Thursday April 25, 2024

4.1.1 Gifts of Art

Gifts of Art

What is Art?  There are many different types of works of art.

Is It a Gift?  In most circumstances, the donor completes a gift of art by making a physical transfer of the artwork to the charity.

Ordinary Income Gifts:  When a person creates a work of art, that property is considered work created in "the ordinary course of trade or business."

Capital Gain Gifts:  If a donor is an art collector and has held the art for more than one year, it is possible to receive a charitable deduction for the fair market value.
"Art is in the eye of the viewer"


What is Art?
There are many different types of works of art. Individuals may own paintings, sculpture, porcelain, artistic screens, scrimshaw, carvings and other types of art. Generally, rare books, letters and other written materials may also be considered art.

There are two general categories for gifts of art. First, if the donor has created the art, it is an ordinary income asset. Reg. 1.170A-4(b)(1). Second, if a collector holds the art, it is a capital asset. In both cases, the art is referred to as "tangible personal property." The property is tangible personal property since it is a physical object, it may be moved and it is not permanently fixed to any real estate.

Is It a Gift?
In most circumstances, the donor completes a gift of art by making a physical transfer of the artwork to the charity. The timing of the gift occurs when the physical transfer actually takes place. The actual transfer of tangible personal property is usually accomplished through a deed of gift.

However, there are circumstances under which the question arises as to whether a completed gift has been made, such as when a donor places a material restriction on the gift. In PLR 200202032, the donor planned to bequeath a collection of 53 paintings to an art museum. Under the terms of the agreement, the museum was required to display and maintain the collection. However, the museum did have the right to lend or sell art works and replace them with similar art. Since the agreement and restrictions did not materially restrict the use of the art, the gift qualified for an estate tax charitable deduction.

Alternatively, some donors desire to make gifts yet retain the art. The gifts could be for a time division during the year or subject to other restrictions, as discussed in GiftLaw Pro 4.1.2.

Ordinary Income Gifts
When a person creates a work of art, that property is considered work created in "the ordinary course of trade or business." Therefore, this artwork would be deemed ordinary income property. Reg. 1.170A-4(b)(1). If an ordinary income asset is sold or donated to charity, there is a deduction only for the artist's cost basis. Sec. 170(e)(1).

There is also one other circumstance in which the artwork could be deemed ordinary income property. If a person acquires a significant number of works of art for the purpose of donating them to charity, it is possible that the volume of such items could result in the donor being characterized as a "dealer" under the Internal Revenue Code.

For example, a wholesaler of art books employed an agent who sold large numbers of art books to a taxpayer. After holding the books for 12 months and one day, the taxpayer donated the books to an art-related charity. The taxpayer then claimed a "related use" deduction for the full fair market value.

However, the Service determined that the large number of books involved in effect caused the taxpayer to become a dealer. For a dealer in art works, the charitable deduction is only the dealer's cost basis. See Rev. Rul. 79-419.

Capital Gain Gifts
If a donor is an art collector and has held the art for more than one year, it is possible to receive a charitable deduction for the fair market value. This is permitted if the donor makes a gift of art to a charity that will use the art in a manner related to its exempt purpose.

These gifts may be of a fractional interest or of the entire property. The gift may involve an agreement, so long as the agreement does not limit the "substantial rights of the charity." See PLR 9303007. Even a right of reversion is permissible, so long as the probability is "so remote as to be negligible."

If a gift of an undivided interest is made that is less than 50% of the value of the art object, it is possible that some discount may be applied to the gift. Normally, gifts of minority interests in assets are valued at a discount to fair market value.

Case Studies on Gifts of Art

Getting Back to the "Art of the Matter," Part 1:   Paulo Frambini, 45, is a talented artist and a self-proclaimed leader of the art purist movement. He lives, breathes and eats art history and culture. Paulo refuses to be characterized as any one particular type of artist. Accordingly, Paulo's artistic creations are very diverse and varied.

The Artful Unitrust:   Billy "Boots" Belton has loved the west his entire life. He was born in California, but moved to the wide-open spaces of western New Mexico. During his youth, Boots studied art at a large art institute in California, but the call of the big sky led him back to his beloved western New Mexico.

Private Letter Rulings

PLR 200202032 Bequest of Artwork to Museum Qualifies for Charitable Estate Tax Deduction:   Taxpayer owns a collection of artwork, which consists of 53 paintings, drawings and watercolors of various artists during a particular period in time. Taxpayer has previously transferred a 50% undivided interest in 32 of the artworks to Museum and owns a 100% interest in the remaining 21 works of art. Pursuant to Taxpayer's will, Taxpayer bequeaths all of his remaining interests in the 53 pieces of artwork to Museum.

PLR 200418002 Significant Conditions on Bequest of Art Collection Still Yields Full Fair Market Value Deduction:   Alexis and Aaron Artcollector have a significant collection of art (the "Collection"). The Artcollectors entered into an agreement (the "Agreement") with Museum, whereby they agreed to bequeath the Collection to Museum upon the death of the survivor of them. The Agreement provided that Museum could not sell any of the Collection, was required to use and maintain it in certain and specific ways and could loan art in the Collection only under specific circumstances. In the event of a violation of the terms of the Agreement, the Collection would automatically revert to the Artcollectors' private foundation, a qualified charity. Will the survivor's estate receive a full fair market value deduction for the gift of the Collection to Museum?

PLR 201825003 Grant of Artwork to Museums Would Be a Completed Gift:   Taxpayer and Spouse entered into a Deed of Transfer (DOT), which provided for artwork that they owned to be donated to two museums upon their deaths.

Related Topics on Gifts of Art

4.1.2  Partial Interests in Art:    The basic rule with respect to partial interests is that there is generally no charitable deduction for a gift of less than a taxpayer's entire interest in property. Sec. 170(f)(3)(A). However, there are several exceptions to the basic rule. The key issue is whether there has been a present gift of part or all of the art object.

4.1.3  Related or Unrelated Use Gifts of Art:    Since art is tangible personal property (TPP), the charitable deduction for a gift of art will depend upon a categorization of the property as a "related" or "unrelated" use asset. A related use gift occurs when the charity actually makes use of the property in a manner consistent with its exempt purpose. Sec. 170(e)(1)(B)(i).

Sommers:    In Estate of Sheldon C. Sommers et al. v. Commissioner; TC Memo. 2013-8; Nos. 9305-07, 9036-07 (9 Jan 2013), the Tax Court held that a state court determination that gifts of art were complete was applicable. The estate was not permitted to redetermine and apportion the estate tax.

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