Friday March 29, 2024

2.4.2 Art Collections - Loans of Works of Art

Current Charitable Gifts

Loans of Artworks:  Many art collectors are willing to allow use of their art collections for expositions by museums.

Partial Gifts of Art:  Understandably, many donors desire to receive a charitable tax deduction, but are not willing to relinquish full control of the art.

Gifts of Fractional Interests in Art:  Gifts of fractional interests in art and other tangible personal property are generally deductible at fair market value.

Loans of Other Property:  Mere use of property does not give rise to a charitable deduction. For example, lending the use of office space or other real estate to the charity does not produce an income tax deduction.

Loans of Artworks


Many art collectors are willing to allow use of their art collections for expositions by museums. In some circumstances, the loan of art objects is temporary. In others, the loan is of unlimited duration, with the potential for a bequest of the artwork to the museum. Finally, some donors desire to allow the use of collections for portions of the year, while retaining use for the balance of the year.

A loan of artwork will not produce a charitable deduction, since there is no completed transfer. Fortunately, the value of the loan of art will not be includable for gift tax purposes. Sec. 2503(g). However, if the lender passes away and the art is to be valued in his or her estate, it will be valued at full fair market value, with any restrictions as a result of the loan disregarded. Sec. 2503(g)(1).

Partial Gifts of Art


Understandably, many donors desire to receive a charitable tax deduction, but are not willing to relinquish full control of the art. A donor may transfer a fractional interest to the charity and receive a deduction. For example, a donor may give one-fourth interest in a painting to an art museum. The museum would be entitled to own and display the painting for three months of the year. The donor would retain the painting for nine months. PLR 9303007.

Gifts of Fractional Interests in Art


Gifts of fractional interests in art and other tangible personal property are generally deductible at fair market value. Reg. 1.170A-5(a)(2). If a fractional gift of tangible personal property is made and subsequent fractional gifts are made, then the future deductions will be based on the lesser of the initial asset value or the value at the time of the future fractional gift. Sec. 170(o)(2)(A). This valuation method applies to income, gift and estate taxes.

If the art has increased in value and the donor passes away prior to completing the gift, the balance of the fractional art gift will be testamentary. However, it is uncertain whether Treasury will include the art in the estate at the appropriate fraction of the initial gift value, since the estate charitable deduction will be limited to the fractional part of that initial value.

Initially, property subject to the fractional gift rules must be fully owned by the donor, or donor and donee charity. All fractional gifts must be completed within ten years or the donor's death, whichever is earlier. Sec. 170(o)(3)(A)(i). The charity must take substantial physical possession or make use of the property for an exempt purpose. If these tests are not met, charitable income and gift tax deductions for all previous contributions of interests in the item will be recaptured (plus interest). Recapture also includes an added penalty tax of 10% of the recapture amount.

For example, an art museum described in Sec. 501(c)(3) is the recipient of a fractional interest in a painting. The art museum includes the painting in an art exhibit and therefore satisfies the related-use requirement.

If there are two or more owners of tangible personal property, then gifts of fractional interests are permitted if all owners give the same fractional percentages. Sec. 170(o)(1)(B). For example, if a painting is owned 60% by A and 40% by B, then both could make fractional gifts of 50% of each respective interest. They would need to coordinate future gifts to continue to give the same percentages, and presumably must die together to qualify for an estate tax deduction. Given the restrictions, there may be a limited number of fractional gifts by multiple owners.

Loans of Other Property


Mere use of property does not give rise to a charitable deduction. For example, lending the use of office space or other real estate to the charity does not produce an income tax deduction. If the item were rented to the charity, the donor would receive and report ordinary income. Since the use of an asset would otherwise produce ordinary income, there is no charitable deduction. Sec. 170(e)(1).


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