Karen Kaplan, 2016 T. C. Memo. 149, filed 8/9/16, is an artist, art teacher and investor. She is also a habitual late-filer, but that isn’t the point. It’s also beside the point that Section 6214(b) bars Karen’s claim that her prior years’ overpayments should offset her tax year’s liability for the year at issue.

What is the point (and I can hear my readers saying “At last!”) is that an artist who contributes her own works to a charity, and can substantiate the contribution sufficiently for Section 170 and Reg. 1.170A-13(b)(1), is limited to a deduction not for the retail or fair market value of the contributed artwork, but only for what would amount to cost of goods sold.

Judge Vasquez: “…if the contributed property would produce ordinary income to the donor if sold at its fair market value, then the amount allowed as a deduction is limited to the donor’s cost or basis in the contributed property. Sec. 170(e)(1)(A); Chronicle Publ’g Co. v. Commissioner, 97 T.C. 445, 447-448 (1991). Such ordinary income property includes artwork created by the donor and property held by the donor primarily for sale to customers in the ordinary course of the donor’s trade or business. Sec. 1.170A-4(b)(1), Income Tax Regs.” 2016 T. C. Memo. 149, at pp. 12-13.

Karen can’t substantiate the cost of the materials needed for her hand-painted postcards, and Judge Vasquez can’t find enough in the record to Cohanize her into a Rule 155 beancount on that score.

“Considering that petitioner is an artist, that she created the postcards, and that she included her printed name on the reverse side with a copyright symbol, we believe that the postcards are similar to inventory and therefore ordinary income property limited to a cost or basis deduction. See sec. 170(e)(1)(A). Unfortunately for petitioner, we are unable to determine from the record her cost or basis in the postcards. Despite being given the opportunity at trial to provide such information, petitioner did not provide any relevant testimony or other evidence on this issue. Accordingly, petitioner is not entitled to deductions for her postcard contributions.” 2016 T. C. Memo. 149, at p. 13.

Takeaway for artists- Save the receipts for any materials you use. Could be very handy.