Inflated Art Appraisals: self-help deductions for the wealthy

Al Golbert, one of my colleagues on the Tax Prof listserve distributed an interesting article today from the LA Times.  Jason Felch & Doug Smith, Inflated art appraisals cost U.S. government untold millions, L.A. Times (Mar. 2, 2008).

Donors reap huge writeoffs for art work donated to museums.  It's the way museums acquire most of their items (more than 80%, according to the article), and it's the way many wealthy patrons create a nice collection to view while getting a nice tax write-off for the full fair market value rather than the amount paid.  And if they can get that "fair market value" inflated, that's an even bigger tax write-off.

Seems like quite a few donors engage in this--lots of times on a small scale, for some, and a few times at a big scale, for others.  The article recites a number of the cases that have drawn media attention over the years--several of them in Los Angeles.  The article notes that IRS audits on donations are infrequent--"only a handful of the 100,000 or more tax returns that allow art donors to reap nearly $1 billion in tax write-offs."  And the payoffs for donors are huge, since "[h]alf of the donations checked over the last 20 years had been appraised at nearly double their actual value."

Robert Reich, economist and former Clinton cabinet member, thinks something should be done.  Charitable contributions shouldn't get only half their fair market value credit if they don't directly benefit the poor.  Here's what he had to say.

"We've created a giant loophole right now through which the rich reduce their taxes by supporting culture palaces frequented primarily by themselves."

Comments

[Brooks Gracie III]

I have seen situations where taxpayers open their own "private galleries", donating their appreciated guest houses to their own private foundations, then contributing their art collection to the foundation to be housed in the gallery. Two charitable contribution deductions, and the taxpayer need not leave one's own property to enjoy their art displays, or open the gallery to the public. They can however invite their friends over to see their "museum" once in a while when it comes their turn to fulfill their social obligations.