Private Letter Rulings - Deduction Permitted for Gift of Undivided Interest in Art Collection
GiftLaw Note:
Adelaide and Armand Artcollector own an extensive art collection. They display parts of the collection in their home throughout the year and want to give their favorite Museum partial ownership of the collection so it can display parts of the collection throughout the year as well. The Artcollectors deeded Museum a 50% undivided interest in the art collection and sought a ruling that their gift would qualify for a charitable tax deduction.
Sec. 170(a)(1) of the Code provides that a deduction is allowed for charitable contributions if payment is made within the taxable year. Treasury Reg. 1.170A-1(b) provides that a payment is generally made when the gift is delivered to the recipient. Sec. 170(a)(3) and Reg. 1.170A-5(a)(4) state that payment of a contribution occurs only once all intervening interests in the property have expired and the donor no longer has any right to use, possess or enjoy the gifted property. Gifts where all intervening interests have not expired are often referred to as nondeductible partial interest or future interest gifts. Gifts of art where the donor retains the right to use the art are often nondeductible partial or future interests gifts because the recipient does not have unrestricted use of the property until the occurrence of a condition or future date.
The IRS ruled that the Artcollectors' gift of an undivided interest in their art collection to Museum did qualify for a current charitable tax deduction. This is because the Artcollectors gave Museum an undivided interest in their art collection rather than a partial or future interest gift of the collection. If the Artcollectors had simply given the art to Museum but retained the right to use the art as they desired, the gift would have been a nondeductible partial or future interest gift. This is because the Museum would not have had a current and unrestricted right to use or enjoy possession of the art by reason of the gift. Because the Artcollectors gave Museum an undivided interest in the art, however, the Museum did receive an unrestricted right to use and enjoy the collection for 50% of each year as of the date of the gift. For that 50% of each year, the donors retained no rights with respect to the property and the Museum's right to unrestricted possession during that time made the gift a present interest gift that qualified for a charitable tax deduction.
Editor's Note: From time to time Crescendo revisits "Classic" Private Letter Rulings that address topics of significance to planned giving. This letter ruling is such a "Classic" letter ruling. It offers a great reminder that while partial interests in property are not deductible because there is no present gift, gifts of undivided percentages of property are deductible present gifts.
Sec. 170(a)(1) of the Code provides that a deduction is allowed for charitable contributions if payment is made within the taxable year. Treasury Reg. 1.170A-1(b) provides that a payment is generally made when the gift is delivered to the recipient. Sec. 170(a)(3) and Reg. 1.170A-5(a)(4) state that payment of a contribution occurs only once all intervening interests in the property have expired and the donor no longer has any right to use, possess or enjoy the gifted property. Gifts where all intervening interests have not expired are often referred to as nondeductible partial interest or future interest gifts. Gifts of art where the donor retains the right to use the art are often nondeductible partial or future interests gifts because the recipient does not have unrestricted use of the property until the occurrence of a condition or future date.
The IRS ruled that the Artcollectors' gift of an undivided interest in their art collection to Museum did qualify for a current charitable tax deduction. This is because the Artcollectors gave Museum an undivided interest in their art collection rather than a partial or future interest gift of the collection. If the Artcollectors had simply given the art to Museum but retained the right to use the art as they desired, the gift would have been a nondeductible partial or future interest gift. This is because the Museum would not have had a current and unrestricted right to use or enjoy possession of the art by reason of the gift. Because the Artcollectors gave Museum an undivided interest in the art, however, the Museum did receive an unrestricted right to use and enjoy the collection for 50% of each year as of the date of the gift. For that 50% of each year, the donors retained no rights with respect to the property and the Museum's right to unrestricted possession during that time made the gift a present interest gift that qualified for a charitable tax deduction.
Editor's Note: From time to time Crescendo revisits "Classic" Private Letter Rulings that address topics of significance to planned giving. This letter ruling is such a "Classic" letter ruling. It offers a great reminder that while partial interests in property are not deductible because there is no present gift, gifts of undivided percentages of property are deductible present gifts.
