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Restrictions on Charitable Bequests of Art: Recent Ltr. Rul. Paints a Picture,
Estate Planning Journal, Sep 2002 |
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Estate Planning
Journal (WG&L) |
BEQUESTS OF ART
Author:
RICHARD L. FOX, ATTORNEY
RICHARD
L. FOX is an attorney and a partner in the law firm of Dilworth Paxson LLP, in
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 Ltr. Rul. 200202032
, the IRS provides guidance as to those restrictions that will be
acceptable.
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 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 public 4 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 purposes 7 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
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 permanent 12 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.
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 use 16 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.
There are a
number of rulings as well as case law in the income tax 18 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
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.
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
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.
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.
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,
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.
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) .
See, e.g., Wilstach Estate, 1
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
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").
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."
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."
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.
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 A2d 1123 ; Miller
Estate, 110 A2d 200 . 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, 97 A2d 81 .
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.
In Morgan Guaranty Trust Co. of N.Y. v. The President and Fellows of Harvard College, No.,
E. 1855 , 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.
The name of the collection is the name of the donor,
followed by the word "collection."
Bequests to art museums classified under Section
501(c)(3) are eligible for charitable deduction
treatment under Section
2055(a)(2) .
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.
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.
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.
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.
1985-2 CB 2.
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) .
Silverman,
TC
Memo 1968-216 , PH TCM ¶68216 , 27 CCH TCM
1066 .
The court stated that the three-year prohibition on
sale "certainly had an adverse effect on fair market value."
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, TC
Memo 1991-276 , 61 CCH TCM 2935 , TCM ¶91276 (contribution of rock sculpture subject
to two-year restriction on transferability); Cooley,
33
TC 223 6
AFTR 2d 5940 , 283 F2d 945 , 61-1 USTC ¶9106 (charitable deduction was limited to
cost basis because cars contributed to charity were never available for resale by
the taxpayer); Deukmejian,
TC
Memo 1981-24 , PH TCM ¶81024 , 41 CCH TCM 738 (grant of deed to charity
restricted for open space and public utility purposes resulted in a deduction
limited to basis).
Ahmanson
Foundation, 48
AFTR 2d 81-6317 , 674 F2d 761 , 81-2 USTC
¶13438 .
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,
TC
Memo 1999-421 , RIA TC Memo ¶99421 , 2000-1 USTC ¶47823 , 78
CCH TCM 1220 ("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").
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.
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.
The other cases cited were as follows: Estate of Schwan,
TC
Memo 2001-174 , RIA TC Memo ¶2001-174 , 82 CCH TCM 168 ; Estate of DiSanto,
supra note 26; Deukmejian, supra note
24; and Cooley, supra note 24.
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).
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,
47
AFTR 1341 , 224 F2d 26 , 55-2 USTC ¶11550 , 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.
"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).
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 .
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.
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.
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.
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, 14
AFTR 668 , 293 US 144 , 79 L Ed 246 , 35-1 USTC
¶9001 , so that people will be encouraged to make such contributions. Estate of Sternberger,
46
AFTR 976 , 348
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