Restrictions placed by a donor in a gift agreement that limit the amount a willing buyer would pay a willing seller must be considered when determining the amount of the charitable deduction. Rev. Rul. 85-89 offers the example of a donor giving a large plot of land to an agricultural college for use in the development of new farming techniques. The valuation must reflect the restriction. Though the highest fair market value for the land may be industrial or residential real estate development, the charitable deduction will be lower.

The Issue

The Tax Court case of WT Art Partnership LP, TC Memo. 2025-30 (April 9, 2025) raised the novel issue of whether an expressed or implied restriction by the donee should be considered as mandating a discount for the lack of marketability.

Oscar Liu-Chen Tang donated 12 pieces of art to The Metropolitan Museum of Art (“The Met”) in New York, claiming a deduction of nearly $74 million.

Novel Argument

The art appraisers representing the IRS argued for a discount between 26% and 31%, relying on methodologies for the determination of valuation discounts for restricted stock. The IRS experts conceded at trial that they had discovered no authority in accounting or appraisal guides, IRS announcements or judicial authority about the appropriate methodology for valuing a deaccession restriction. The court determined that this discounting methodology was irrelevant.

The IRS argued that the gift was subject to The Met’s formal deaccession policy, permanently restricting a subsequent sale. The Tax Court concluded from the trial evidence that the gifts were not subject to that policy.

The IRS argued that even if the gift was not subject to the formal deaccession policy, the donor’s motivation and expectation were that the paintings would remain forever at The Met.

Rationale

The Tax Court opined that The Met voluntarily imposed upon itself, as a courtesy to donors, a deaccession restriction for the first 25 years after receipt of the gift. It noted: “… if a museum had a policy of never deaccessioning artwork, a deaccession restriction would have zero negative value, because the restriction would simply reflect the policy the museum had unilaterally adopted. And if a museum never deaccessioned paintings it regarded as part of its core collections, a deaccession restriction affecting such works would likewise have zero or minimal negative value.” Moreover, the court further noted that, in practice, The Met appeared to have deaccessioned high-value artwork infrequently.

Policy Implications for Gift Planning

Had the Tax Court accepted the IRS’s discount for lack of marketability, future gifts of art to museums might have been discouraged. Happily, for Mr. Tang and The Met, the Tax Court recognized the philanthropic reality that art’s highest and best use is realized by permanent display to the public. These expressed or implied restrictions enhance the ability of an art museum to achieve educational and artistic missions. The point of giving the art is for display, not to be sold or exchanged regularly like a security. Of course, the IRS could well try to argue for discounting in a future case. Stay tuned!