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Tangible Personal Property
Because of its nearly infinite variety, tangible personal property is one of the most interesting types of property contributed to charity. This text defines tangible personal property, reviews the income tax rules associated with its transfer, discusses its compatibility with various planned giving vehicles, and provides guidance for its ownership and disposition.
Supervising Editor: Philip T. Temple, LL.B.
Special thanks to Laurence C. Zale.
Tangible personal property is one of the most interesting types of property contributed to charity because of its infinite varieties. The most common types of tangible personal property contributed to charity include: artworks, jewelry, gems, and other collectibles; motor vehicles, watercraft, and aircraft; livestock, harvested crops, cut timber, and other agricultural products; as well as items of business inventory or equipment.
Tangible personal property is frequently given on an outright basis. However, it can also be transferred through split-interest planned giving vehicles such as charitable remainder trusts.
Tangible Personal Property Defined
The Code and Regulations applicable to charitable contributions do not provide a definition of tangible personal property. IRC §48, which deals with investment credits, defines tangible personal property as:
"[a]ny tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Thus, buildings, swimming pools, paved parking areas, wharves and docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, such property as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which is contained in or attached to a building constitutes tangible personal property for purposes of the credit allowed by section 38."
The only definition of tangible personal property in a charitable context is found in IRS Pub. 5261
"The term tangible personal property means any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars."
The only specific example of tangible personal property for charitable contribution purposes found in the regulations involves a gift of a future interest in a chandelier that is attached to a building.2 If the chandelier is to be severed from the property when the gift becomes complete, it is tangible personal property. Conversely, if the chandelier is to remain attached to the real property that is also contributed, it will also be considered real property.
Tangible personal property are objects that can touched, excluding cash, securities and real estate and is distinguishable from intangible personal property. For example, although currency can be touched, it is considered intangible property unless it has numismatic value as a collectible. Other examples of intangible personal property include patents, copyrights, royalties, installment obligations, insurance and annuity contracts, partnership interests, checks, securities and other negotiable instruments.
Income Tax Considerations
Transfers of tangible personal property present specific and special issues for income tax charitable deduction purposes. Questions to be asked in determining the allowable income tax deduction include:
- Can the property be placed to a use that is related to the charitable donee's tax-exempt purpose; and
- Is the property held by the donor for investment purposes, held primarily for sale to customers in the ordinary course of a trade or business, or held as qualified research property; and
- Is the gift one of a present or future interest in the tangible personal property?
Related Use Rule
It is only where the use of tangible personal property is related (as defined more fully below) to the tax-exempt purposes of the donee charity that the donor is allowed a fair market value deduction for the contribution of that property. Thus, the amount of the available charitable contribution deduction and the percentage limitation applicable to its use depends on the relation between the tangible personal property and the tax-exempt purposes of the charitable donee. Reg. §1.170A-4(b)(3)(i) of the regulations provides:
"(i) In general. The term "unrelated use" means a use which is unrelated to the purpose or function constituting the basis of the charitable organization's exemption under section 501 or, in the case of a contribution of property to a governmental unit, the use of such property by such unit for other than exclusively public purposes. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use. If furnishings contributed to a charitable organization are used by it in its offices and buildings in the course of carrying out its functions, the use of the property is not an unrelated use. If a set or collection of items of tangible personal property is contributed to a charitable organization or governmental unit, the use of the set or collection is not an unrelated use if the donee sells or otherwise disposes of only an insubstantial portion of the set or collection. The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one that would have been unrelated if made by the charitable organization."
The regulations further require the taxpayer to provide proof that the property is in fact not being placed to an unrelated use by the charity, or that it is reasonable to anticipate that the property will not be put to an unrelated use. For example, if an individual donates a painting to a museum and it is of the type normally retained by the museum, it is reasonable for the donor to anticipate, unless he or she has actual knowledge to the contrary, that the painting will not be put to an unrelated use by the donee. Whether or not the object is later sold or exchanged by the donee is immaterial.3>
IRS, in a series of private letter rulings, has given guidance as to when the gift will be deemed one for a related use.
In Ltr. Rul. 7751044, a donor requested a ruling on the contemplated gifts of three sets of lithographs to X museum, Y council and Z Foundation.
The museum wrote it would display the lithographs in the museum or as part of its lending collection and confirmed that such uses would further the public's appreciation of art.
The council wrote that it would use the lithographs in connection with its art program at a year round camp, display the lithographs at its center for retarded children and loan the lithographs to retarded children to display in their homes. The council also confirmed that those uses would further the appreciation of art by the children affected.
The foundation operates a residential facility for retarded children and would, it wrote, use the lithographs for display in art exhibits and for study in its art program. It also confirmed that appreciation of art would be furthered by such use.
IRS ruled that use of the lithographs by each of the above charitable donees would not be unrelated to its exempt charitable purposes and, based on the written statements of the organizations, it was reasonable for the donor to anticipate that the lithographs would not be put to an unrelated use by such organizations.
