Restrictions on Charitable Bequests of Art: Recent Ltr. Rul. Paints a Picture

Restrictions on Charitable Bequests of Art: Recent Ltr. Rul. Paints a Picture

Article posted in Estate Planning on 25 September 2002| comments
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Summary

In making a charitable bequest of an art collection, special consideration must be given to whether the imposition of restrictions may unexpectedly cause estate tax. In this article from the September 2002 issue of Estate Planning Journal, Philadelphia attorney Richard Fox reviews Ltr. Rul. 200202032 in which the IRS provides guidance regarding acceptable restrictions.

by Richard L. Fox

Richard L. Fox is an attorney and a partner in the law firm of Buchanan Ingersoll & Rooney, in Philadelphia (www.bipc.com). He is also a CPA and holds a Masters of Law degree in Taxation from New York University School of Law. Mr. Fox's practice areas include income taxation, charitable giving, private foundations, family planning, and trusts and estates. He may be contacted at richard.fox@bipc.com.


RIA Estate PlanningThis article is reprinted with the publisher's permission from ESTATE PLANNING, a monthly journal on strategies for saving taxes, building wealth, and managing assets published by RIA under the WGL imprint. Copying or distribution without the publisher's permission is prohibited. To subscribe to ESTATE PLANNING or other RIA journals please call 800.950.1216 or visit http://ria.thomson.com/. For information on ESTATE PLANNING, click here.


In many cases, individuals with large and valuable art collections ultimately wish to bequeath those collections to art museums so that the works may be exhibited for the public good and enjoyment, while at the same time sheltering the donors' estates from tax liability because of the available estate tax charitable deduction. Donors of art collections, however, often desire to impose certain restrictions on the donee museum in order to ensure that their collections, which are often accumulated over a lifetime, will be maintained and displayed as a cohesive and permanent collection pursuant to certain specified terms and conditions. While placing such restrictions will effectuate the donor's intentions, a question arises as to whether the restrictions will cause the estate tax charitable deduction otherwise available to be less than the actual fair market value (FMV) of the artwork included in the donor's gross estate, thereby unexpectedly triggering potentially substantial estate taxes.

In Ltr. Rul. 200202032,1 the IRS recently concluded that despite the imposition of numerous restrictions on a charitable bequest of an art collection, the allowable estate tax charitable deduction was equal to the full FMV of the artwork includable in the donor's gross estate. In so ruling, the IRS did not apply case law in which restrictions or other limitations imposed on charitable contributions of property were determined to reduce the value of the available charitable deduction. The letter ruling highlights that special consideration must be given to placing restrictions on charitable bequests of art collections, and provides guidance as to the restrictions that the IRS will find acceptable.

Restricted bequests of artwork generally

Restricted bequests of an art collection impose legally binding conditions on the donee art museum regarding the use and disposition of the artwork, typically lasting in perpetuity.2 These may include a variety of conditions, depending on the intentions of the donor. For example, the donor may:

  1. Require that the works of art in the collection be displayed by the museum on a permanent and continuous basis;3
     
  2. Prohibit the sale, exchange, or other disposition of the artwork; or
     
  3. Prohibit or restrict the lending of the artwork.


The donor may also impose requirements regarding such matters as gallery or installation design, display of the collection, scholarly use of the collection, publicity concerning the collection, publication of catalogs, security, and insurance for the collection.

The fact that an art museum is receiving the art as a gift (i.e., for no consideration) does not necessarily mean that a museum will accept a collection of artwork subject to the sought-after donor restrictions. An art museum is a public charity whose primary charitable purpose is to educate the public4 and, in effect, the museum holds its artwork as a trustee for the public at large, subject to a fiduciary obligation to maintain an environment that will advance the museum's educational purposes. The acceptance of an art collection subject to a restriction that it be permanently displayed, for example, could ultimately run contrary to the museum's educational purposes if, at some point in the future, the museum determines that the continued public display of the collection is no longer suitable, the collection is redundant, other artwork in the museum's possession is more appropriate for display, or the museum has changed its focus.5 Further, the museum may find it costly or difficult to comply with restrictions placed on gifts of art.6

In theory, therefore, given its educational purposes and obligation to the public, the museum should not accept donor restrictions unless its board of trustees can determine, in good faith, that such restrictions will not ultimately be inconsistent with the museum's educational purposes7 or unduly burden the museum.8 As a practical matter, the greater the relative importance and magnitude of the collection to the particular potential donee museum, the more likely it is that the museum will accept the restrictions sought to be imposed by the donor.9

Facts of Ltr. Rul. 200202032

In Ltr. Rul. 200202032, an individual owned a collection of paintings, drawings and watercolors, consisting of masterpieces of impressionism and post-impressionism. Under the individual's will, the entire collection was to be given to a world-renowned art museum subject to the museum's agreeing to maintain and display the collection pursuant to specified terms and conditions.

