Thursday March 28, 2024

4.1.2 Partial Interests in Art

Partial Interests in Art

A Future Interest in Art:  If a donor makes a gift of art in the future, there is no charitable deduction under the "intervening interest" rule.

Gift of Undivided Interest:  It is permissible to receive a charitable deduction for a gift of an undivided interest in property.

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

Time Division for Artwork:  It is also possible to transfer artwork and to divide the ownership into periods of weeks or months.

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.

A Future Interest in Art


If a donor makes a gift of art in the future, there is no charitable deduction under the "intervening interest" rule. Sec. 170(a)(3). That is, if the art is subject to a loan or other restriction that precludes the charity from full or at least effective ownership of the art, there is no charitable deduction until the restriction has lapsed. For example, if a donor lends a painting to an art museum and intends to make a future gift, there is no charitable deduction until the donor has actually irrevocably transferred the art to the museum. See Reg. 1.170A-5(a)(1).

Gift of Undivided Interest


It is permissible to receive a charitable deduction for a gift of an undivided interest in property. Reg. 1.170A-7(b)(1) . For example, a donor may give an undivided interest in artwork to charity. The undivided interest will entitle the owner to a charitable deduction. In one case, a taxpayer donated to an art institute a 10% interest in 44 works of art. In the second year, the donor gave another 10% interest in the 44 works of art. Finally, in the third year, the donor transferred the remaining 80% interest in five of the 44 pieces. Thus, the deduction was permitted. See Winokur v. Commissioner 90 T.C. 733 (1998), acq., 1989-1 C.B.1.

Gifts of Fractional Interests in Art


Gifts of fractional interests in art and other tangible personal property are generally deductible. Reg. 1.170A-5(a)(2). If several fractional gifts from the same tangible personal property asset(s) are made over time, the deductions from additional contributions will be based on the lesser of the initial asset fractional value or the fractional value at the time of the additional contribution. 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. Initially, some tax advisors were concerned that the art might appreciate in value and a donor would pass away, leaving the remaining fraction to the charity as a bequest in his or her will. If the art were included on Form 706 at fair market value but the charitable estate deduction was limited, there could be estate tax on phantom value. However, the issue was resolved in the Tax Technical Corrections Act of 2007. If a donor passes away and bequeaths the balance of a fractional gift to a qualified exempt charity, the estate will receive a full estate tax charitable deduction.

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 10 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, 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

Time Division for Artwork


It is also possible to transfer artwork and to divide the ownership into periods of weeks or months. For example, the donor may transfer to an art museum the right to own and display the art for "a portion of each year appropriate to its interest." Reg. 1.170A-7(b)(1)(i). The charitable deduction will be appropriate for the percentage of time each year transferred to the charity. This charitable deduction will be permissible. However, the charity must take possession for the appropriate time. See PLR 9218067.

Example 4.1.2A Loan of Artwork

Carol Collector owns a group of 30 French impressionist paintings. She very much enjoys Monet, Manet, Sisley and other artists in her collection. Carol has been approached by the local art museum and has agreed to lend paintings to the museum periodically for display purposes. Since this is a loan and Carol has not relinquished control, there is no current charitable income tax deduction.

Example 4.1.2B Fractional Interest Art Gift

Carol Collector decides to make a gift of a Manet painting to the art museum. She irrevocably transfers through a deed of gift an undivided 50% interest in the Manet painting. The museum displays the Manet for six months each year and Carol owns the painting for the remaining six months. There is a charitable income tax deduction for 50% of the value. Since they both are equal owners, it is probable that there would not be a minority discount, but that decision will be made by the appraiser.

Example 4.1.2C Timeshare Art Gift

Carol owns a Monet painting and plans to travel extensively during the winter months in the coming years. Thus, she would like to retain the ownership of the Monet painting during the five summer months. She transfers the ownership of the Monet to the art museum for the seven remaining months each year. Carol receives a charitable deduction for 7/12 of the value of the Monet painting.

Example 4.1.2D Helpful Donor Will "Store the Art" for Charity

Carol transfers 100% of a Rembrandt to an art museum and informs the art museum that it may take possession at any time. Since the art museum is subject to budget limitations on insurance and the painting is very valuable and thus expensive to insure, the art museum informs Carol that it will be two years before the appropriate display area with security will be available. Carol continues to insure the painting and display it in her home, while the art museum completes the capital campaign and construction of the new building. Carol receives a charitable deduction, even though the delivery has been delayed. However, it is essential under the Winokur case facts to demonstrate that the charity could have acquired the art at any time and that the reasons for not doing so were solely within the control of the charity.

Case Studies on Partial Interests in Art

Getting Back to the "Art of the Matter," Part 6:   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.

Private Letter Rulings

PLR 200223013 Loan of Artwork Does Not Qualify for Current Tax Deduction:   Taxpayer and Spouse wish to establish an art collection at Museum, a 501(c)(3) organization. Taxpayer and Spouse want their collection to provide the public with viewing opportunities and further appreciation of Artist. Some of the artwork will be given outright to Museum and some of the artwork will be lent to Museum subject to a "Gift and Loan Agreement" (GLA).


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