In Ltr. Rul. 8247062, a donor gave a painting to a retirement center that collected artworks for display in its public areas. In doing so, it believed it enriched and enhanced the lives of the residents and helped provide stimulation by keeping its residents motivated and alert with therapeutic value for the residents by stimulating artistic creativity. IRS ruled that such use of the painting would be related to the exempt function of the retirement center providing care for aged men and women.
In Ltr. Rul. 8204167, a charity organized to educate the public on Judeo-Christian Heritage provided a retreat where families could visit to strengthen and renew their relationships was given a houseboat. The houseboat would be used for meeting purposes and as a lodging facility. IRS ruled that such use was related to the organization's exempt purpose.
In Ltr. Rul. 8016116, a donor donated a rare oriental tree to an organization's botany department. IRS held the gift related to the donee's charitable functions.
In Ltr. Rul. 8143029, a donor gave four pieces of a collection of porcelain art objects to a tax exempt retirement center which would display those pieces in its dining hall and intended to keep them permanently for the benefit of its residents. IRS ruled that those uses were related to the retirement home's purpose of creating a living environment for its residents.
- But a gift of an antique automobile to a college was held to be unrelated because the car was not used by the school but stored in a professor's garage and the college did not offer courses in antique car restoration or like programs. See Ltr. Rul. 8009027.
If appreciated property is considered related to the public charity's exempt purpose, the deduction is based on fair market value and available to the extent of 30% of the donor's contribution base. If property is considered unrelated to the public charity's exempt purpose, the deduction is based on the lesser of its fair market value and its cost basis, and is available to the extent of 50% of donor's contribution base.4
Property Acquired for Passion or Investment
Collectors of tangible personal property are driven by a variety of forces: passion, status, curiosity, financial gain, tax relief. They generally fall into two groups: those who feel an emotional involvement with their collections, and others who view their collections as disposable assets. Some will have both characteristics.
Tangible personal property that is acquired for passion or as an investment is generally considered a long term capital gain asset, if it is held for more than one year. An example is a visual arts collection (or any part of it). Otherwise, the collection "is ordinary income property if 1) the donor created it, 2) the donor received it as a gift from the creator, 3) it is held as inventory by a dealer, 4) its sale would generate short term capital gain because it was held for one year or less."5
Collectors with charitable objectives are entitled to a full market value deduction for donations of tangible personal property provided that "the use by the donee institution must be related to its charitable purposes or functions. If not, the deduction is for cost basis only (or, if less, fair market value."6 Donors who meet the related use rule are allowed "a charitable deduction to full fair market value of the property on the date of the contribution base."7 "Any amount that exceeds the 30 percent limitation may be carried forward for five years, retaining its character as capital gain property."8 "If the contributed collection satisfies the related use rule, the taxpayer may elect to increase the 30 percent limitation to 50 percent of his or her contribution base. However, if that election is made, the amount of the deduction must be reduced by 100 percent of the appreciation in value of the collection."9 Thus, the deduction is limited to the donor's cost basis.
The donation of a visual arts collection to a museum is a related use gift as well as a donation to higher education or to a school that has space dedicated for the display of visual arts and provides art education. Gifts to other charities are appropriate too, but each must meet the above criteria.
For example, a collector has a contribution base of $150,000. He or she contributes a capital gain visual arts collection with a fair market value of $90,000, in which he or she has a cost basis of $40,000, to a museum. If the donation has a qualified appraisal prepared by a qualified appraiser, he or she is allowed a $90,000 deduction, of which $45,000 (30 percent of $150,000) is allowed with a carryover of $45,000.
However, if that visual arts collection is donated to a charity but not related to the charitable purposes or functions of that charity, the collector's deduction will be for a cost basis of $40,000; such a cost which is fully deductible with a 50 percent ceiling, and no carryover.
Here is a comparison between donors holding two long-term assets, stock and tangible personal property, such as a visual arts collection. Both assets have a fair market value of $90,000 and a cost basis of $40,000.
|Maximum Capital Gains
|Capital Gains Tax||$7,500||$14,000|
By donating tangible personal property to charity rather than stock, the donor could save $6,500 of capital gains tax when the asset is sold.
Inventory is not considered a capital asset but, rather, property held by a taxpayer primarily for sale to customers in the ordinary course of a trade or business.10 A "trade or business" generally includes activities carried on for the production of income from the performance or services or the sale of goods.11 Gain from the sale of inventory is considered ordinary income regardless of the owner's holding period.
When inventory property is transferred to a public charity, the donor's charitable deduction is based on the lesser of the property's fair market value and the cost of goods sold (ordinary income property).12 The resulting amount is deductible to the extent of 50% of the donor's contribution base.
For example, artwork contributed by its creator is considered a gift of inventory. Whether the property is placed to a related use by the donee is irrelevant to the determination of the donor's deduction; it is limited to the cost of the materials: canvas, paint, brushes, etc. Contributions of services are not deductible; therefore, the value of the artist's time in completing the work is not deductible. Had the artist paid an assistant to help on the project, however, the amount so paid would be included in the cost of production and could be deducted.
