June 1966 | Volume 17, Issue 4
Iam writing about a subject which in the past has not ordinarily been discussed in public, but the time has come for a public airing of it. Many librarians, collectors, curators, and dealers are called upon in the normal course of day-to-day activities to place a value on a letter, a manuscript, or a book, or on a collection of such items. And on occasion they are required to prepare a document to satisfy the whims of Internal Revenue Service examiners.
This is simply “appraising,” but of late the word seems to indicate to many not the science of placing a true, current, acceptable value on an object, but part of a complex game of wits whose ultimate objective is to confuse, baffle, or outwit one or several exceedingly curious individuals in the Treasury Department. I shall cite a few dangerous examples.
John Smith, a collector, donates an item for sale to an accredited organization accepted by the Revenue Service as qualified to receive gifts on a tax-exempt basis. The institution or organization runs an auction at which the item is sold for f 1,000. Mr. Smith, therefore, takes a deduction from his income tax in that year of $ 1,000 as a gift to an educational, charitable, or religious institution. The buyer, Tom Brown, makes his check out to the institution as a cash gift, assuming that the item he receives is merely a token; or, if you have a suspicious mind, he assumes the government won’t know the difference. Deduction No. 2 for $1,000. Mr. Brown then turns around and makes a gift of the item to another institution, taking another f 1,000 deduction, since there now exists a record that the item sold for this amount.
Three deductions of $ 1,000 each, and all involving a single item! Now what’s wrong, even if the Revenue Service doesn’t find out? Deduction No. 1, that of the donor, John Smith, is legitimate. He gave his property, and the sale of the item brought $1,000 to the receiving institution. Deduction No. 2, that of the buyer, Tom Brown, is not legitimate. He received something for his money. He could, however, have elected not to accept the item, in which case his check would have been a gift and his deduction legitimate. If he did accept the item, his first deduction was not legal, but the deduction for his gift of the item to another institution was. So that while three deductions for the same transaction cannot be allowed, apparently two are legal. Some of our friends in the Revenue Service are going quietly mad in an effort to discover how legally to cut the deductions to one.
The example just cited was a quasi-legal operation. Now contemplate this one: John Smith has a collection of papers. Let us say they are his own, accumulated during seven less-than-earthshaking months as ambassador to Mali and consisting in the main of carbons of letters to his political sponsor asking him, “For heaven’s sake, get me out of this place!” He arranges for a friendly institution to buy a fraction (probably five per cent) of his collection for $5,000 (and chances are that he donates the $5,000 to the institution). The following year he donates the balance—ninety-five per cent—of his collection to the institution and takes as his tax deduction nineteen times $5,000, or $95,000. This may seem legitimate, but in actuality it is fraud perpetrated by the donor and a friendly official of the institution.
Another example: the benefactor goes to his favorite and very friendly bookseller and makes a very sizable purchase; perhaps the amount is $35,000. He asks the dealer to bill a certain school or college for perhaps one-fifth of the items, but at the full purchase price of the collection. He then advises the school that he has located several items he knows the library would like to own. He would like to buy them for the institution, even though the price is admittedly high. He has, therefore, asked the dealer to send them to the school, but he is sending his personal check to the school so that they can pay the bill. Now what has happened in this literary version of the union “sweetheart contract”? The collector gets a tax deduction for the entire amount of his purchase and ends up with eighty per cent of the items in his own collection. The school is the innocent “dupe,” though a knowledgeable librarian or curator might suspect something was wrong by virtue of the high price of the items received. The collector and the dealer, however, are not innocent individuals trapped in a maze of tax law; on the contrary, they are highly sophisticated sharpies who are trying to defraud the government.
Congress has passed certain laws affecting the collector and the institution. These laws are designed to encourage the collector to give materials to institutions so that they may be studied by the many instead of the few and so that the collector may receive some financial benefit from his generosity. Congress never intended that the main motive for the gift would be tax avoidance.
Now it so happens, in the actual operation of this section of the Internal Revenue Act, that there are occasions when a donor of books, manuscripts, paintings, securities, or real estate may actually profit by making a gift to an educational, religious, or charitable institution or organization. But we must assume that this is an accident—the donor, when he bought or created the book, manuscript, painting, stock, or building, did not plan ultimately to make a gift on which he would realize a profit. It merely happened, and one day he found himself the possessor of materials worth much more than his cost. His income bracket made it possible for him to make a gift and actually be ahead in dollars because he had made the gift. In the case of the securities or real estate, he could, if he chose, have converted these items into cash, taken his profit, and paid his capital-gains tax—he would still have been ahead of the game. But could he really have done this with his manuscripts, books, or paintings? Perhaps. That’s the big question the government asks and the appraiser must answer. He is required to state a figure that represents the price at which the object can be sold at the time of the appraisal or at the time of the gift. And he must be prepared to prove his case.
