One of the most common questions I get when completing returns is about donations and what can be deducted. A most recent, high-profile tax case, can shed some light on the proper way to handle this issue.
A wealthy Chinese-American businessman and philanthropist named Oscar Tang, donated five early Chinese paintings through a family partnership to New York’s Metropolitan Museum of Art in 2010-2012. The Tang Partnership took a $74M deduction based on a certified appraisal completed by Beijing-based China Guardian, the country’s second-largest auction house.
The initial position of the IRS was to disallow the entire deduction. That’s right. Zip. Zero. Zilch.
There are dozens of rules when it comes to any donation valued in excess of $5K. The first is that if it isn’t cash or securities, which are easily valued on the date of donation, that a certified appraisal must be completed and should accompany the tax return. This was completed by the taxpayer, but that wasn’t the problem.
There are at least a dozen more IRS Rules that can invalidate an appraisal. One of those qualifiers is that the appraiser must regularly perform appraisals.
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The Tang Partnership Paintings may have been the only ones China Guardian appraised for a fee during 2010-2012. The judge then ruled that within the confines of the law, the appraiser wasn’t qualified.
After years of arguing back and forth, the charitable deduction was decreased to $54M. As a result, the donors owe a penalty of $2 million.
Think about it. You try to do a nice thing. You make a donation, hire the wrong appraiser, and it costs you a cool $2M.
Thank you for shopping at the IRS and have a nice day.
Let me leave you with this.
When I read this case I almost never wanted to give another cent to a soul. But this brings a difficult problem into specific relief.
I’m sure it’s impossible for any of you to imagine this, because none of you would ever do such a horrible thing, but people have a tendency to increase the value of donations on artwork, real estate, and collectibles in order to cheat on their taxes.
So let’s use an example to describe this phenomenon.
Joanne B. Owner donates a piece of real estate that’s been in her family for generations to a qualified charity. She’s had it on the market for years and can’t get a lousy $100K for it, because no one wants it.
Joanne comes up with a plan. She goes to one of her drinking buddies who never does this sort of thing and gets an appraisal on the real estate for $300K. Since she pays an average tax rate of 33% between federal and state income taxes, a $300K deduction is the same as a $100K sale.
She takes the deduction, and wonders why the IRS wants to disallow it when she gets audited. Gee. I don’t know. Maybe because it wasn’t a bona fide transaction?
My favorite issue of this ilk is Donations In Kind. This is when you donate goods, services, or expertise to a charitable organization.
Let’s say that Joanne is approached by a charity that asks for a donation. She gladly complies because they give her a charitable donation receipt saying that the donation was worth $1,000.
In reality, she normally would have sold those goods or services for half of that. But she has a piece of paper from a 501(c)3 organization saying that the donation was worth $1K, and that’s the deduction she wants.
The IRS, knowing that these charitable receipts normally aren’t worth the paper they’re written on, disallowed these deductions years ago. The only thing that can be deducted is the cost of producing the goods or services inside her normal Cost of Goods Sold.
At least at that point, the IRS knows that we’re dealing with real numbers.
Be careful on your donations. You don’t want to end up spending $2M in non-deductible penalties because you gave something away.
We’re all going to get through this. Let’s get through it together.
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Sincerely yours,
Chris Amundson
President
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