Additional rules apply to ensure the taxpayer cannot claim a double deduction. Specifically, according to Rev. Rul. 55-138, there must be an adjustment to inventory effecting the removal of the donated asset and the costs pertaining thereto from the opening inventory in the year of the gift.
Gifts of Inventory for Care of the Ill, Needy, or Infants
An exception to the normal reduction rules applies to gifts of inventory by C corporations where the charity's use of the inventory is related to its charitable purposes and is solely for the care of the ill, needy, or infants.13 In such case, the corporation can claim a charitable contribution income tax deduction based on the lesser of 1) its cost basis plus 50 percent of the difference between the cost basis and the list price, and 2) 200 percent of cost basis.14 The corporation must obtain a statement from the charitable donee confirming that its use of property meets those requirements.
Qualified Research Property
Another important exception to the normal reduction rule for business inventory exists for gifts of "qualified research property." IRC §170(e)(4) provides a special exception for corporate donors that create and contribute "qualified research property" to an institution of higher education or scientific research. Provided the organization uses the property for research purposes, the corporation can claim a charitable contribution income tax deduction based on the lesser of 1) its cost basis plus 50 percent of the difference between the cost basis and the list price, and 2) 200 percent of cost basis.
Future Interest Rule
A charitable contribution that 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 or those standing in a relationship to the taxpayer described in IRC §§267(b) or 707(b).15
The term "future interest" generally includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. Future interests also include situations in which a donor purports to give tangible personal property to a charitable organization, but has an understanding, arrangement, agreement, etc., 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.16 Outright contributions do not run afoul of the future interest rule as long as the property is physically delivered to the charitable donee.
The application of these rules are illustrated in the regulations by the following examples:
Example 1. On December 31, 1970, A, an individual who reports his income on the calendar year basis, conveys by deed of gift to a museum title to a painting, but reserves to himself the right to the use, possession, and enjoyment of the painting during his lifetime. It is assumed that there was no intention to avoid the application of section 170(f)(3)(A) by the conveyance. At the time of the gift the value of the painting is $90,000. Since the contribution consists of a future interest in tangible personal property in which the donor has retained an intervening interest, no contribution is considered to have been made in 1970.
Example 2. Assume the same facts as in example (1) except that on December 31, 1971, A relinquishes all of his right to the use, possession, and enjoyment of the painting and delivers the painting to the museum. Assuming that the value of the painting has increased to $95,000, A is treated as having made a charitable contribution of $95,000 in 1971 for which a deduction is allowable without regard to section 170(f)(3)(A).
Example 3. Assume the same facts as in example (1) except A dies without relinquishing his right to the use, possession, and enjoyment of the painting. Since A did not relinquish his right to the use, possession, and enjoyment of the property during his life, A is treated as not having made a charitable contribution of the painting for income tax purposes.
Example 4. Assume the same facts as in example (1) except A, on December 31, 1971, transfers his interest in the painting to his son, B, who reports his income on the calendar year basis. Since the relationship between A and B is one described in section 267(b), no contribution of the remainder interest in the painting is considered to have been made in 1971.
Example 5. Assume the same facts as in example (4). Also assume that on December 31, 1972, B conveys to the museum the interest measured by A's life. B has made a charitable contribution of the present interest in the painting conveyed to the museum. In addition, since all intervening interests in, and rights to the actual possession or enjoyment of the property, have expired, a charitable contribution of the remainder interest is treated as having been made by A in 1972 for which a deduction is allowable without regard to section 170(f)(3)(A). Such remainder interest is valued according to section 20.2031-7A(c) of this chapter (estate tax regulations), determined by subtracting the value of B's interest measured by A's life expectancy in 1972, and B receives a deduction in 1972 for the life interest measured by A's life expectancy and valued according to Table A(1) in such section.
Application of Related Use and Future Interest Rules to Charitable Gift Annuities
Transfers of tangible personal property in exchange for an immediate or deferred payment charitable gift annuity are not considered a gift of a future interest because such transfers are considered part outright gift and part sale. Although there are no rulings directly on point, if the property can be placed to a related use by the donee, we presume the donor can claim a deduction based on the related-use percentage limitations as described above. Furthermore, because the gift portion of the transfer is one of a present interest, the income tax deduction generated by the transfer can be used immediately by the donor regardless of the timing of the subsequent disposition of the property.
Application of Related Use and Future Interest Rules to Pooled Income Funds and Charitable Remainder Trusts
The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one that would have been unrelated if made by the charitable organization.17 Presumably, because a pooled income fund or charitable remainder trust will not place the property to a related use but, rather, will most likely sell it in due course, such a use normally falls outside the tax-exempt purpose of most organizations.
