Maximizing the charitable contribution deduction when donating tangible personal property.

Facts

Bob and Susan collect antique guns. They have recently purchased a smaller home and do not have room for the collection. The collection has been admired by guests, and several have suggested that Bob and Susan donate the collection to a local museum. Bob and Susan are also supporters of their church and have considered donating the collection to it. The gun collection has a fair market value (FMV) of $10,000 and an original cost of $6,000.

Issue

What will be the tax consequences to Bob and Susan if the collection is donated to the museum or to the church?

Analysis

Contributions of tangible personal property that will be used by a charitable organization (other than certain private foundations) in the charity's exempt function will result in a charitable contribution deduction equal to the FMV of the donated property. If the tangible personal property is put to an unrelated use, the deduction will be limited to the taxpayer's basis. Property is put to an unrelated use when it is not used by the organization in the charitable activites for which it was granted exempt status.

The contribution of tangible personal property and the subsequent sale by the organization of the property is generally considered an unrelated use even if the donated property was related to the charity's exempt function. The deduction is limited to the taxpayer's original cost.

However, Regs. Sec. 1.170A-4(b)(3)(ii)(b) states that tangible personal property given to a museum of the type normally retained will not be considered used in unrelated activities if the item is later sold. Thus, an FMV deduction can be taken. if a collection is given to charity for a related use and an insubstantial portion is sold, this also will not be considered unrelated use, thereby allowing an FMV deduction. To deduct the FMV of tangible personal property gifts, the taxpayer must establish that the property is not put to an unrelated use by the charity, or that, when the contribution was made, it was reasonable to anticipate that the property would not be put to an unrelated use by the charity.

A statement from the charity as to the ultimate use of the property, while not required by statute, would be helpful in substantiating an FMV deduction.

For Bob and Susan, if both the museum and the church had taxable income of $100,000, contributing the gun collection to the museum would result in a tax savings of $1,240 ($20,429 of tax to the museum, as opposed tax $21,669 of tax to the church).

Conclusion

Because the museum plans to display the collection, Bob and Susan can deduct the $10,000 FMV of the gun collection by donating the collection to the museum. Accordingly, this will qualify as a related use by the museum. Even if the museum sells the gun collection, the donation will still qualify for an FMV deduction because of the exception provided in the regulations.

A donation to the church would result in a deduction of only the original cost ($6,000), because the church plans to sell the collection and use the proceeds for charitable purposes. If the church displayed the gun collection in its library or office and an argument could be made that the use was somehow related to its exempt status, a charitable deduction equal to FMV could be taken. However, such a position would be aggressive.

The tax adviser should remind Bob and Susan that an appraisal is required for gifts of tangible personal property valued at more than $5,000. An appraisal summary must be completed on Form 8283, Noncash Charitable Contributions, and attached to the income tax return. Also, a contribution of appreciated tangible personal property to organizations is subject to 30% of the taxpayer's contribution base. In recommending gifts of tangible personal property, the adviser should be aware that, because the sale of appreciated tangible personal property would generate a long-term capital gain, a gift of appreciated property results in additional tax savings beyond the charitable contribution equal to the tax on the capital gains if the property had been sold.