The agreement did not prohibit the museum from selling the contributed artwork,10 but if, for whatever reason, the museum did sell, exchange or otherwise dispose of any works of art in the collection, it was required to acquire other examples of works of art that were typified by and consistent with the spirit of the collection and were of a value substantially equal to the value of the deaccessioned work of art in the collection. Similarly, any insurance proceeds paid for the loss, damage, or destruction of any work in the collection were required to be used by the museum to repair the work or, if the repair was not deemed advisable by the museum, to acquire one or more examples of works of art that were typified by the collection and consistent with the spirit of the collection.

The agreement imposed the following additional restrictions:11

  1. The museum was required to maintain all the works in the collection in a first-class condition in accordance with the conservative and preservative standards for comparable works of art in internationally recognized museums and to insure all of the works of art under its standard fine arts policy or policies in accordance with its customary practices covering its collections.
     
  2. The museum was required to maintain appropriate security for all the works of art in the collection.
     
  3. All the works of art in the collection were required to be exhibited on a permanent12 and continuous basis to the public during the museum's normal operating hours in accordance with standard operating policies. However, works of art could be removed from public display for such periods of time as may be appropriate for preservation, conservation, building renovation, photography, or scholarly examination.
     
  4. All the works of art in the collection were required to be exhibited together in a coherent and integrated manner, except that works may from time to time be exhibited on a brief, temporary basis in special exhibitions within the museum.
     
  5. All the works of art in the collection were required to be continuously exhibited in gallery space in a specified area of the museum, and the entrance or entrances to such gallery space housing the collection had to prominently identify the name of the collection.13
     
  6. Each work of art in the collection was required to bear an appropriate plaque or sign which identifies the name of the work of art and that it is part of the named collection.
     
  7. The credit line for all reproductions of any works of art in the collection was required to identify the name of the collection.
     
  8. The museum was required to take all reasonable steps to assure that the identification and credit line obligations were observed by all persons and entities.
     
  9. The museum could loan works of art in the collection on a temporary basis in accordance with its standard operating policies.


The agreement expressly stated that the museum could not be divested of its ownership of the collection and that neither the donor, his estate, nor his heirs or legatees had any reversionary interest in the collection.

The issue in the ruling: The value of the estate tax charitable deduction in light of the restrictions

If a decedent owns an art collection upon his death, the value of the collection will be included in his gross estate under Section 2033 based on the FMV of the collection. Under Section 2055(a)(2), the value of the taxable estate is determined by deducting from the FMV of the gross estate the amount of all bequests, legacies, devises, or transfers to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art.14 "Fair market value" for the foregoing purposes is based on the price at which the collection would be sold between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the facts.15

In the typical case, a decedent owning an art collection has unfettered ownership rights in the collection immediately prior to death. He is free to sell the collection, donate it to charity, lend the collection to others, or use the collection for any other intended purposes, without regard to any limitations or conditions as to its use or display. In such a case, the value of the collection for purposes of inclusion in the gross estate should be no less than an amount based on its highest and best use16 under the hypothetical willing buyer/willing seller standard.

If a bequest of an art collection is made to a museum wholly without restriction (i.e., the decedent transfers all the ownership rights that he had in the property immediately preceding his death), it is clear that the estate tax charitable deduction under Section 2055(a)(2) will equal the amount included in the gross estate. If, however, as part of a testamentary plan, a decedent imposes restrictions on the collection under his will or some other testamentary arrangement, the decedent has transferred to the museum something less than what he held upon his death. The issue in such a case is whether, as a result of those restrictions, the available deduction under Section 2055(a)(2) should be less than the amount included in the gross estate under Section 2033.17 An affirmative answer could cause a catastrophic result.

