9060 / How is the value of property donated to charity determined?

As in other circumstances, fair market value for this purpose is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”¹ The willing buyer has often been viewed as a retail consumer, not a middleman.² However, there are certain circumstances where the retail consumer is not the proper benchmark. For example, in the case of unset gemstones, the ultimate consumer is generally a jeweler engaged in incorporating the gems into jewelry. Therefore, the fair market value is based on the price that a jeweler would pay a wholesaler to acquire such stones.³

Often, taxpayers rely on expert appraisals in determining the fair market value of property.⁴ For some gifts to charity, an appraisal is required (see Q 9061). However, the value assigned by an appraiser is not always controlling and the IRS or the Tax Court may consider factors in addition to those considered by the taxpayer’s appraiser(s) which may reduce the value of the gift and, thus, the charitable deduction.⁵ The IRS has warned taxpayers that some promoters are likely to inflate the value of a charitable deduction for gemstones and lithographs, thus subjecting the taxpayer to higher taxes and possible penalties.⁶ Earlier case law has indicated that an auction price may be helpful in determining the value of art.⁷

The taxpayer claiming the charitable deduction has the burden of proof in establishing the fair market value of the property donated.⁸