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.
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).
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 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
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.
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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.