Example. An art collection owned by a decedent, having an FMV of $50 million, is bequeathed to an art museum, subject to various restrictions on its use, display and ownership, as set forth in the decedent's will. If the imposition of restrictions on the transfer of the art to the museum is considered, for example, to reduce the available deduction under Section 2055(a)(2) to $40 million, the decedent's taxable estate would include $10 million attributable to the collection. Assuming a 50% marginal estate tax rate, the bequest of the art collection to the museum would subject the estate to a $5 million estate tax that was not anticipated.

Effect of restrictions on valuation of charitable donations

There are a number of rulings as well as case law in the income tax18 and estate tax context where the imposition of restrictions or other limitations imposed on charitable contributions of property caused the deduction otherwise available to be less than the unrestricted FMV of the property contributed.19 In Rev. Rul. 85-99,20 an agricultural college sought to acquire a certain parcel of land to use in connection with its operations in farming research and development of new farming techniques. Although the highest and best use of the contributed property, if unrestricted, would have been for a more valuable use than as agricultural land, the owner contributed the land under a deed of gift that carried a restrictive covenant providing that the land could be used only for agricultural purposes.

The IRS stated that property that is encumbered by some restriction or condition limiting its marketability or use must be valued in the light of such limitation. Thus, the IRS ruled that the amount of the taxpayer-donor's income tax charitable contribution deduction was the FMV of the property at the time of the contribution determined in the light of the restriction placed by the donor on the use of the property, rather than the property's higher unrestricted value.21 Similarly, in Ltr. Rul. 8641017, the IRS concluded that for purposes of determining the value of land contributed to charity subject to various deed restrictions as to mining and subsurface extraction, the amount of the income tax deduction must be "determined in light of the restriction placed by the donor on the use of the property."

In Silverman,22 the Tax Court was faced with an issue involving the valuation of 148 paintings for income tax purposes contributed by an individual over a five-year period to 22 different organization, three of which were art museums and the rest were generally colleges. Each gift of artwork was subject to a condition that the donee organization not dispose of the paintings for a three-year period.

The court agreed with the taxpayer's position that a restriction against the sale or disposition of a painting for a fixed period of time is not of as great importance as a like restrictions on securities or other property of fluctuating value. Nevertheless, the court held that such a restriction was of more than negligible significance and, consequently, was taken into account in the court's final determination of the amount of the available contribution deduction.23 A number of factors specific to the paintings in the Silverman case may have influenced the court's decision, making the precedential value of this case questionable: (1) the paintings were purchased for relatively nominal amounts and were painted by young living French artists; (2) the contributed paintings were largely unknown in the U.S.; (3) the taxpayer claimed deductions for the value of the paintings well in excess of the approximate costs of the paintings, although the paintings were contributed within 21 months of purchase;24 and (4) the large majority of the recipient charities were not art museums.

In Ahmanson Foundation,25 an estate tax case, the decedent owned all the stock of a company. While not explicitly imposing restrictions, the decedent transferred only nonvoting shares to charity, thereby transferring stock subject to restrictions as to voting rights. By severing the voting power of the stock from its economic entitlement, and giving only the economic entitlement to charity, the decedent, in effect, reduced the value of the stock actually passing to the charity.

The court held that, for estate tax inclusion purposes, the nonvoting shares should be valued under Section 2033 based on the decedent's controlling interest in the company--i.e., determined based on the decedent's ownership of both the voting and nonvoting shares. In contrast, the court found that the charitable deduction under Section 2055(a) should be limited to the lesser value of the nonvoting shares actually passing to charity. Consequently, the amount included in the gross estate for the nonvoting shares was held to be greater than the available estate tax charitable deduction for those same shares under Section 2055(a).26

The court reasoned that "[t]he statute does not ordain equal valuation as between an item in the gross estate and the same item under the charitable deduction. Instead, it states that the value of the charitable deduction shall not exceed the value of the transferred property required to be included in the gross estate."27 In support of its holding, the court observed that the purpose of the charitable deduction is to encourage gifts to charity and given that purpose, "it seems doubtful that Congress intended to give as great a charitable deduction when the testamentary plan diminishes the value of the charitable property as it would when the testamentary plan conveys the full value of the property to the charity intact."

