Deduction for Appraised Value of Art Denied Where Taxpayer Found Only Have Had an Option to Buy Art

In the case of Williams v. Commissioner, TC Memo 2011-89, the taxpayer claimed that he should be able to claim a charitable contribution for the donation of artwork. The taxpayer entered into an agreement with a third party that he would “purchase” art work by putting down 5% of the price he would eventually pay. Just over a year later, that artwork would be donated to a charity on his behalf, at which time he would pay over an amount equal to 24% of the appraised value of the artwork to complete the purchase.

The third party would actually select the artwork at such time as the taxpayer designated the charity. If the taxpayer failed to go forward with the transaction, the third party could keep the 5% paid, but had no rights to collect the balance due from the taxpayer. The taxpayer claimed a charitable contribution deduction for the appraised value of the artwork, after having paid the 24% agreed upon, reduced by the 5% already paid. The taxpayer argued that he had owned the property for over one year, which under §170(e)(1)(A) would allow him to claim a deduction for the fair value of the property rather than merely his cost basis.

The Tax Court sided with the IRS, limiting his deduction to the amount he actually paid. The court found there was, effectively, no obligation on the taxpayer’s part to complete the transaction, as the only consequence to him of doing so would be to give up the 5% already paid. Thus, the court found that transaction was in the nature of an option to purchase rather than an actual purchase of the artwork.

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