Taxpayer has a lovely oil portrait of a White Elephant. Seeing that a local museum is going to be putting on an exhibit featuring animals in the wild, taxpayer offers to donate the portrait to the museum. The museum studies the portrait and determines it would be a wonderful addition to the exhibit. An independent appraisal puts the value of the portrait at $5,000. The donation is made, and taxpayer takes a charitable donation for $5,000 in this first tax year.
A number of years pass, and the museum decides to remove the animal exhibit and use the space for other exhibits. The various animal artwork exhibited are given back to their owners, placed in other parts of the museum, or placed in storage. More years pass, as does the statute of limitations for amending tax returns for that first tax year.
The museum then decides it does not have the space to store the White Elephant any longer, and offers to return it to the taxpayer who donated it. Taxpayer accepts the White Elephant back into his home. Taxpayer, being a devoted fan of MTM, researches the tax implications of the White Elephant's return. After studying the various responses to a similar issue posted on MTM, taxpayer tosses a coin and decides to declare the return of the White Elephant as "other income" in a second tax year. Taxpayer gets an independent appraisal and, to keep things simple, the appraisal comes in at $5,000.
A number of years pass, as does the statute of limitations for amending tax returns for that second tax year.
There is a change in staff at the museum, and as part of a reorganization/study/analysis it comes to light to the new staff/directors at the museum that the White Elephant was given back to the original donor for free. Discussion ensues, and the new powers decide that they really should have that White Elephant back at the museum. Taxpayer at this time says he has again grown fond of the White Elephant. A lawsuit is filed, and the Judge renders a decision that in this particular instance, with this particular museum, the return of the White Elephant to the original donor/taxpayer was improper, and title to the White Elephant is still held by the museum. The Judge's ruling specifically states that this decision need not be the outcome with all museums or charitable organizations, he is simply deciding the specific facts in this case, including this specific museum's charter, etc. The Judge's ruling also clearly states that there was no wrongdoing whatsoever on the part of the original donor in accepting the return of the White Elephant. Nevertheless, the return was improper with respect to this museum, title remains in the museum, and the White Elephant must be returned to the museum. Taxpayer does so in a third tax year.
What is the tax situation with respect to the taxpayer? The period for amending either prior tax years has passed. He cannot take a charitable donation in the third tax year, as he was ordered to return the White Elephant, and he did not own it at that point anyway.