Special Rule: An income tax charitable contribution deduction may not be available if the charitable remainderman purchases tangible property from the trust and a related individual or entity as described in IRC §267 has direct or indirect control of the recipient tax-exempt organization.18
Gifts of tangible personal property made to a pooled income fund or charitable remainder trust are considered gifts of a future interest. When does the "intervening interest" in tangible property held by such vehicles expire thereby triggering the donor's deduction? With respect to contributions to pooled income funds, the regulations provide two examples.19
Example 6. On December 31, 1970, C, an individual who reports his income on the calendar year basis, transfers a valuable painting to a pooled income fund described in section 642(c)(5), which is maintained by a university. C retains for himself for life an income interest in the painting, the remainder interest in the painting being contributed to the university. Since the contribution consists of a future interest in tangible personal property in which the donor has retained an intervening interest, no charitable contribution is considered to have been made in 1970.
Example 7. On January 15, 1972, D, an individual who reports his income on the calendar year basis, transfers a capital asset held for more than 6 months consisting of a valuable painting to a pooled income fund described in section 642(c)(5), which is maintained by a university, and creates an income interest in such painting for E for life. E is an individual not standing in a relationship to D described in section 267(b). The remainder interest in the property is contributed by D to the university. The trustee of the pooled income fund puts the painting to an unrelated use within the meaning of paragraph (b)(3) of section 1.170A-4. Accordingly, D is allowed a deduction under section 170 in 1972 for the present value of the remainder interest in the painting, after reducing such amount under section 170 (e)(1)(B)(i) and paragraph (a)(2) of section 1.170A-4. This reduction in the amount of the contribution is required since under paragraph (b)(3) of that section the use by the pooled income fund of the painting is a use which would have been an unrelated use if it had been made by the university.
In Example 6, there is no mention of the disposition of the painting by the donee. Arguably, because the income interest is retained in the fund and not in the tangible property, the donor's interest should expire when the fund or trust sells the property to an unrelated party. The Service has finally validated this argument with respect to charitable remainder trusts. In Ltr. Rul 9452026, the taxpayer contributed publicly traded stock and a musical instrument. With respect to the deductibility of the gift of the instrument, the Service states:
Because the musical instrument is tangible personal property, section 170(a)(3) of the Code prevents any deduction for the remainder interest so long as Taxpayer retains an income interest in the musical instrument. However, an income tax deduction would be allowed under section 170(a)(3) when the trustee sells the musical instrument. When the musical instrument is sold, Taxpayer no longer retains an intervening interest in the tangible personal property as contemplated under section 170(a)(3), that is, Taxpayer is only holding an income interest in the sale proceeds from the musical instrument. Accordingly, Taxpayer's intervening interest in the musical instrument is treated as terminated upon its sale.
In its ruling, the Service also cited the previously mentioned Example 6 (applicable to pooled income funds). We surmise the Service would reach the same conclusion with respect to contributions of tangible personal property to pooled income funds.
In addition to this ruling, two earlier rulings are also instructive:
In Ltr. Rul. 8002034 an individual proposed to transfer a farm to a pooled income fund. The donor did not materially participate in farming operations; rather, the property was leased to a tenant in a form of sharecropping arrangement. The donor also proposed to transfer certain livestock, crops, farm equipment, and the indebtedness secured by the farm equipment. In approving the arrangement, the Service ruled that the transfer of debt-encumbered property would be considered a bargain sale and that no deduction would be allowed for the items of tangible personal property until the expiration of the donor's intervening interest in the property.
In Ltr. Rul. 9413020, a taxpayer proposed to transfer "slaughter cattle" and "breeding stock" to a charitable remainder unitrust. The charitable remainderman would serve as the trustee. Once the cattle were transferred to the trust, the trustee would engage the services of an independent agent to sell them. In the meantime, the trustee would make arrangements to have them cared for and fed strictly on a maintenance basis (i.e., no attempt would be made to fatten them for market and, therefore, increase their value).
The trustee would use a similar procedure for disposing of any farm machinery it decided to sell. Thus, it was represented that the trust would not engage in the regularly carried on sales of farm items as a dealer, and that the farm items to be sold would not be held by the unitrust for sale to customers in the ordinary course of business. The donor would claim no income tax charitable deduction for any contribution of cattle, crops, or farm machinery to the trust. It was also represented that the sales of donated farm items would not involve any property that was debt-financed under section 514 of the Code.
The Service ruled as follows:
- The trustor will not recognize any gross income on the transfers of farm items to the unitrust.
- Costs and expenses that the donor has incurred in raising slaughter cattle and crops transferred to the unitrust and that are properly deducted under section 162 of the Code or another Code section are allowable as deductions in the year such expenses are paid or incurred, whether or not that year is the year in which such items are transferred to the unitrust.
- The trustor will not recognize any gross income on sale by the unitrust of farm items the donor has transferred to the unitrust.
- The unitrust will not have unrelated business taxable income under sections 511 through 514 of the Code on sales of farm items the trustor has transferred to it.
