Question

David donated a painting to the Leigh Yawkey Woodson Art Museum. He bought the painting 20 years ago while on a European vacation for $6,000. David had the painting appraised by the owner of Nature's Beauty art store in Eagle River, a qualified art appraiser, who estimated its value to be $11,000. David believed the painting was worth more than $11,000, so he had it appraised by an art dealer in New York. That dealer, also a qualified art appraiser, appraised the painting at $15,000. David itemizes deductions on his annual tax return and takes a charitable contribution of $15,000. Was David justified in taking the deduction based on the higher value? What forms if any, need to be in his return? What documents documentation should he keep with his tax return, just in case of audit?

Answer 1

Facts of the case:

1.      David donated a painting to the Leigh Yawkey Woodson Art Museum.

2.      Painting was bought 20 years ago for $6,000.

3.      Painting appraised by the owner of Nature's Beauty art store in Eagle River, a qualified art appraiser. Estimated its value to be $11,000.

4.      Painting appraised for the second time by an art dealer in New York. a qualified art appraiser. Estimated value at $15,000.

5.      David itemizes deductions on his annual tax return and takes a charitable contribution of $15,000.

Analysis of Case:

Actual cost paid by David is $6,000. Painting was purchased for his own use and utility at that point in time. Provisions of income tax required to be consider whether such donation in kind can be considered to be as deduction from his taxable income.

Questions & Answers:

1.      Was David justified in taking the deduction based on the higher value?

Ans: David may take deduction of amount as charitable contribution if it is allowed to be considered as deduction in computation of income for income tax purpose. Considering amount of deduction on the basis of valuation is not justified since value derived by valuer is notional amount unless and until it is realized. David can take deduction of $ 6000 (since it is actual cash outflow) subject to provision of income tax. David may take higher amount of deduction as per provisions of income tax however he is not justified in taking deduction on the basis of valuation reports.

2.      What forms if any, need to be in his return? What documents documentation should he keep with his tax return, just in case of audit?

Ans: David will have to provide original receipt of $6000 he has paid in order to claim deduction from taxable income. In case if he is allowed to take deduction higher than cost i.e. $ 6000 under provisions of income tax, then he may be required to produce such documents as mentioned under the provisions of income tax to justify such higher deduction.