Case:

Bill Russell grew up on the Great Plains. During his youth, he was a rodeo bull rider and gained fame as "Wild Bill" for his daring exploits. Bill was an artist at heart and soon decided to move on to his artistic pursuits. He traveled throughout America and Europe and studied all of the great modern and classical artists. In France, he was greatly moved by the delicate works of Impressionist painters Monet and Manet and the bold colors and brush strokes of Van Gogh. Upon his return to his beloved great plains of the west, Bill combined the subtlety of the Impressionists, the colors of Van Gogh and his own unique skills. His Impressionist Western landscapes, paintings of cowboys and depictions of life on the ranch became treasured by art collectors nationwide.

Question:

Bill was approached by the Western Museum and asked to donate one of his paintings. The museum director noted that they did not have any Western Impressionist art and explained that a "Wild Bill" Russell painting would draw art lovers from America and around the world. Bill was now selling his paintings for $75,000 or more and, as a result, was facing a much higher income tax bill. He asked, "Could I get a charitable deduction for a gift of my painting?"

Solution:

Bill will not solve his tax problem with a gift of his own art. When Bill creates a work of art, that property is considered work created in "the ordinary course of trade or business." Therefore, his artwork would be deemed ordinary income property. Reg. 1.170A-4(b)(1). If an ordinary income asset is donated to charity, there is a deduction only for the artist's cost basis. Sec. 170(e)(1). Cost basis is limited to materials invested in the creation and does not include time spent creating the work of art. With tangible personal property (TPP) type gifts, the charitable deduction is the lesser of the cost basis or the fair market value.

As a result, Bill will receive a deduction for only the cost of creating the painting – his canvas and paints. Nevertheless, since Bill wanted to help the Western Museum, he decided to make the gift.

At the Western Museum, Bill's painting, The Lonesome Cowboy, caused a sensation. Art lovers from around the world flocked to view the solitary cowboy on a soft Impressionist landscape. Bill did not receive a large deduction, but he had the satisfaction of lifting the souls and spirits of thousands of art enthusiasts.