 
Tax Benefits From Donated Appreciated Property
by David L. Ganz
Column 2 - March 29, 1999
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Tax laws have been changed to benefit collectors, and the effect can
substantially reduce the amount that you have to give Uncle Sam and the IRS
each year as a consequence.
You can use your coin collection, stock that has appreciated in value, zero
coupon bonds, and a variety of other instruments to accomplish the goal. The
tax savings can be enormous, and the benefits substantial, when planned
correctly.
Under tax laws passed by Congress, and signed into law Aug. 10, 1993, an
important change was made retroactive to June 1992: the ability for
individuals to donate appreciated property to non-profit organizations, and to
obtain a tax write-off. Keystone to all this: the write-off is not subject to
the dreaded alternative minimum tax (AMT).
Aegis for the change was, of all things, Vincent Van Gogh, or more aptly his
painting of the Irises, which was sold for some $90 million several years ago,
just after the tax laws had previously been changed.
The owner, Jock Whitney (wealthy former Ambassador to Great Britain, formerly
an owner of the New York Herald Tribune and other ventures) under the pre-1986
tax code (and, indeed, under the change made effective by the August law)
could have donated the painting to any major museum. Indeed, there were
numerous museums that were salivating at the thought of being able to acquire
the painting.
Under the old law (and now, again, under the revised version) a donor in this
instance would have been given considerable credit against his income tax for
the painting he had acquired so long ago at a relatively modest price.
(Imagine if you will the 1936 proof set that you acquired in 1975 for $1,100
-- the one that's now selling for about $3,600).
Instead, because of the AMT, the donation itself would have triggered a
substantial tax burden, rather than shelter it. Patrons of the arts -- and
others -- were quick to pick up on this, and museums nationwide reported a
substantial drop in donations of artwork, and other collectibles that have,
in the past, appreciated in value.
Institutions such as the museum of the American Numismatic Association, and
the American Numismatic Society -- not to mention the Smithsonian
Institution's numismatic collection -- also felt the pinch, as donations were
substantially reduced.
Enter Sen. Daniel Patrick Moynihan (D-N.Y.), who, in addition to then being
chair of the Senate Finance Committee, has an important constituency in his
own back yard in the form of more museums than, perhaps, any other city or
state in the world.
Moynihan, who is retiring in the year 2000 (in a closely watched contest that
may feature Hillary Rodham Clinton versus Rudolph Giuliani, the Mayor of the
City of New York), proposed a resolution.
He persuaded Congress to rewrite the law, permitting donations of appreciated
property without looking to the alternative minimum tax to offset the
appreciation. What the new law does is permit donations of the appreciated
value of property (coins, stamps, art, and other collectibles) and allow the
gain to offset income, subject to certain deduction limitations and tight
restraints.
Suppose in 1999 you are married with grown children (no dependents) and
earned $50,000 a year. The tax laws put you in the 28% bracket, meaning that
on each dollar of income above about $37,000, you pay a marginal rate of 28%
tax.
Lets also suppose that you have been a collector for 30 to 40 years and were
routinely buying $20 gold pieces in the early 1960's for $60 each. (These
same coins, today, might be selling for about $500 each).
Suppose that you took 10 of these coins, which originally cost you $600, and
gave them to a coin museum, such as the ANS, ANA, the Industry Council for
Tangible Assets, the Newark Museum or the Smithsonian. The fair market value
would be, say, between $5,000 to $5,150.
If you sold the coins for $5,150, you would have a long-term capital gain of
$4,550 (the difference between cost and fair market value). That would be
taxed at the 28% capital gains rate (a tax of some $1,300, leaving a net
profit of about $3,250).
On the other hand, if you donated them to a museum, you would obtain a tax
deduction against gross income of $5,150. This reduces your tax burden (the
amount you have to pay to the equivalent amount in taxes) by some $1,400.
If you sell the coins, the tax on the gain is inevitable. (It can be
postponed by use of a like kind exchange permitted under section 1031 of the
Internal Revenue Code; but it cannot ever be legally avoided).
There are still limitations. Cash gifts exceeding 50% of your adjusted gross
income cannot be deducted in the same year. The excess can be deducted over
the next five years, subject to certain limitations.
In the example, double eagles were used for convenience. There is a readily
established market for such coins. How, where there is no readily established
market (for paintings, or for medals, or even for nearly unique items such a
Brasher doubloon, or a 1943 copper cent), is value established?
First, an independent appraiser is required (especially for any items valued
at more than $250). If the recipient sells the donation within two years of
receipt, its selling price must be reported to the IRS.
Thus, if an institution accepts something at an inflated value and then
resells it, if done within two years of donation it reports to the IRS what
the actual selling price was -- and that triggers tax consequences to you.
Appraisers must give an item a "fair market value", which can conveniently be
defined as the price that knowledgeable parties who are willing buyers, and
willing sellers, would accept as an appropriate price.
On items of substantial value, multiple appraisals are sometimes warranted --
especially since appraising is an inexact science under the best of
circumstances.
What is important, for substantial gifts, is for a prospective donor to
consult with an appraiser, and a tax advisor, at the early stages of the
process -- not after the fact. That permits a donor to maximize the tax
advantage over the shortest period of time.
For more information about this or other issues, you can contact David L. Ganz, Esq., Ganz & Hollinger, Attorneys at Law, 1394 Third Avenue, New York N.Y. 10021 Toll free: 1-888-COIN-LAW (212 517 5500) or email DavidLGanz@aol.com.
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David L. Ganz
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