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Legal Nuggets.

The Tax Man Cometh

In 1900, when J. P. Morgan, at George Kunz's behest, purchased the Bement collection and promptly donated it to the American Museum of Natural History, he likely was unconcerned about the amount of the income tax deduction generated by his contribution. That was because the modern income tax was not passed until after the Sixteenth Amendment to the Constitution was ratified in 1913.


Since 1917, every version of the income tax code has included a section authorizing a deduction for contributions or gifts to entities organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. Currently, that provision is found in section 170 of the Internal Revenue Code. If you contribute property, the amount of your deduction under this section is "generally" equal to the "fair market value" of the property.

Now, if you ever hear a lawyer, let alone a tax lawyer, utter the word "generally," take note, as that is a sure-fire indication that there is at least one exception to the general rule lurking. In the case of section 170 of the Code, there are more than a few. For those donating minerals, one of the more important ones is found in section 170(e), which essentially caps the amount of the deduction in the case of property which is not "capital gain property." Under this rule, if a mineral specimen is inventory in a trade or business, the amount of the charitable deduction is set at the cost incurred in acquiring the specimen. The same is true if the specimen is not inventory in a trade or business, but has been held for a year or less before the time of the donation. So, if a specimen is not used in inventory in a trade or business and has appreciated, you must hold it for more than year before you donate it in order to deduct the full appreciated fair market value. Alas, this rule does not work both ways; if the fair market value of the specimen decreases from your cost, it is that diminished value at the time of the donation, and not the cost of purchase, that sets the amount of the deduction.

This begs the question: what is "fair market value?" Under IRS regulations, that value is "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." (1) (A slightly different formulation applies if the donated property was held as inventory.) IRS Publication 561, entitled "Determining the Value of Donated Property" (available at, indicates that "[t]he cost of the property to you ... may be the best indication of its [fair market value]." It adds that "because conditions in the market change, the cost or selling price of property may have less weight if the property was not bought or sold reasonably close to the date of the contribution." The law thus anticipates that as time passes, it is more likely that the value of the property will differ from its acquisition price.

Publication 561 provides additional guidance for valuing "hobby collections," including "natural history items." It cautions taxpayers not to rely too much on published prices, noting that "a dealer may sell an item for much less than is shown on a price list, particularly after the item has remained unsold for a long time." (Shocking news, no doubt.) Other helpful hints on how to value minerals may be drawn, by analogy, from the guide's discussion of valuing jewelry. As to such items, the IRS encourages donors to get appraisals that consider the "coloring, weight ... brilliance and flaws" in the specimen. The guide notes that while "sentimental personal value" has no effect on fair market value, "if the jewelry was owned by a famous person, its value might increase." In other words, provenance matters, as, undoubtedly, do such traditional indicia of mineral value as the size, associations and locality of the find.

So, in auditing returns, does the IRS actually focus on this valuation issue? Who knows? But, rest assured, the IRS's audit-selection formulae are more sensitive to large deductions than small ones. Evidence that this issue has periodically arisen in audits may be found in court cases involving the value of contributed minerals and gems. These cases provide us with additional guidance on how to value mineral specimens in calculating a charitable deduction.

One of them, Chiu v. Commissioner of Internal Revenue, 84 T.C. 722 (1985), involved an all-star cast from the mineral world, with key testimony being provided by none other than Paul Desautels, fresh off his 25-year tour as the distinguished Curator of Gems and Minerals at the Smithsonian Institution. Desautels, in fact, was still the Curator when the taxpayers in question donated a variety of specimens to the Smithsonian, among them, a sinhalite, a cat's-eye rubellite tourmaline, a couple of euclase crystals, several cerussite specimens, some wulfenite specimens and a few anglesite crystals.

The taxpayers claimed that they had acquired these specimens at significant discounts and that their values as of the time of the donation were much higher. Their claim was supported by two appraisers, as well as testimony from Desautels. As quoted in the court's opinion, Desautels testified that the mineral market was "chaotic" and that establishing actual sale prices was complicated by the fact that selling "fine mineral specimens is a very secretive business" in which "[d]ealers don't tell you" the final sales price. He added that he had never been able to wheedle "a discount greater than 30 percent from the asking price, even at a time when the dealer was under pressure to sell," noting that the "normal discount" he received was "10 percent from the asking price." These last comments actually served to doom the taxpayers, who were arguing that they had acquired their specimens at discounts of 75 to 90 percent. The court rejected the higher values placed on the specimens by Desautels and the other appraisers, choosing instead to set that value at what the taxpayers had paid.

Now, times have changed, but the moral of this story still rings true: courts tend to give more credit to the price fetched on the recent purchase of a donated mineral than on a subsequent appraisal. So, if you intend to argue that you bought your mineral at a super discount price and are now donating it at its "true" value, or that the specimen being donated has exploded in value since its purchase ("yes, the mine really did close"), be prepared to bring in heavy artillery in the form of appraisals and appraisers. Indeed, the IRS publication mentioned above warns that appraisals should carefully document any "unusual circumstances" associated with relatively short-term swings in value.

A word to the wise about appraisals and appraisers. The degree to which you must document the "fair market value" of your specimen for tax purposes hinges on the amount of the deduction claimed. Generally, if the amount claimed for an item or a group of similar items of donated property is under $5,000, an appraisal is helpful, but not required. If it is $5,000 or more, then you must get a qualified appraisal of your specimens made by a qualified appraiser and retain it for your records. And, if your deduction exceeds $500,000, then you must attach that appraisal to your return. For more information on this see IRS Publication 526, "Charitable Contributions," also available at

IRS regulations (2) shed light on what is a "qualified" appraisal and who is a "qualified" appraiser. They indicate that where an appraisal is required, it must be performed not more than 60 days before the date of contribution. Care must be taken in setting the appraisal fee; that charge cannot be what the IRS calls a "prohibited appraisal fee." According to the IRS, a "prohibited appraisal fee" is one in which some part of the fee is based on a percentage of the appraised value of the property or the amount of a deduction allowed by the IRS. (By the way, an appraisal fee, even if acceptable, cannot be deducted as a charitable contribution, but may qualify as a "miscellaneous deduction" subject to the 2 percent cap applicable to such deductions.) To be a "qualified appraiser" one must meet a number of requirements in the regulations, principal among which is having verifiable education and experience in valuing the sort of property being appraised. Importantly, an appraiser generally cannot be involved in the transaction in which the donor acquired the property being appraised. (For more information see the segment on "Appraisals" in IRS Publication 561.)

Tax provisions often are complex and section 170 is no exception. Those with particular issues should consult a tax professional--always a good idea given what Will Rogers once said about filling out tax returns: "Even when you make one out on the level you don't know, when it's through, if you are a Crook or a Martyr."

(1) 26 C.F.R. [section]1.170A-1.

(2) 26 C.F.R. [section]1.170A-13.

NOTE: This column is for educational purposes only and is not legal advice, or a substitute for such advice. Readers who have questions on this topic should consult with a qualified lawyer.

Francis M. Allega

Judge, United States Court of Federal Claims

Adjunct Professor, Georgetown University Law Center

717 Madison Place, NW

Washington, DC 20005
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Author:Allega, Francis M.
Publication:The Mineralogical Record
Date:Jul 1, 2008
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