Understanding the Tax Risks When Donating Art to Charity

Charitable giving is often a valuable component of tax planning. However, when the contribution involves non-cash assets such as artwork or collectibles, the process becomes significantly more complex. A recent U.S. Tax Court case involving a multimillion-dollar donation to the Metropolitan Museum of Art serves as a timely reminder of the importance of strict compliance with IRS requirements.

The case centered on the donation of several early Chinese paintings by the family partnership of Oscar Tang, a prominent businessman and philanthropist. The paintings, acquired in the late 1990s, were donated to the Met between 2010 and 2012. The donors claimed a total charitable deduction of approximately $74 million based on appraisals conducted by a respected auction house based in Beijing.

The IRS challenged the deductions on two primary grounds. First, it questioned whether the appraiser met the IRS’s definition of a “qualified appraiser.” Second, it contested the valuation of the paintings, particularly one piece whose appraised value had more than doubled over a three-year period. Following litigation, the court reduced the overall deduction to approximately $54 million dollars and imposed a penalty of approximately $2 million dollars due to the overvaluation of one artwork.

While the figures involved in this case are substantial, the core issues apply broadly to any taxpayer considering the donation of non-cash property.

Understanding the Requirements for Property Donations

Unlike cash donations, which are relatively straightforward, contributions of tangible property are subject to detailed regulations. When the claimed value exceeds $5,000 dollars, a formal appraisal must be included with the taxpayer’s return. That appraisal must be conducted by a professional who meets the IRS’s criteria.

In this case, although the appraisal firm was internationally recognized, the court found it did not meet the IRS’s standards. As a result, the entire deduction based on the appraisal was placed at risk. The ruling illustrates that using a reputable appraiser is not sufficient on its own. The individual or entity must also meet specific technical standards set forth in the tax code.

Appraisal Accuracy and Documentation Are Critical

In addition to the qualifications of the appraiser, the IRS may scrutinize the valuation itself. In the Tang case, one painting was valued at more than double what a previous appraisal had suggested. The court ultimately adjusted the value downward and imposed a penalty for substantial overvaluation.

This outcome demonstrates that even if a donor relies on professional advice, penalties may still apply if the valuation is significantly overstated. The burden is on the donor to ensure that appraisals are not only reasonable and compliant, but also defensible and supported by credible market data.

Best Practices for Donors of Non-Cash Assets

For individuals or businesses planning to donate property such as artwork, real estate, or partnership interests, proper preparation is essential. Key steps include the following:

• Engage an appraiser who meets the IRS definition of a qualified professional
• Ensure the appraisal includes all required elements, including valuation methodology and relevant market comparisons
• Confirm that the appraisal is dated within the allowable timeframe for tax reporting
• Complete and retain IRS Form 8283 and attach the appraisal to the return as required
• Consult with your tax advisor before finalizing the donation to review compliance and strategy

For questions related to charitable contributions or the tax implications of donating art, please reach out to your LMC advisor.