Q: Terrie, I always look to you as “the source” for answers. Do you know the latest IRS rule on determining the fair market value of donated artwork? We are holding an auction where the bulk of the auction items consists of donated artwork by local artists.
Recently, another local nonprofit posted the following statement on its auction registration form: “According to IRS regulations, the purchase price at auction sets the “fair market value” and as such, your auction purchase is not a tax-deductible contribution to the XYZ Organization .” Would this statement apply to donated artwork?
A: Life for development officers and nonprofit organizations would be so much easier if there was a clear formula for determining fair market value. Alas, since we’ll probably never see that in our lifetimes, we have to deal with this issue on a regular basis. To review, fair market value is the price that one would expect to pay for an item or service if he or she was to buy it in the marketplace. Obviously, it is easier to place such a value on some items than on others. Art, often being in the eye of the beholder, is one of the most difficult categories within which to assign value.
Determining the fair market value of a work by local artists Romero Britto, Purvis Young or Captiva Island resident Robert Rauschenberg is one thing. The art market is influenced by comparable sales and the opinions of experts. Well-known artists such as these three have catalogs, gallery representatives and a long public history of sales. However, even with artists of this stature, assigning fair market value can be challenging. Not every Rauschenberg is a “Combine,” and not every “Combine” 1 is equally valuable.
It may be easier in some situations and a lot more difficult in others to assign a value to the work of lesser-known local artists. For those artists with a specific style, where most of their work is a variation on a theme, and who sell regularly at street fairs, art shows or in galleries within a set price range, few would probably argue the fair market value as long as it was within the typical range. On the other hand, setting fair market value for emerging artists with little history of sales would be almost impossible.
All this being said, you do not want to get into the business of appraising art. Nor, I would think, do you want to go to the expense of hiring an independent appraiser to ensure authenticity or assign value. If you feel it necessary to put out a bid book with approximate values I would be sure to specify that the values are based on the donors’ estimates. The easiest approach would be to go the route of the local nonprofit that stated that the purchase price would be considered the fair market value. 2 (Follow the link below for the one exception.) In any case, I would clearly state that the ascribed values are not warranted by your organization for tax, provenance or insurance purposes.
To better understand fair market value and the deductibility/lack of deductibility in an auction setting, you might wish to refer back to the January 2005 On Nonprofits column entitled, “Fair Market Value Can Be Ambiguous at Auction Time,” found at http://corestrategies4nonprofits.com/fair_market.html .
Note: Do not confuse this discussion of fair market value as it applies to the buyer with assigning fair market value to artwork for the purpose of substantiating deductibility for those artists and collectors who donate works to be auctioned. That is a different discussion and an entire article in itself.
2 Be careful not to cast too wide a net when going this route. Items like cruises or theater packages have published costs which define the fair market value. Considering the purchase price as fair market value is only relevant where there is no clear market value, most typically in “experience items” such as where the mayor or a sports figure cooks dinner for the highest bidder.