The court emphasized that when the valuation would be different depending on whether an asset is held in conjunction with other assets, the gross estate must be computed as a block, but the valuation of these same sorts of assets for purposes of the charitable deduction must be based only upon what is actually received by the charity--"a principle required by the purpose of the charitable deduction."28

The result in Ltr. Rul. 200202032

In Ltr. Rul. 200202032, the IRS, citing Ahmanson Foundation and various other cases,29 stated that under certain scenarios, the value of property passing to a charity under Section 2055 may not be the same as the amount included in a decedent's gross estate under Section 2033. The IRS found, however, that the restrictions imposed on the contribution of the art collection did not fall under any of those scenarios. As a result, the IRS ruled that the amount of the charitable deduction under Section 2055 was equal to the amount includable under Section 2033.30

The IRS identified three factors under the terms of the agreement in support of its ruling: (1) the museum could not be divested of its ownership of the collection;31 (2) the only restriction on the sale of works of art in the collection was that the use of the sale proceeds was limited to the acquisition of works of art that are typified by the collection and are equal to the value of the deaccessioned work of art; and (3) the museum was not prohibited from loaning works of art as long as the loans are made on a temporary basis in accordance with the museum's standard operating policies.

The effect of permanent restrictions on deaccessioning

There is no case law addressing the effect under Section 2055 of a permanent restriction on the deaccessioning of artwork by a museum.32 Although Ltr. Rul. 200202032 did not specifically involve this issue, the clear implication of the ruling is that a permanent restriction on the deaccessioning of artwork could result in a valuation issue under Section 2055.33 The most appropriate result, however, is that where a permanent restriction on the deaccessioning of artwork is, in fact, accepted by a museum,34 such a restriction should not, as a matter of law, affect the amount of the deduction otherwise available under Section 2055.35

The acceptance of the collection in such a case is indicative of the position of the museum's board of trustees that owning the collection, even subject to a permanent restriction on sale, furthers the museum's long-term educational purposes and is otherwise in the museum's best interests. To reduce the amount of the available estate tax charitable deduction in such a case would, in effect, make the IRS or the courts the ultimate arbiter of those restrictions that can be permissibly imposed on charitable bequests of artwork--an issue clearly better left to the judgment of the museum's board of trustees.

Unlike in Ahmanson Foundation, where a noncharitable asset (i.e., shares of nonvoting stock) was contributed to charity, a contribution of artwork involves the very type of property that is directly used by an art museum for its educational purposes.36 Further, contrary to those income tax cases where the restrictions imposed actually prevent the donee charity from using the property contributed for its highest and best use, a restriction on sale does not prevent a museum from using the artwork for display and exhibition--the highest and best use of any piece of art.

As a practical matter, it should be recognized that significant collections of art have, in fact, been contributed to art museums subject to restrictions on deaccession. Placing a limitation on the available deduction under Section 2055 in such a case may discourage such contributions--contrary to the very policy underlying Section 2055 of encouraging charitable bequests of property.37

Conclusion

Individuals contemplating charitable bequests of an art collection should be aware of the potential estate tax risk associated with the imposition of restrictions on a donee museum. Ltr. Rul. 200202032 provides guidance as to those restrictions that the IRS will find acceptable for purposes of the available estate tax charitable deduction under Section 2055. In cases involving significant collections, a private letter ruling should be considered before subjecting the bequest to restrictions.


This article is reprinted with the publisher's permission from ESTATE PLANNING, a monthly journal on strategies for saving taxes, building wealth, and managing assets published by RIA under the WGL imprint. Copying or distribution without the publisher's permission is prohibited. To subscribe to ESTATE PLANNING or other RIA journals please call 800.950.1216 or visit http://ria.thomson.com/journals/. For information on ESTATE PLANNING, click here.


  1. Although a private letter ruling is a written statement issued by the National Office of the IRS "which interprets and applies tax laws to a specific set of facts," a letter ruling may not be relied upon by taxpayers other than the one to whom it is issued. Reg. 601.201(a)(2). Subsequent to Ltr. Rul. 200202032, the IRS issued two identical rulings, Ltr. Ruls. 200223013 and 200223014, which reached the same conclusion in the context of the restrictions at issue in those rulings.back

  2. Perpetuity in the case of a tangible object of art is obviously limited to the life of the particular work of art. In one case highlighting the particular vulnerability of works of art, Harvard University accepted from the artist Mark Rothko five huge murals that he created, subject to a condition that they were not to be removed and were never to be sold. Within a fairly short time thereafter, the murals began to change colors and fade as a result of exposure to sunlight and instability in the artist's materials. To salvage the art, the murals were ultimately removed and stored under controlled conditions.back