- Annual distributions from the unitrust to the income recipients will have income tax characteristics, in the hands of the recipient, determined under section 1.664-1(d)(1) of the regulations.
- The trustor will not recognize any self-employment income under section 1402 of the Code on the transfers of farm items to the unitrust or on sales by the unitrust of farm items the donor has transferred to the unitrust. No portion of any annual distribution from the unitrust to the trustor / income recipient will be included in computing his self-employment income under section 1402 of the Code.
Gifts of Undivided Interests
The future interest rule does not apply to contributions of an undivided fractional interest in tangible personal property. For example, an individual contributes an undivided one-quarter interest in a painting with respect to which the donee is entitled to possession during three months of each year. The transfer is evidenced by a formally executed and acknowledged deed of gift. In such case, the donor is entitled to a charitable contribution deduction for the one-quarter interest in the painting provided the period of initial possession by the donee is not deferred for more than one year.20
Specific Assets Require Special Consideration
Objects that can be touched, excluding cash, securities, and real estate, are tangible personal property. Copyrights or business goodwill, contrariwise, are intangible personal property. Since many objects are tangible personal property (some with copyrights or business goodwill), Internal Revenue Code rules dictate that certain objects require specific and special consideration.
Artworks can be broadly described as objects with visual content that elicit an aesthetic response from viewers, while providing a social function. Examples include fine art (such as paintings, drawings, prints, sculpture, photography), decorative art, and collectibles. A collection (or any part of it), without its copyright, can be contributed to a related use charitable organization and qualify for a full fair market value deduction.
The Copyright Act of 1976, which became effective January 1, 1978, differentiates between original artwork and its copyright. "Section 202 of the Copyright Act provides the following: Ownership of a copyright, or any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied."21 Therefore, an original work of art and its copyright are considered separate property for gift and estate tax deduction purposes.22 However, the transfer of artwork to charity with the copyright retained by the donor constitutes a nonqualified gift of a partial interest and therefore, produces no income tax deduction.23
Jewelry and Gems
Jewelry and gems vary widely and are generally thought of as decorative, precious and long lasting. Occasionally, they also serve as sculptural statements of importance. "Jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized jewelry appraiser. The appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is now in fashion. If not in fashion, the possibility of having the property redesigned, re-cut, or reset should be reported in the appraisal. The stone's coloring, weight, cut, brilliance, and flaws should be reported and analyzed. Sentimental personal value has not effect on FMV. But if the jewelry was owned by a famous person, its value might increase."24 Thereafter, a collection (or any part of it) can be contributed to a related use charitable organization and qualify for a full fair market value deduction.
Coins have two distinct characteristics that enhance their value. First, coins function as money, are mass-produced and widely available. Second, they are issued with the image of a ruler, a leader or an important figure, giving them the status of collectible public art.
Therefore, it's important to differentiate between coins that are currency and those that are tangible personal property. Coins that are tangible personal property can be contributed to a related use charitable organization and qualify for a full fair market value deduction.
In Rev. Rul. 69-63, a taxpayer transferred a collection of rare coins and cash to a predecessor of a charitable remainder trust. The ruling held that since the collection of rare coins was not held by the donor primarily as a medium of exchange but instead had acquired added value as collector's items, the collection is tangible personal property. On the other hand, the cash was not deemed to be tangible personal property. For purposes of IRC §170(f), the present value of the remainder interest in the cash is deductible as a charitable contribution in the year of transfer to the trustee whereas the deduction attributable the coin collection would have to await the expiration of the donor's intervening interest in the trust.
Conversely, in Ltr. Rul. 9225036 the Service ruled privately that South African Krugerrand gold coins are more akin to money than to coins that have value as collector's items. Krugerrands are one of the best known types of gold bullion coins and, therefore, have no numismatic value. Using the rationale of Rev. Rul. 69-63, the IRS concluded that Krugerrands are equivalent to cash and, therefore, and not tangible personal property within the meaning of IRC §170(a)(3). However, in dealing with a similar gift on a later ruling request (that became moot and was withdrawn when the taxpayer died) the Service appeared to take a different tack.
Cars, Boats and Aircraft
Donors should consult market guides to determine the approximate FMV of cars, boats and aircraft. Each guide will provide high and low values, with additions for extra equipment and superior condition. However, "the prices are not official, and these publications are not considered an appraisal of any specific donated property."25 To determine FMV, donors should have their cars, boats and aircraft appraised by experts that specialize in this area. After careful planning, contributions can be made to related use charitable organizations and qualify for a full fair market value deduction.
Grazing animals are livestock. Reg. §1231 defines "livestock" as including cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. However, it does not include poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, reptiles, etc. This distinction is important because "livestock" held by the taxpayer for draft, breeding dairy, or sporting purposes may qualify for long-term capital gain treatment upon sale, exchange, or involuntary conversion. Specifically, livestock will qualify for IRC §1231 treatment if held:
(i) for 24 months or more from the date of acquisition in the case of cattle or horses, or
(ii) for 12 months or more from the date of acquisition in the case of such other livestock.
