In 2015, Stefan Edlis and Gael Neeson donated their contemporary art collection valued at $400 million to the Art Institute of Chicago. The collection, containing over 40 pieces, was the largest-ever gift of art to the museum. Gifts of art and other non-cash charitable contributions play pivotal roles in the building of collections for museums, archives, and libraries. For many institutions, it’s the primary way of building a collection.
Rebecca Meyers, Permanent Collection Curator at the National Museum of Mexican Art, explains “our permanent collection is mostly built on the generosity of our donors, and artists who have donated their work to the collection.” Staff at the Smart Museum of Art at the University of Chicago and the Newberry library say the same thing: these institutions rely on gifts of art, papers, and books, to build their collections.
While donors may give for a variety of reasons, such as securing a permanent home for their collection or helping to deepen an institution’s holdings, the potential tax benefit is definitely an important consideration. However, many donors may not realize that receiving that tax benefit is not a simple matter. The IRS requires an appraisal for items valued over $5,000 (with some exceptions). Finding an appropriate appraiser can be a challenge, according to the IRS’ rules, which has become even more complex and ambiguous this year.
“In the past, the IRS said you have to be qualified appraiser and present ‘a qualified appraisal.’ The qualified appraiser had the appropriate knowledge and training,” explains Sheryl Yaeger, an appraiser specializing in ephemera and paper dolls. The qualified appraisal needs to have certain basic elements, such as a description, an amount, evidence to justify the value of the item, and more.
Recently IRS recently changed the regulation about the meaning of a qualified appraiser. Yaeger explains, “You have to be from a recognized professional appraisal association, or have otherwise met minimal experience/education requirements.” However, the meaning of minimal experience and education has been ambiguous.
What Do the New Rules Mean?
The Antiquarian Booksellers’ Association of America (ABAA) has attempted to get the IRS to clarify these minimal requirements. Yaeger says that the organization is setting up a program for booksellers who want to do appraisals that includes certification in the Uniform Standards of Professional Appraisal Practice (USPAP) and a secondary course from the ABAA, which hopefully will meet the new IRS requirements. Yaeger points out that part of the challenge is the experience requirement where “you have demonstrated at least two years in the subject matter.”
As with any regulatory change, it will take time for changes in practice to catch up. Meanwhile, the ambiguity around the new rules may have serious ramifications for donors considering non-cash charitable contributions to organizations. When asked about how the law change will impact appraisals, Yaeger says, “the primary impact is that people understand that an appraiser needs to be a qualified appraiser.” She recommends going to a professional appraisal association, like the Appraisers Association of America or a trade association, like the ABAA, but note that some lists have not been updated from last year. Ultimately a donor should be cautious when choosing an appraiser.
Ramifications for Donors
If the IRS decides that an appraiser is not qualified, the ramifications can be large for the donor. Yaeger points out that the donor may face penalties, possibly up to two to three years since it can take time for the IRS to audit so interest may accrue. Appraisers may lose clients, pay fines, and more.
Institutions accepting non-cash charitable contributions have a strong interest in helping the donors navigate the appraisal process. But such institutions are not permitted to make appraisals themselves since that could be seen as a conflict of interest. Best practice is for interested donors to find their own third-party appraiser and pay for their own appraisal. This may be confusing for some donors who were newer to the world of giving non-cash gifts since they may be confused as to why they have to pay for the appraisal on top of giving the gift.
The most important factor for institutions is considering a non-cash gift is not its value, but whether the donation fulfills the collecting mission of the institution and whether it will be used. “We want to make sure [that the gift is] a good fit and that we have the resources to store and to make them accessible,” Alice Schreyer, Vice President of Collections and Library Services at the Newberry explains. The Smart Museum also thinks about how the piece may fill the teaching needs of the faculty.
Pros and Cons of Appraisals
While an appraisal is not be required by many institutions that receive non-cash gifts, there are certainly benefits, starting with the fact that the donor is complying with IRS rules and can use the deduction on their taxes. Moreover, institutions may be able to use the value from the appraisal to fulfill campaign goals. Stephanie Oberhausen, Assistant Vice President for Development, Humanities and the Arts at the University of Chicago, noted that “an appraisal counted towards fundraising progress” which can be wonderful if an institution is in a campaign.
However, there can be drawbacks to an appraisal. Notably, if the market is undervalued, that would have an impact on an artwork. Meyers at the National Museum of Mexican Art notes, “Mexican art has been undervalued and under exhibited. Sometimes appraisal value isn’t very high.” But that does not necessarily mean people should avoid getting an appraisal; the price may not be as high as expected.
One notable exception to valuations are gifts of papers, artwork, and other materials from the creators. Due to a law change in the 1970s, artists and writers can only receive an appraisal at cost, notably the cost of the materials itself, such as the canvas, paints or paper. Creators do not get to benefit from the fair market value of their work.
This situation disincentivizes artists and other creators from donating to institutions. The law change made it harder for institutions to collect important works that can be shown to public or fuel scholarly research.
But the tax incentives overall help encourage the growth of collections. Schreyer at the Newberry pointed out, “There are definitely incentives in our tax laws. Institutions would be much the poorer if they didn’t exist.”