  3. As a result of such a requirement, works of art could not, for example, be placed in storage, with the gallery space then being available to display other works of art.back

  4. It is assumed, for purposes of this article, that the donee art museum is a Section 501(c)(3) organization, classified as a public charity under Section 509(a).back

  5. See, e.g., Wilstach Estate, 1 Pa. D & C 2d 197, 207 (1954) ("An art museum, if it is to serve the cultural and educational needs of the community, cannot remain static. It must keep abreast of the advances of the times like every other institution whose purpose is to educate and enlighten the community").back

  6. The gift of the Reves Collection to the Dallas of Museum of Art, for example, required that the museum build an exact replica of a French villa owned by the donor and that the collection be displayed as it appeared in that villa. According to one newspaper article, the $6 million that the museum spent to build the villa could arguably have bought better paintings in the open market. See Sokolov, "Art: Wendy's Villa in Dallas," Wall Street J. (1/29/86).back

  7. The Code of Professional Ethics promulgated by the International Council of Museums provides that with respect to offers of gifts: "Offers that are subject to special conditions may have to be rejected if the conditions proposed are judged to be contrary to the long-term interests of the museum and its public." 5.4 ("Conditional Acquisitions and Other Special Factors").back

  8. See, for example, "Power Plays in the Galleries," U.S. News & World Rep't (8/1/88), describing the restrictions rejected by the Los Angeles County Museum of Art that were sought to be imposed on a proposed contribution of artwork by Armand Hammer. According to this article, the proposed restrictions required the removal of other donors' names from the galleries where his works would be hung, a special curator for the collection having to report to the Hammer Foundation rather than to the museum's director, and a full-length portrait of Hammer to be permanently exhibited at the entrance to wing where the collection would be displayed. Further, "none of the paintings--even those widely acknowledged to be second-rate--could ever be sold."back

  9. For an excellent analysis of issues related to the acceptance of restricted gifts of art by a museum, see Malaro, "Restricted Gifts and Museum Responsibilities," 18 J. Arts Management and L. 41 (1988). In this article, the author concludes that the "imposition of permanent restrictions on the utilization of collections strikes at the very heart of the museum's educational work" and that the "acceptance of such restrictions by museums is in conflict with basic educational goals." Id. at 67. Notwithstanding this conclusion, there would appear to be a place for permanently restricted gifts of artwork because, in practice, museums are generally able to strike a balance between their educational goals and the restrictions sought to be imposed by donors. Of note, in this regard, is the fact that the National Gallery of Art has a self-imposed policy against deaccessioning of contributed artwork. Another excellent article on this topic is Sare, "Art For Whose Sake? An Analysis of Restricted Gifts to Museums," 13 Columbia-VLA J. L. and the Arts 377 (1989).back

  10. The agreement did, however, contain precatory language indicating that it was the donor's hope and desire that none of the works of art in the collection be sold, given, loaned, exchanged or otherwise disposed of by the museum, so as to ensure the continued public enjoyment of the collection in perpetuity and to retain the spirit of a body of works of art that the owner had collected over a lifetime. Precatory language expresses the wishes of the donor, whereas mandatory language imposes a legally enforceable obligation. Certain details underlying Ltr. Rul. 200202032 that are not specifically set forth in the ruling are known to this author due to his involvement in obtaining the ruling on behalf of the specific taxpayer to whom the ruling was issued.back

  11. Of note is that, after the donor's death, the agreement conferred standing upon a private foundation previously created by the donor to enforce the provisions of the agreement. Typically, only the state attorney general and someone having a "special interest" in a charitable organization have standing to enforce charitable restrictions placed on charitable contributions. See, e.g., Valley Forge Historical Society v. Washington Memorial Chapel, 426 A.2d 1123 (Pa., 1981); Miller Estate, 110 A.2d 200 (Pa., 1955). A person whose only interest with respect to the charitable organization is the same as that held in common with other members of the general public will not have standing to bring such a proceeding. Weigand v. Barnes Foundation, 374 Pa. 149, 97 A.2d 81 (1953). The purpose of this restrictive rule is to protect the trustees or directors of the organization from frequent suits and harassing litigation perhaps based only on cursory investigation and brought by irresponsible parties.back

