How familiar are you with the IRS' Related Use Rule? In this episode of the BIF Bites podcast, Jerry dives into the 2010 Hobby Lobby Scandal and the purchase of smuggled artifacts to what you need to know about how this relates to charitable donations on the CFP® Exam.
What Is the Related Use Rule?
The Related Use Rule determines the amount of charitable deduction allowable for gifts of tangible personal property, like art, collectibles, or artifacts, based on whether the charity or non-profit uses the property in a way that is related to its exempt purpose.
So, if a donor gives a tangible item of personal property to a charity, and the organization uses it in a manner consistent with its charitable mission, this is referred to as a related use. For example, an individual donates a sculpture to an art museum for display, this would be a related use, and the donor's tax deduction would be based on the fair market value of the property.
On the other hand, if a donor donates the sculpture to an animal shelter, and the shelter sells it to use the money to fund operations, the charitable deduction would be limited to the cost basis in the property.
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Click Below to Read Full Transcript
00:00:08 Jerry Mee
Hello everyone, and welcome back to another awesome episode of the BIF Bites Podcast. I’m your host, Jerry Mee, and we got a fun one for you today. Now, typically with these fun episodes, I’ll tell you a story or an anecdote or an example, and then relate that back to a CFP exam question or topic so that it can better prepare you for the exam.
Today, however, we’re going to do it a little bit different because this story is so crazy, you really need to understand the CFP exam topic first in order to truly appreciate it. So without further ado, I’m going to dive into that topic first, and then we’re going to hear a pretty crazy story that played out about 10 years ago.
First and foremost, the IRS has very special and specific rules when it comes to donating art or historical artifacts in order to get a charitable donation tax write-off. That is called the related use rule. What this rule says is that if you are going to donate a piece of art or historical artifact to a museum or institution that will display that piece for its intrinsic artistic or historical value, you can value that donation at its fair market value.
However, if you donate that piece to another type of charity, like a soup kitchen, you cannot value it at fair market value. Instead, you must value it at your cost basis.
00:02:11 Jerry Mee
This rule exists to prevent abuse of the tax code. In the past, some wealthy individuals exploited loopholes by buying cheap artwork from friends, having it appraised for inflated values, and then donating it to unrelated charities for huge deductions. For example, someone might pay $1,000 for a painting, have it appraised for $50,000, donate it to a soup kitchen, and then claim that $50,000 deduction.
To stop this, the IRS created the related use rule, which essentially puts the accountability on museums and institutions. If they display the art, they are confirming it has artistic or educational value. In those cases, the donor can claim fair market value. But if the charity doesn’t use it for a related purpose, the donor can only claim cost basis.
It’s a good rule that stops most abuse. But as we’ll see today, it’s not perfect. Keep that rule in mind as we go into today’s story: Hobby Lobby.
00:04:31 Jerry Mee
For those who don’t know, Hobby Lobby is a massive arts and crafts retailer based in the Midwest. They’re hugely successful, earning hundreds of millions of dollars each year, and they’re owned by the Green family — a deeply religious family with an interest in biblical history and philanthropy.
The Greens wanted to combine their two passions — their interest in ancient Middle Eastern and biblical artifacts, and their desire to make charitable donations to reduce their tax bill. So, around 2007 to 2009, they hired a team of so-called archaeologists and historians (you’ll soon see why those titles deserve air quotes) and sent them via private jet to the Middle East.
There, they began buying historical artifacts at extremely low prices, then loaded them onto Hobby Lobby’s private jet, flew them back to the U.S., and had them appraised for enormous amounts.
00:07:00 Jerry Mee
These weren’t small trinkets either. Among them was the Dream Tablet from the Epic of Gilgamesh — one of the oldest written works in human history. Hobby Lobby, an arts and crafts chain, had just bought a piece of it and brought it to America.
They then donated these artifacts — tens of thousands of them — to a museum in Washington, D.C. called the Museum of the Bible. They reported millions of dollars in donations and received enormous tax write-offs under the related use rule, since the artifacts were being displayed in a museum.
However, there was a major conflict of interest. The Museum of the Bible was owned and operated by the Green family, the same family that owns Hobby Lobby. Essentially, Hobby Lobby was buying artifacts, donating them to their own museum, and getting massive tax deductions.
00:09:30 Jerry Mee
That’s not even the worst part. Their so-called experts weren’t careful about sourcing. Many of the artifacts they purchased turned out to be stolen or looted items from Iraq and Egypt, taken during the chaos of the Iraq War when museums were ransacked. Others were outright fakes — crude forgeries that any qualified archaeologist should have recognized immediately.
Investigators eventually discovered the truth, and Hobby Lobby found itself in the middle of a decade-long federal case. The company was forced to return tens of thousands of stolen artifacts to Iraq and Egypt.
You might think they lost their tax deductions, but surprisingly, they didn’t. Their accounting team had done everything correctly from a legal standpoint. Aside from the fake artifacts, most of the donations qualified under the related use rule.
00:12:00 Jerry Mee
Ultimately, Hobby Lobby was allowed to keep most of its tax write-offs. Their only real penalty was a $3 million fine — not for tax fraud, but for failing to file proper importation paperwork. Because they were flying the artifacts in on private jets and skipping customs, the government fined them for improper import documentation.
So in the end, Hobby Lobby returned the stolen items but kept much of its tax benefit. I guess that goes to show you — if you’re going to hire a crack team, maybe spend more on your accountants than your archaeologists.
This was such a wild story that I had to share it. And now, when you’re sitting for your CFP exam and come across a question on the related use rule and charitable donations of art or artifacts, you can think of the Hobby Lobby case. As long as the item is displayed in a museum (even one you own), it can be valued at fair market value. If it’s donated elsewhere, it must be valued at cost basis. That’s it for this episode. I hope you learned something new, and we’ll see you next time.
