximizes the tax deduction that they receive. However, the amount of the deduction that the donor can claim depends on how the museum uses the art.

To help donors maximize their deduction, the museum’s use of the art must be related to the museum’s exempt purpose. The tax consequences are much less favorable for donors when the use by the museum is unrelated to its exempt purpose.

But what is a related use? This determination is made based on the facts and circumstances of each individual case. A classic example of a related use is the donation of a piece of art to a museum for use in its collection. However, other cases are less easily determined, as illustrated by the following examples: The IRS has found the donation of a piece of art to a retirement home to be related to the retirement home’s purpose of caring for residents because the display of art enhanced residents’ lives.[1] In contrast, the IRS has found that the donation of an antique car to a university failed the related use test because the university didn’t offer a class in antique car restoration, so the donation was not related to the university’s purpose of educating students.[2] Museums can assist donors by providing a statement of the intended use of the art prior to the donation to help protect the value of the deduction and to ensure that donors are not misled about the tax consequences of their gift.

What if the museum accepts the gifted piece of art with the intention of selling it? Take caution before auctioning that piece of art! The sale of a piece of art by a museum can turn what was otherwise a related use into an unrelated use as the IRS does not consider the sale of art to be related to a museum’s exempt purpose. This is true even if the proceeds of the sale are used to purchase other objects for the museum’s collection. To help donors maximize their deductions, museums should only accept gifts of art if they have a good faith intention of keeping the art. If the museum intends to sell the donated art, this should be clearly communicated to the donor prior to donation of the art so that the donor is aware of the tax consequences.

What if a museum is receiving a group of items and intends to sell some and keep some? IRS regulations state that the related use test will not fail if the museum disposes of only an insubstantial portion of the donated collection. However, the IRS has not clarified whether “insubstantial portion” refers to quantity, quality, or value. Legal counsel can assist museums in determining if and when a sale of donated work(s) will satisfy or fail the related use test.

A donation of artwork can be a wonderful gift from donors. But museums should take care when accepting these gifts to ensure that their donors don’t receive any tax surprises that might leave them with a bad taste in their mouth. Gonsowski Law is experienced in the related use test and the other requirements for charitable donations of art and would welcome the opportunity to work with your institution on such transactions to help ensure a positive outcome for all parties involved.

This post published by Gonsowski Law is available for informational purposes only and is not considered legal advice on any subject matter. By viewing blog posts, the reader understands there is no attorney-client relationship between the reader and Gonsowski Law or any of its attorneys. The blog should not be used as a substitute for legal advice from a licensed professional attorney, and readers are urged to consult their own legal counsel on any specific legal questions concerning a specific situation.

[1] Private Letter Ruling 8347062 (August 23, 1983). [2] PLR8009027 (Nov. 29, 1979).