  12. In Morgan Guaranty Trust Co. of N.Y. v. The President and Fellows of Harvard College, No. E. 1855 (Mass. Probate Ct. for Worcester, 12/20/83), the court had to interpret a restriction requiring that the donated work be on "permanent exhibition." The court held: "'Permanent exhibition' ... means readily accessible to anyone desiring to examine the art objects under such reasonable rules as the museum may make ... [It] includes display ... in public galleries, study-display areas or in other facilities available to the public upon reasonable request. The term 'permanent exhibition' does not prohibit loans to other museums ... [and] does not prohibit removal of art objects for gallery renovation, photography, preservation, cleaning or scholarly examination." Obviously, it is best to have definitions set forth in an agreement, rather than to leave such matters to the interpretation of the courts.back

  13. The name of the collection is the name of the donor, followed by the word "collection."back

  14. Bequests to art museums classified under Section 501(c)(3) are eligible for charitable deduction treatment under Section 2055(a)(2).back

  15. Reg. 20.2031-1(b).back

  16. An important factor in determining FMV is the highest and best use to which the property can be put. H.R. Rep't No. 94-1380, 94th Cong., 2d Sess. 21, 1976-3 (Vol. 3) CB 735, 755.back

  17. A similar issue could be presented for gift tax purposes with respect to an inter vivos gift of art; the question would be whether the charitable gift tax deduction under Section 2522 could be less than the amount of the taxable gift under Section 2503. The effect of restrictions on valuation for tax purposes is also addressed in the articles cited in note 9 supra.back

  18. Reg. 1.170A-1(c) provides that the amount of the deduction for the contribution of property is the FMV of the property at the time of the contribution.back

  19. In many cases, the existence of restrictions will produce intended and favorable results for estate and gift tax purposes. For instance, where limited partnership interests in a family limited partnership are transferred to the next generation, substantial estate and gift tax valuation discounts may be available because, for example, the transferred interests cannot be sold to third parties and are not subject to redemption.back

  20. 1985-2 CB 2.back

  21. For income tax purposes, the Regulations provide that a "qualified appraisal" must include the terms of any agreement or understanding that "restricts temporarily or permanently a donee's right to use or dispose of the donated property." Reg. 1.170A-13(c)(3)(ii)(D)(1).back

  22. TCM 1968-216.back

  23. The court stated that the three-year prohibition on sale "certainly had an adverse effect on fair market value."back

  24. Query whether the court would have made a similar finding if the paintings had comprised well-known works of art collected over the taxpayer's lifetime and contributed to one art museum. For other income tax cases dealing with the effect of restrictions on charitable contributions, see Murphy, TCM 1991-276 (contribution of rock sculpture subject to two-year restriction on transferability); Cooley, 33 TC 223 (1959), aff'd per cur. 283 F.2d 945, 6 AFTR2d 5940 (CA-2, 1960) (charitable deduction was limited to cost basis because cars contributed to charity were never available for resale by the taxpayer); Deukmejian, TCM 1981-24 (grant of deed to charity restricted for open space and public utility purposes resulted in a deduction limited to basis).back

  25. 674 F.2d 761, 48 AFTR2d 81-6317 (CA-9, 1981).back

  26. A similar result has been reached in the context of the marital deduction where the allowable deduction under Section 2056(a) was limited to the value of a minority block of shares passing to the surviving spouse, but a greater value was included in the gross estate based on the decedent's controlling block of shares. See Estate of DiSanto, TCM 1999-421 ("The value of the marital deduction for a devised interest in stock of a closely held corporation equals the value of the interest that passes to the surviving spouse").back

  27. The latter sentence contained in this quote is a reference to Section 2055(d), which provides that the amount of the deduction under Section 2055 must not exceed the value of the transferred property required to be included in the gross estate.back

  28. In this regard, the court stated that "[o]therwise ... the testator would be able to produce an artificially low valuation by manipulatively disbursing complimentary assets into the hands of different beneficiaries--only to have those beneficiaries recombine assets in their more valuable arrangements at some later time." In Ltr. Rul. 9530026, Ahmanson Foundation was applied where the decedent owned all the shares of a corporation, consisting of Class A, B, and C shares. The decedent contributed to charity only the Class B and C shares, which lacked many of the rights inherent in the Class A shares. All the decedent's shares were valued for gross estate tax purposes under Section 2033 as if the decedent owned one single class of shares of a corporation. For purposes of the estate tax charitable deduction under Section 2055(a), however, the Class B and C shares were valued based on the lesser rights that those shares possessed.back

