Student ID #: 90676032
TAXATION B2, PROFESSOR ZOLT, MAY 1, 2008STUDENT ID #: 90676032Part IIQuestion 1: Auction of the Portraits by Harvard Law School
There are several ways to treat the auction of the portraits. These alternatives are discussed below.
Donation as a Charitable Gift to the public Interest Auction
:Harvard might argue that this is a charitable donation to the Public Interest Auction, which might be a separate entity eligible to receive deductible donations under § 170. In this instance,Harvard would likely to attempt to deduct the FMV. However, typically when goods aredonated and then auctioned, the deduction is limited to the amount realized from sale of thegoods (in order to avoid valuation scams).
Auction as a Sale:
Perhaps the most obvious approach would be to treat the auction as a sale of the goods. This treats the auction as if it were an arm’s-length transaction. If the transactionwere characterized this way, the chief questions are (1) what is the amount of loss or gain, and(2) should this amount be treated as capital gains or losses.
Gain or Loss
: The gain or loss is the difference between the price amount received $5000 per painting and Harvard’s basis in the property. If Harvard purchased the property, the basis is theamount paid. If the property was donated, Harvard takes the basis of the donee. Harvard couldargue that the paintings were ‘inventory’ and that by having an appraisal done, they effectively priced their inventory at current value as permitted by § 472 (for FIFO taxpayers). However, if Harvard had wanted to do this, they should have realized gains on inventory at the time of appraisal. If this had been done, then Harvard could have attempted to take a loss of thedifference between the FMV and the sale price.1