Can I Deduct That?
A President Kennedy signed photograph, image courtesy of Stuart Lutz, AAA
As an appraiser of historic documents, I regularly find myself in the unenviable position of being the Destroyer of Deduction Dreams. Due to several key characteristics commonly found in archives and historic manuscripts, many items in this category cannot receive a tax deduction if donated. I frequently have to tell people who approach me to prepare an appraisal report that the materials they want to donate cannot be legally deducted from his or her taxes. Some people seem genuinely shocked, and others tell me that right after our phone call, they are contacting their accountant who insisted their manuscripts can be deducted. So why can’t you deduct that? Let’s explore.
I was recently called to perform the following potential appraisals:
A very famous, older athlete wanted to donate to a museum his personal archives (including the manuscript of his autobiography), extensive videotapes of himself on television, etc. He hoped for a tax deduction.
A famous magazine donated their extensive files, consisting of thousands of boxes of letters, memos, and correspondence to an institution; included were amazing letters from some of the giants of the twentieth century. The magazine wanted to deduct the fair market value of the donation and take a very large tax write-off.
A man who was college friends and a penpal with a very famous writer wished to donate the writer’s letters to their alma mater and get a tax break.
A congressman wanted to donate all his congressional papers – including letters from presidents – to his alma mater. Of course, the congressman assumed he could get a deduction.
All four of these examples have one thing in common: while the materials can be donated, due to their specific circumstances, their fair market value cannot be deducted for tax purposes. I have had to explain this countless times to disbelieving folks on the phone.
I want to explain the reasoning for why the materials cannot be deducted in each of these four specific scenarios. There are three basic explanations for this inability to deduct these manuscript materials and here is a brief review:
1) The IRS has ruled that self-created materials cannot be deducted for anything more than the cost of the materials to create the item, such as paper and ink. This applies to every citizen, all the way up to the president. Richard Nixon got in hot water with the IRS for deducting the FMV of his Vice Presidential archives which the IRS considered to be “self-created.” The self-created designation impacts many materials in my world of manuscripts, but it also has major implications for artists who would like to donate their own artworks.
2) The second reason stems from the 1991 tax court case, Chronicle Publishing Co. v. Commissioner of Internal Revenue. (Endnote 1) In the mid-1980s, the San Francisco Chronicle newspaper donated to the California Historical Society its clippings library that contained about 7.8 million articles from the Chronicle and other newspapers. The newspaper took a $1.5 million tax deduction in 1983, $458,000 deduction in 1984 and a $891,000 deduction in 1985. The IRS disallowed the deductions and the Chronicle challenged the ruling. The case went to the tax court, where the judges ruled in the IRS’s favor. The court stated that the business could not deduct a “letter, memorandum, or similar property… for whom such property was prepared or produced.” In other words, the product of paid work – even if they are letters to someone at the company, like the CEO – cannot be deducted.
3) Thirdly, if you did not inherit the materials, you must have a cost basis (and “zero” is not a cost basis) to deduct the items. If the artist Jeff Koons gave me one of his famous statues or the president handwrote me a letter on White House letterhead, I cannot deduct the FMV of these items since they have a zero-cost basis.
The manuscript appraisal field is plagued by a misunderstanding of these donation and deduction topics. For example, there are likely no “self-created” items or “products of work” in the donation of early American furniture or Old Master paintings because the original creators are long dead.
To return to the scenarios discussed at the beginning of this article, in example #1, the athlete’s autobiography manuscript and videotapes he made fall under this “self-created” umbrella. No deduction is allowed.
In example #2, all of the memoranda and letters produced by the magazine – including the internal memos and the amazing letters to the magazine – are all products of work and are ineligible for a tax deduction. When I brought this up to the tax department of the magazine, they were utterly shocked, for the high-priced tax law firm they hired had given them the go-ahead to take what they presumed would be a huge write-off. After I emailed the accountants the San Francisco Chronicle tax case, the department told me that the law firm eventually agreed that no deduction can be taken. I was happy that I wasn’t the one to tell the higher-ups that their planned deduction was invalid.
In example #3, the author’s letters to the potential donor have a cost basis of zero; they were essentially a gift, one received through the mail. The potential donor called me back and said that his accountant said the letters could be deducted for the full FMV. The accountant is wrong, and no deduction can be taken.
In example #4, the congressional aide who called me was flummoxed by my assertion that the congressman could not deduct his letters. The aide decided to investigate further and later emailed that he “checked with the US House General Counsel’s office” and told me that I was correct; the congressman’s papers cannot be deducted.
So, I am the Destroyer of Deduction Dreams.
Orville Wright signed photograph of the first flight, image courtesy of Stuart Lutz, AAA
Of course, there are scenarios in which manuscripts can be legally donated and deducted for their full fair market value. If your grandfather received a letter from Theodore Roosevelt and it came down through your family, donate and deduct away. If your grandfather bought a George Washington letter in the 1930s and left it to you, donate and deduct away. If you bought a Thomas Jefferson letter and you want to give it to a museum, donate and deduct away, for you have a cost basis.
If you have your own self-created archives or if you have received letters from famous people, then you could leave them to your spouse or children, and they can donate and deduct the materials. The famous athlete in example #1 told me that he was going to leave his personal archive to his children as a result.
This article is intended to scratch the surface of manuscript appraisals. I cannot explain everything in such a short essay that years of experience and education have taught me. I still find myself having to call the IRS on occasion to ask specific questions and find them to be very helpful.
If you are hiring an appraiser for donation, estate tax, or insurance purposes, make sure you vet them – they should have taken a USPAP class recently and belong to one of the three major appraisal organizations. Not all appraisers are trained equally.
The information in this article is for general informational purposes only and is not considered legal advice or a legal opinion. In addition, topics may not necessarily reflect the most current economic, legal, and appraisal developments. Verify sources independently and seek the advice of an appropriate professional if needed.
About the Author
Stuart Lutz, AAA is a Certified Member of the Appraisers Association of America, qualified in Historic Documents. He is a member of the Professional Autograph Dealers Association, the Manuscript Society, the Antiquarian Booksellers Association of America, and the Ephemera Society. He is the author of The Last Leaf: Voices of History’s Last Known Survivors (Prometheus Books, 2010), which contains almost forty interviews with the final survivors or last eyewitnesses of historically important events. His contact information is available via his website at http://www.historydocs.com/ The author notes that this article is not intended to be a substitute for professional tax advice.