Portrait of a White Elephant

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.

Reply to
Gil Faver
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Long post; short reply.

He has a capital loss.

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Gil Faver various responses to a similar issue posted on MTM, taxpayer tosses

Great satire, Gil.

He came to the correct decision albeit the wrong method. Also he did not need a second appraisal as the tax transaction only needed to offset the original charitable deduction.

As far as the Service is concerned, he has a capital loss equal to the $5000 in income he correctly declared PLUS the cost of the second appraisal AND any attorney fees related to preserving his rights in an asset.

BUT what if he had followed the advice of myself and my learned colleagues and waited a year, got another appraisal, and donated it to another museum. NO Lawsuit!

The moral of this story must be: "Don't fall in Love with a White Elephant".

Dick

Reply to
Dick Adams

On Mon, 15 Dec 2008 18:35:05 EST, "Gil Faver"

Reply to
Vic Dura

He runs the risk that the second trial will conclude the museum acted properly, and so he wasn't damaged. He should have countersued when they sued him for the return.

========================================= MODERATOR'S COMMENT: Fascinating legal issues, but this is a tax board. Can we please restrict this thread to tax issues.

Reply to
john

Why not? The first museum still wants it back. Would they sue (only) the second museum?

Seth

Reply to
Seth

don't kid yourself. That would not avoid a lawsuit, and might make a litigant more inclined to sue this taxpayer, since his actions now make it seem like he KNEW the return was improper.

Actually, I remain of the mind that the return was a gift. I have seen little if any specific information to support theories to the contrary.

Another question: What if in the scenario I posed, the Judge ruled that the return was, in this particular instance, proper. Would that not make it a gift to the original donee, and his basis in this gift is now zero? If so, what does he do with his taxes in the third tax year, to "undo" the incorrect claim that it was income in the second tax year?

Reply to
Gil Faver

"Gil Faver"

Reply to
Stuart Bronstein

Ok. Then I'll limit my comments to say that in general courts will not allow you to sue for recovery of taxes that you were properly required to pay, even if someone said you wouldn't have to.

Stu

Reply to
Stuart Bronstein

Will courts allow you to sue and recover for taxes paid that were not properly required to be paid? This is a general question, I don't know or care how it might fit into the White Elephant scenario.

Reply to
Gil Faver

"Gil Faver" > will not allow you to sue for recovery of taxes that you were

If you're looking for repayment from the IRS, you might be able to get it. If you're looking for repayment from someone else, my recollection is that you generally won't get it. If a tax is properly payable by you, the courts are very reluctant to say that someone else has to be responsible for paying it.

Stu

Reply to
Stuart Bronstein

no, that is not my question. Let's say a tax preparer screws up, and you pay taxes you didn't have to. The statute of limitations runs out. Can that tax preparer then be compelled to reimburse you for taxes you did NOT have to pay? I suppose this might also apply to investment houses, banks, etc. under some scenarios.

Reply to
Gil Faver

"Gil Faver" and you pay taxes you didn't have to. The statute of limitations

In that case it might be accounting malpractice, which might allow the taxpayer to recover against the accountant. But it's a tricky area and I haven't researched it in a long time, so if the case comes up, be careful either way.

Stu

Reply to
Stuart Bronstein

I will let you know in a year or two, as I have a case sorta like that now. My attorney assures me that I will win, and the defense hasn't made such a claim (yet).

Reply to
john

In article , Gil Faver litigant more inclined to sue this taxpayer, since his actions now make it

I don't see why. I got it back because they didn't want it any more. I wasn't in love with it either, that's why I donated it the first time, and why I donated it again when I got it back. (Why did I wait a year? I wasn't in any hurry, and I had higher priority calls on my time.)

Seth

Reply to
Seth

In article , Gil Faver care how it might fit into the White Elephant scenario.

If it's income tax, you don't get it back after 3 years after filing deadline.

Seth

Reply to
Seth

What if the tax wasn't properly payable by you?

Say, you thought you owned some property, and paid property taxes. Then someone else with a senior claim came along, and the courts ruled that he had owned it all along. Since you didn't own it, you weren't required to pay property tax; can you collect what you paid (from either the owner or the taxing authority)? If not (or even if so), do you have to file amended income tax returns?

Seth

Reply to
Seth

Gil Faver make a litigant more inclined to sue this taxpayer, since his

If the taxpayer recognized income for the return of the painting, he would be putting himself in the same position he was in before he made the donation.

I remain of the mind that a 501(c)(3) is not allowed to gift its assets to private parties.

There an underlying presumption here that the museum directors were not ignorant of the law and had exhausted attempts to transfer the painting to another museum.

I have been trained to think like a thief, but I am unable to conjure up a single scenario under which the return of the painting was legally a gift.

Reply to
Dick Adams

You wouldn't have paid taxes on it unless you received some financial benefit from owning it. Ownership isn't, then, an issue.

If you received taxable income that you had to pay to someone else later, you get a deduction for that. But normally you don't get someone else to pay you back for taxes you properly paid.

Stu

Reply to
Stuart Bronstein

not necessarily. there are White Elephants in real estate, too.

Ownership isn't, then, an issue.

you seem to keep missing the point. what if you paid taxes that were NOT "properly paid". Here is another example. You provide all documentation to your tax preparer. He is an idiot. He miscalculates your taxes. You are unaware of this, and pay the wrong amount (too much). The statute of limitations runs, so you cannot amend the return. Can you sue the preparer and have him pay you back the taxes "IMPROPERLY paid"?

Reply to
Gil Faver

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