This responds to your ruling request of October 4, 1991, submitted on behalf of Donors. You have requested a ruling as to the tax treatment of property donated by Donors under section 170 of the Internal Revenue Code.
Donors plan to execute a deed of gift transferring certain art objects to Donee for display in a museum that Donee is currently constructing. Donee is exempt under section 501(c)(3) of the Code, and is a public charity described in section 170(b)(1)(A). The property will be used for a related purpose. All parties expect that Donors will retain and display the objects in their home until the museum opens. It is represented that the museum will open in October 1992 or thereabouts. While Donee can not currently display the art, Donee has facilities in which the pieces can be stored. Donee will insure the objects while the pieces remain in Donors' possession.
The issue presented by the request, as amended, is whether Donor's contribution of the art objects constitutes a charitable contribution under section 170(a) of the Code, within the taxable year that Donors execute a deed or gift to Donee.
Section 170(a)(1) of the Code provides, subject to certain limitations, a deduction for charitable contributions described in section 170(c), payment of which is made within the taxable year.
Section 170(c)(2) of the Code states, in part, that the term "charitable contribution" means a contribution or gift to or for the use of a qualified organization.
Section 170(a)(3) of the Code states that payment of a charitable contribution which consists of a future interest in tangible personal property is treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, the property have expired or are held by persons other than the taxpayer.
Section 1.170A-1(b) of the Income Tax Regulations provides that, ordinarily, a contribution is made at the time delivery is effected.
Section 1.170A-5(a)(4) of the regulations provides that a future interest in tangible personal property results when a donor purports to give tangible personal property to a charitable organization, but has an understanding, arrangement, agreement, whether written or oral with the charitable organization which has the effect of reserving to, or retaining in, such donor a right to the use, possession, or enjoyment of the property.
The first issue, under section 170(a)(1) of the Code, is whether the deed of gift will give Donee an interest in the property. Under local law such deeds are effective in transferring personality, therefore, the execution of the deed results in a gift of an interest in property at the time it is executed.
The second issue is whether the property interest that passes under the deed is a present or a future interest for section 170(a)(3) purposes. Pursuant to section 1.170A-5(a)(4) of the regulations, when the circumstances of a purported transfer of a present interest and the understanding of the parties have the effect of giving the donor a right to present enjoyment of the gift of property, a seeming transfer of a present interest may be treated as the transfer of a future interest. In this situation, Donors will retain the art objects until Donee takes physical delivery, and Donee will take possession of at least some of the art objects when the museum opens later in the year. Donee, however, has the right to take the objects at any time after the execution of the deed.
Winokur v. Commissioner, 90 T.C. 733 (1988), acq. 1989-1 C.B. 1, involved the donation of undivided interests in a collection of art. Petitioners executed two deeds of gift by which a museum was given two 10-percent interests in the art. The museum had the right to possess the works for a specific number of days each year. The museum did not take physical possession of the art during either of the 12-month periods following the donations. One question presented was whether the museum's failure to exercise its legal right to have possession for part of each year had the effect of converting the purported present interest to a future interest. The court held that the right to current possession was real, and was all that was required for a present interest to exist.
In this case the museum can take immediate possession, however, unlike Winokur, the museum cannot yet put the property to use. Nevertheless, it can, if its interests require, take and store the objects until the museum opens later in the year. Thus, the understanding and expectations of the parties do not result in a tacit reservation by donor of a present right of possession.
Accordingly, we conclude that Donors' contribution of the art objects qualifies as a charitable contribution, deductible under section 170(a) of the Code, subject to the limitations of section 170.
This letter ruling is directed only to Donors. Section 6110(j)(3) of the Code provides that this letter may not be cited or used as precedent.
No opinion is expressed as to the federal tax consequences of the transaction described above under any provision of the Code other than section 170.
Donors should attach a copy of this ruling to each tax return that reflects the transaction covered by this ruling.
Sincerely yours,
Assistant Chief Counsel (Income Tax & Accounting)
Paul L. Kane
Senior Technician Reviewer
Branch 3
Enclosure: Copy for section 6110 purposes