Therefore, a charitable contribution of qualified livestock to a related use public charity may qualify for full fair market value deduction.
Crops are plants that can be grown and harvested or picked to be consumed or sold. To determine if crops are tangible personal property will depend on whether the crop has been harvested.
Reg. §1231-1(a) provides that "unharvested" crops sold with the land on which the corps are located (and which has been owned by the seller for more than one year) are considered long-term capital gain property. If the sale results in a net capital loss, such loss is treated as an ordinary loss. The length of time for which the crop, as distinguished from the land, is held is immaterial. Accordingly, for charitable deduction purposes, a contribution of land containing unharvested crops to a public charity is based on the fair market value of the land and crops on the date of contribution and is subject to the 30% deduction limitation. The use to which the charitable donee places the crops is immaterial to the donor's deduction because they are not considered tangible personal property. However, income from the crops could be considered unrelated business income under IRC §512 when sold by the charitable organization. For this reason, land laden with unharvested crops may be unsuitable for transfer to a charitable remainder trust because the presence of any unrelated business taxable income will cause the trust to lose its tax-exempt status.
If harvested crops are contributed to charity, they are considered tangible personal property. Crops are most often produced for sale to customers in a trade or business. As such, they are considered ordinary income property. The deduction for a contribution of ordinary income property to a public charity is limited to the lesser of fair market value or cost basis, and is subject to the 50% deduction limitation regardless of whether or not they placed to a related or unrelated use by the charitable donee.
A contribution of unharvested crops is considered a gift of a futures contract. The donor's deduction is, therefore, limited to cost basis.
The harvesting or contribution of crops by an operating farmer does not cause realization of income. However, the receipt by a landlord of crops pursuant to a sharecropping agreement is ordinary income when received. However, the sharecropper can contribute the crops and receive a charitable contribution deduction for their fair market value.26
Timber can be land covered with trees and shrubs or the wood of trees cut and prepared for use as building material. It can also function as a beam or post made of wood. Contributions of timber, therefore, represent one of the most complex of all property gifts. Factors that determine the tax treatment of charitable contributions of timber include whether the timber is standing and being contributed with the land, or has been cut and is being contributed separately. Likewise, it is important to distinguish whether the donor holds the timberland primarily for investment purposes or is engaged in the sale of timber to customers in the ordinary course of a trade or business.
Timberland Held Primarily for Investment Purposes
Standing timber on land held by a taxpayer primarily for investment purposes is considered a capital asset.
If timberland and its standing timber, held for investment long-term, are contributed to charity, the donor's deduction is based on the fair market value of the entire property, subject to the 30% deduction limitation. Because standing timber itself is not considered tangible personal property, the use to which the charitable donee places the property is irrelevant for purposes of determining the donor's income tax charitable deduction. It should be noted, however, that if the charitable donee sells timber from the contributed property, income from the sale might, depending on the nature of the organization, be considered unrelated business income.27
If a donor, who is not engaged in the timber business, contributes cut timber from land held for investment purposes, the timber is considered tangible personal property. Provided the timber has been held long-term by the donor and is contributed to a public charity that places it to a related use, the donor's deduction is based on the fair market value of the timber on the date of contribution, subject to 30% limitation. If, however, the property has not been held long-term or the timber is contributed to an organization that places it to an unrelated use, the donor's deduction is limited to the lesser of the donor's adjusted basis allocable to the timber or its fair market value, subject to the 50% limitation.
Timber Held for Sale to Customers
The rules applicable to taxpayers engaged in the timber business are extremely complex and can vary depending on state law. Issues including but not limited to transfers of timber rights, IRC §631(a) sale elections, reforest station amortization recapture, and state environmental laws are beyond the scope of this text. Those interested in contributions of timber should consult with tax and legal counsel that specialize in this area.
Gift Planning Considerations
While unique income tax rules apply to contributions of tangible personal property, there are also non-tax issues that donors and charities should consider prior to making or accepting such gifts.
Perhaps the most important issue is whether or not the gift property meets the related use rule. The rule requires that the contribution of tangible personal property to a charity must be related to its purpose or function to allow the donor a full fair market value deduction (e.g., a museum receives a collection of paintings, or a university, with an art department, receives a collection of photography).
If the contribution does not meet the related use rule, the donor receives a cost basis deduction (e.g., a church receives a sailboat, or a hospital receives a collection of jewelry).
Many organizations are offered gifts of tangible personal property related to their purpose or function. But unlike donors, they may be unfamiliar with or intimidated by the type of property offered; and ill prepared to accept, care for or dispose of it. To assuage those concerns, the following questions provide a starting point for organizations to determine the appropriateness of a proposed gift of tangible personal property:
Does the property comply with the related use rule?
Is there a qualified appraisal, from a qualified appraiser, for contributions of property valued over $5,000?