  29. The other cases cited were as follows: Estate of Schwan, TCM 2001-174 ; Estate of DiSanto, supra note 26; Deukmejian, supra note 24; and Cooley, supra note 24.back

  30. The IRS also ruled, in the first instance, that the contribution was deductible under Section 2055. Theoretically, if the imposition of significant restrictions on contributed property could be viewed as preventing a charity from using the property for its charitable purposes, an argument could be made that the contribution does not, in the first instance, even qualify for deduction under Section 2055, without regard to any valuation issue (which would then become moot).back

  31. Under Reg. 20.2055-2(b), an estate tax charitable deduction is not allowed if the interest of a charity receiving a charitable bequest could be defeated by the subsequent performance of some act or the happening of some event, unless the possibility of the occurrence of which appears at the time of the decedent's death to be so remote as to be negligible. A similar rule applies in the context of the charitable income tax deduction under Section 170. Reg. 1.170A-1(e). See, e.g., Ltr. Rul. 9303007, where the possibility of a reversion to the heirs or legatees of the donor of an art collection contributed to an art museum was considered to be so remote as to be negligible, therefore not preventing the deductions otherwise available under Sections 170, 2055, and 2522. See also Dean, 224 F.2d 26, 47 AFTR 1341 (CA-1, 1955), where the court, in disallowing an estate tax charitable deduction, held that one chance in 11 that the charity would actually receive the charitable bequest could not be considered so remote a chance as to be negligible. Any restriction placed on a charitable contribution of artwork which provides a possible reversionary interest to the donor's estate or his heirs or legatees should be carefully scrutinized.back

  32. "Deaccessioning" is defined as the process by which an art museum permanently removes and disposes of works in its collections. See Lerner and Bresler, Art Law, The Guide for Collectors, Investors, Dealers and Artists, p. 1448 (2d ed., Practising Law Institute, 1998).back

  33. This is the case because, in support of its ruling, the IRS specifically stated that the "Agreement authorizes the sale of works of art in the Collection and only limits the use of the proceeds of sale to the acquisition of works that are typified by the Collection that are equal to the value of the deaccessioned work of art in the Collection." Further, in dealing with the IRS National Office in connection with Ltr. Rul. 200202032, it was indicated that the IRS may be resistant to issuing a ruling where an agreement prohibits, in perpetuity, a museum from deaccessioning an object of art or from loaning works of art, as such restrictions could, at some future time, conflict with the museum's educational purposes. In a previous private letter ruling involving restrictions on artwork, including prohibitions on deaccessioning, such restrictions were determined to be "incapable of valuation" for estate and gift tax purposes and the IRS ruled that "no allowance will be made on account thereof." Ltr. Rul. 9303007.back

  34. As indicated above, in theory, a museum should not accept donor restrictions unless its board of trustees can determine, in good faith, that such restrictions will not ultimately be inconsistent with the museum's educational purposes or unduly burden the museum.back

  35. This conclusion would not necessarily be applicable where, for example, a collection of artwork is contributed to a charity whose primary purpose is not the public display and exhibition of artwork, in which case a permanent restriction on sale could justifiably result in a Section 2055 valuation issue.back

  36. In addition, unlike in Ahmanson Foundation, where the voting and nonvoting shares at issue came to rest in the hands of different beneficiaries and the charity received only nonvoting shares, a contribution of an art collection results in the entire collection coming to rest only in the hands of the museum.back

  37. But see Malaro, supra note 9, where the author states (in note 52) "that donors, if seriously challenged regarding proposed restrictions, may well withdraw their demands." Note, however, that the judicial policy is in favor of a liberal construction of statutes authorizing deductions for charitable purposes, Bliss, 293 U.S. 144, 14 AFTR 668 (S.Ct., 1934), so that people will be encouraged to make such contributions. Estate of Sternberger, 348 U.S. 187, 46 AFTR 976 (S.Ct., 1955); Benedict, 338 U.S. 692, 38 AFTR 1208 (S.Ct., 1950).back

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