Related Use and Charitable Donations

A few days ago there was a good question and short discussion on charitable donations and the IRS Related Use rule on the ISA forum. I posted the following response with some examples form the Planned Giving Design Center which has some excellent articles and reference material on gifting and donations. I thought the content of the article on related use and charitable donations would be helpful for appraisers to review and to better understand the rule.

There is a difference between the value a donor can deduct based on the related use of the charity. As you will see from the following examples, there is a big difference in the allowable deduction. The FMV remains the same, but if not donated to the proper institution, then the initial cost basis is used. Many times when I have a charitable donation assignment I ask the client to get a statement from the charitable organization noting acceptance of the gift and if the gift meets with the institutions related use.

Step 4: Make Sure the Public Charity Meets the Related Use Rule

The related use rule applies to capital gains property that is tangible personal property (objects) contributed to a public charity. The related use rule requires that the use of the art object by the organization be related to the purpose or the function constituting the basis for the organization’s charitable exemption under Code Sec. 501.

This means that the donated object must be of a type normally retained and exhibited by that charitable organization, such as a museum or educational institution that normally has a collection of similar paintings, or silver, or sports memorabilia. All of the appreciated value of the donated art object will be lost as a charitable deduction if the related use rule is not satisfied.

Example

As an example, we will look at Mr. Donor Client’s donation and the tax deduction benefit he would receive if he made his donation to three different institutions. Mr. Client purchased a sculpture by an unknown artist for $1,000 15 years ago. It has appreciated over the years as the artist has gained notoriety. Mr. Client obtains a qualified appraisal by a qualified appraiser. The fair market value on January 1, 2008, the date of his donation, is appraised at $15,000.

Example Donation 1. Mr. Client donates the sculpture to a private charity. He will only be able to receive a deduction for his cost, $1,000.

Example Donation 2. Mr. Client donates the sculpture to a public charity (a charitable hospital), but the charity’s charitable exemption purpose is unrelated to his donated sculpture. He will only be able to receive a deduction for his cost, $1,000.

Example Donation 3. Mr. Client donates the sculpture to a public charity (an art museum with a collection of similar type sculptures), and the use of the sculpture by the organization is related to the purpose or the function constituting the basis for the organization’s charitable exemption. He will be able to receive a deduction for the full fair market value of the sculpture as of the date of donation, $15,000.

Click HERE to read the full Planned Giving Design Center article.