What should the would-be donor do? He should consult a capable tax attorney or accountant and use the services of competent appraisers. He should not do his own appraisals unless he proposes using an invoice for a purchase as the basis for the appraisal figure. The recipient institution should appraise only items of minor value (no gift in excess of $500); preferably, it should make no appraisals at all.
What should a donor expect from an appraiser? His appraisal document should fully describe the gift and should be interpretive. The document can note the collecting, historical, and literary value of the items involved and indicate the basis upon which a valuation has been established. The appraiser’s final decision should be dictated by neither donor nor recipient. His fee should not be determined by the value of the item appraised, lest he be tempted to fix a higher valuation to earn a higher fee.
Prospective donors will be well-advised not to fall victim to some of the folklore of the gift-appraisal field. Example One: “It’s none of the government’s business where or when an item was acquired; the only concern is the appraised value at time of the gift.” Wrong. The government can, and often will, ask where one purchased an item and how long one has had it, and can ask to see the original invoice.
Example Two: “Nine times out of ten the federal examiner is baffled by the whole business and passes it because he can’t figure it out.” Wrong again. Some of the valuation men do know some of the fundamentals of the collecting world. They are familiar with auction catalogues, Book Prices Current , and other guides, and often employ knowledgeable consultants.
Example Three: “A competent appraiser’s word is usually sufficient to satisfy the government.” Wrong; much more is required. The appraiser must show that a market exists for this material, and he must be able to cite instances where similar material has been sold for comparable prices. This can cause much agony in some areas. Let us suppose that a large collection of Gandhi letters were to come on the market. The owner wants to give them away. An appraiser agrees that they are valuable, but he can’t produce a record of a sale of Gandhi material for any substantial figure. What then? He will have to seek out some sale of material of an individual who may be accepted as comparable to Gandhi and use this as a basis.
Sometimes, unfortunately, there is a double standard in appraisal. Senator “X” makes a gift of his papers to the Library of Congress and claims a deduction on his tax return. His return is audited and passed. His regional I.R.S. office accepts the principle of his gift and agrees that his papers have value. They may question the amount of the valuation and there may be an adjustment, but in the main, the donor and the governmental agency are in agreement. “Thomas Z,” an author, makes a gift of his papers to his alma mater and files a tax return from his home. In his district, the regional office takes the position either that (a) the papers have no value whatsoever, or (b) they will accept a valuation only if “Z” can prove that other papers of his have been sold; that sale will be used as the guide. Even if the author is famous, if by chance no manuscript of his has ever been offered for sale, the government would refuse to accept any valuation! Of course, that seems preposterous, yet it has happened and is happening now.
Thus far, perhaps, I have devoted too much space to discussing money, and that is of little ultimate concern. Collecting is a noble pursuit. It is intellectual, it is stimulating, it brings benefits to many. The complete collector is not a grubby individual hotly in pursuit of a tax benefit or an honorary degree; he is a remarkably well-rounded individual whose knowledge, instinct, courage, and persistence all aid him in the hunt for the elusive, the mysterious, the almost unavailable, the unbelievable. He has knowledge and energy—although some money doesn’t hurt, either—and he generously expends all three in his quest. He spends his money willingly, because he believes that what he receives for his cash is worth it—not primarily in dollars and cents, but in an intimacy with the greatness of the past.
I share with most persons who have a genuine affection for the printed or written word the sense of uneasiness that comes from hearing dealers, collectors, and institution officials discuss an item as an investment in the same sense one would discuss a stock. When you buy a book or an autograph you invest in incredible adventure, excitement, and mystery. Where else can you spend your money so wisely? Spend it, then—wisely, freely, foolishly, carefully—it’s your money. But don’t try to make it back at the expense of your uncle in Washington. For I assure you that there isn’t any dodge that some sharp mind in the Internal Revenue Service hasn’t heard about. This doesn’t mean that some people haven’t gotten away with it. But the day of reckoning is drawing closer; when it comes, all of us, the calculating and the naïve, the bad and the good, will be asked to pay the price.