How will ownership of property by the donor be confirmed; its copyright and title conveyed?
Will the charity be subject to out-of-pocket expenses associated with the property's display, security, storage, insurance, conservation, copyright and sale?
Should the charity keep the property, sell it, or use it for a gift-planning vehicle?
Compatibility of Tangible Personal Property with Remainder Gift Vehicles
Previous sections discussed the application of the income tax deduction rules to transfers of tangible personal property to charitable remainder trusts, pooled income funds, and charitable gift annuities. Are there non-tax issues that make one vehicle more attractive or compatible than another?
Charitable Gift Annuity
There are no restrictions that prohibit the transfer of tangible personal property in exchange for an immediate or deferred payment charitable gift annuity; (except in New York where a charity is specifically prohibited by the Insurance Law from accepting such property for an annuity) however, the charitable organization will not likely accept such property if it believes the property may not be accurately valued or easily sold. This is due to the fact that the charitable organization is obligated to make annuity payments regardless of whether or not the transferred property is sold. If the charity ultimately sells the gift property for less than the amount on which the annuity payments are based, the gift to charity will be reduced, eliminated, or result in a net loss. As an alternative, the charity may accept the property at a conservatively lower value that it believes will compensate it for market risk and then sell it in due course.
Pooled Income Fund
There are no restrictions that prohibit the transfer of tangible personal property to a pooled income fund; however, as with charitable gift annuities, there are circumstances that may lead the managing charity to decline such gifts. Specifically, if non-income-producing property is transferred to a pooled income fund, the income payable to other fund participants will be diluted. Accordingly, if the charity does not believe the transferred property can be readily converted to cash or that it may not be accurately valued, accepting such a gift would place other fund participants at risk. Similar to the gift annuity, the charity may accept the property at a conservatively lower value that it believes will compensate it for this risk, purchase it from the fund, and then sell it in due course.
Charitable Remainder Trusts
A charitable remainder trust may be the ideal vehicle to accept tangible personal property. In general, a "flip" unitrust can accept the property and not be required to make any income distributions until the property is sold, at which time the trust converts from a net income to a standard payout format.
As an alternative, a net income unitrust (with or without make-up provision) can also insulate the trustee from having to make distributions from the trust while it holds non-income producing property. However, the net income unitrust is a less attractive alternative to the flip unitrust from the perspective of the trustee's ability to reinvest the proceeds from the sale of the property to produce trust accounting (distributable) income. For a detailed discussion of this issue, see Charitable Remainder Trusts.
A standard unitrust may also be a suitable candidate to accept tangible personal property provided the property can be quickly converted to cash or the trust possesses other liquid assets with which to make income distributions until the property is sold. As an alternative, if other liquid assets are unavailable, the donor can make timely additional cash contributions to the trust in the amount of the required income distributions until the tangible property is sold. These additional contributions are returned to the donor in satisfaction of the trust's payment obligation. However, this method may be unnecessarily burdensome from an administrative standpoint.
The least attractive type of charitable remainder trust for use with tangible personal property is the charitable remainder annuity trust. The reason is that such trusts are unable to receive additional contributions. If the trust is unable to sell the property and has no other assets with which to make distributions, the trustee will be forced to distribute an undivided fractional interest in the property to the income recipient. Such distributions are treated for income tax purposes as though the trust had sold that portion of the property and distributed cash. If the property is highly appreciated, this results in significant phantom income to the income recipient.
Gifts of Remainder Interests in Tangible Personal Property Not in Trust
It is clear from the previous discussions that a gift of a future interest in tangible personal property is not deductible for income tax purposes until the expiration of all intervening interests held by the donor. In the case of a gift of an irrevocable remainder interest in such property, if the measuring term of the agreement is based on the donor's life, not only will no income tax deduction be generated, the transfer will also be considered a taxable transfer for gift and estate tax purposes.
In Rev. Rul. 76-165, a taxpayer contributed a remainder interest in his personal residence to charity with a retained life estate. Included with the gift were all of the household furnishings. The ruling held that since the remainder interest in the household furnishings transferred to charity after the death of the noncharitable life tenant was not a remainder interest in a personal residence or farm or an undivided portion of the decedent's entire interest in property, and since it was not a remainder interest in a charitable remainder annuity trust or in a charitable remainder unitrust or in a pooled income fund, no estate tax charitable deduction was allowable under section 2055(a) of the Code in respect of the household furnishings. As an alternative, donors considering such arrangements should do so by bequest.
Gifts of Tangible Personal Property to Charitable Lead Trusts
The use of tangible property to fund a charitable lead trust must be accomplished with care. For instance, if the property is non-income-producing and highly appreciated, either the trust or the grantor will pay capital gains tax on the sale. However, certain tangible personal property may be suitable if it produces a steady stream of cash flow in order to fulfill the trust payments to charity. In addition, tangible personal property is ordinarily a "hard-to-value" asset. Therefore, a charitable lead annuity trust may be preferable. In all events, careful analysis of all issues must be accomplished prior to any such funding.
