David Rockefeller’s Art Collection
Last week David Rockefeller’s art collection realized over $825 million at auction. The proceeds will be distributed to about a dozen of his favorite charities.
Rockefeller was the last surviving grandson of John D. Rockefeller and was the son of John D. Rockefeller, Jr. During his lifetime he donated selected art to museums and some years ago he sold a painting at auction intending to donate the proceeds to a museum. Well, after he saw the tax bite, he decided that any sales during his lifetime made no sense. The federal taxes are 28% on capital gains of collectibles which category art falls in. He also got hit for the added 3.8% net investment income tax and NYS and NYC income taxes. By having his estate sell the art, there would be no income or capital gains taxes, nor would there be any estate taxes as bequests to charities are deductible from the taxable estate. He also reasoned that the cash starved museums would appreciate the cash more that some additional paintings.
Many people donate collectibles to charitable organizations that immediately sell it to get the proceeds. What is not widely known by many contributors is that when the art is sold within three years the tax deduction is limited to their basis, which for most people is their cost. The deduction will be allowed at the fair market value on the date of the gift provided the charity retains the item and uses it in connection with its charitable activities. An example is where a painting is donated to a museum that cost the donor $2,000 but is valued at $100,000 at the time of donation, the donor would be entitled to a $100,000 tax deduction if it is retained in the museum’s collection. If it is sold within three years, the deduction will be limited to $2,000 regardless of the proceeds the museum receives. Further, all such donations of individual items valued over $5,000 must have a certified appraisal and adhere to strict compliance rules. A tax professional should always be consulted with before any such donations are made.
Successful bidders at the auction for David Rockefeller’s collection would not be entitled to any charitable deduction since the proceeds went to his estate which will disburse the funds to the charities. In cases where the charity conducts the auction and receives the proceeds, a tax deduction would be available for any excess over the fair market value that is paid. For example, a painting appraised with a $75,000 fair market value (FMV) that is sold for $90,000 would permit the winning bidder to take a $15,000 tax deduction, subject to how they file their taxes. However, any sales tax paid would not be added to the tax deduction. Note that the $75,000 paid would be a quid pro quo benefit the buyer received. Comment: If there is an appreciation in the value due to a time gap between the date of the gift to the charity and sale at auction, then the quid pro quo benefit might be the entire amount paid and there would be no charitable deduction for the purchaser. If you believe this might be the situation, then the FMV should be ascertained before you enter any bids.
Donating to charities is admirable but anything other than cash is fraught with minefields. Once you decide what you want to do, meet with a tax professional to determine the way to proceed.
Brian Lovett, CPA, JD and Withum Partner assisted in the preparation of this blog.
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