Guidance for Lifetime Ownership of Tangible Personal Property and its Disposition
"Art is long, and Time is fleeting,
And our hearts, though stout and brave,
Still, like muffled drums, are beating
Funeral marches to the grave."
A Psalm of Life - Longfellow
Collectors of tangible personal property generally feel an emotional involvement with their collections. Others view their collections as disposable assets like stocks, bonds and real estate. Some will consider them both. Regardless of their relationships with their property, collectors will be affected by the inevitable and unpredictable life forces of dollars, disputes, divorce and death.
It is therefore important for collectors with philanthropic objectives to plan properly for the lifetime ownership and testamentary disposition of their collections. Before making firm plans, however, collectors should first consult with their financial advisors and legal counsel. If there is agreement, from a tax, trust and estate standpoint, that their collections (or any part of it) should be donated, sold, used for a lifetime annuity or other income stream, finding an advisor who specializes in tangible personal property is crucial. The advisor should be independent and not represent museums, auction houses, dealers or artists.
He or she should be able to work harmoniously with financial advisors and legal counsel in creating a realistic comprehensive plan that implements the tax, trust and estate objectives of collectors and their estates.
For collectors who feel an emotional involvement with their collections, the advisor can arrange for them to donate a collection (or any part of it) to an appropriate charitable organization; receive an income tax deduction for fair market value; avoid capital gains taxes; and reduce their estate taxes
Caveat donor: "To claim a charitable deduction for the full fair market value of a donated collection, the taxpayer must generally comply with four specific requirements. Before donating a collection to a charitable organization, the donor must determine the following:
- The status of the charitable organization: the collection must be contributed to a public charity, not a private foundation
- The type of property being contributed: the collection must be long-term capital gain type property and not ordinary income type property
- Whether the collection satisfies the related use rule: the use of the collection by the donee charity must related to the tax-exempt purpose of the charity
- Whether there is a qualified appraisal prepared by a qualified appraiser"28
For others who view their collections as disposable assets, the advisor, together with financial advisors or legal counsel that specialize in planned giving, can arrange for collectors or their estates to make a gift of appreciated property to a charitable organization; receive a lifetime annuity that will generate income from a nonproductive asset; receive annual payments, spread the tax on capital gains over a lifetime; receive a tax deduction for a portion of the value for the transferred property; reduce their estate taxes; all while fulfilling their philanthropic objectives.
Moreover, the advisor should be able to assist with appraisals, insurance, storage and make arrangements for the sale of tangible personal property.
Donor Mirabilis: Current tax laws favor collectors who donate or offer tangible personal property for lifetime annuities or other income streams to museums or other qualified charitable organizations. According to the nonprofit Trust for Philanthropy of the American Association of Fundraising Counsel (AAFRC), individuals, families and corporations, encouraged by the generosity of those laws, last year donated in excess of $12 billion to the arts, culture and the humanities.
IRS Pub. 526 (12-03) - Charitable Contributionsback
IRC §§1221(d), 170(e)(1)(A); Treas. Reg. §§1.170A-8(d)(3), 1.170A-4(b)(2), Trusts & Estates, April 2001, pg. 43, "Donations of Art: They Are Not Just Appropriate For Museums." Laurence C. Zale and Philip T. Templeback
IRC §170(e)(1)(B)(i); Treas. Reg. §1.170A-4(b)(3), Trusts & Estates, April 2001, pg. 43, "Donations of Art: They Are Not Just Appropriate For Musuems," Laurence C. Zale & Philip T. Templeback
IRC §170(b)(1)(C)(i), Art Law Vol. 2, pg. 1193 Ralph Lerner, Judith Bressler, Practicing Law Institute, 1998back
IRC §170(d)(1)(A), (b)(1)(ii), Art Law Vol. 2, pg. 1193 Ralph Lerner, Judith Bressler, Practicing Law Institute, 1998back
IRC §170(b)(1)(C)(iii), (e)(1), Art Law Vol. 2, pg. 1193 Ralph Lerner, Judith Bressler, Practicing Law Insitute, 1998back
IRC §170(a)(3); §267(b)(9); Reg. §1.267(b)-1(a)(3)back
Reg. §1.170A-5(b) Examples 6 and 7back
Art Law Vol. 2, pg. 1242 Ralph Lerner, Judith Bressler, Practicing Law Institute, 1998back
IRC §§2055(e)(4); 2522(e)(3); Reg. §§20.2055-2(e)(1)(ii); 20.2522(c)-3(c)(1)(ii)back
IRS Pub. 561 (Rev Feb 2000) pg. 4back
IRS Pub. 561 (Rev Feb 2000) pg. 5back
Thompkins v. U.S. (S.D. III. 1977back
Art Law Vol. 2 pg. 1183 Ralph Lerner, Judith Bressler, Practicing Law Institute 1998back