Herbert Vogel, a retired postal worker, and his wife, Dorothy Vogel, a former librarian, spent 45 years amassing a collection of more than 4,000 pieces of artwork. On April 11, 2008, they announced their intention to donate 2,500 pieces of their collection — with 50 select pieces going to a museum in each of the 50 states.1

The Vogels' grand donation illustrates two major trends regarding art collections in the United States:2 First, the value and size of private art collections have grown in recent years.3 Second, increasing amounts of artwork being displayed in museums are either donated or on loan from private collections.4

The result is that advisors can expect to have at least one client who'll be looking to transfer or loan artwork to a museum. If that's you, it's essential that you be aware of the many rules as well as the pitfalls involved.

The analysis of the rules for the transfer of artwork begins with the general rules applicable to any personal property. Basically, the transferor of artwork to a qualified charity may be entitled a charitable deduction (gift, estate and/or income tax). The amount of deduction allowed generally equals the artwork's fair market value (FMV) at the time of the contribution.

But, on top of these simple rules, transfers of artwork are subject to a number of others that can cause adverse tax or other consequences. Namely, there's the related-use rule that can limit the income tax deduction for donated art. There are rules governing deductions for fractional interests. There are exceptions to the rule preventing donors of appreciated artwork from recognizing gain when the work is transferred to the charity or later sold by it. And there are state laws that can transfer ownership to a charity of loaned artwork if an owner is not careful.

Related-Use Rule

Before the Pension Protection Act of 2006 (PPA), a donor of appreciated artwork to a qualified charity was entitled to a charitable deduction equal to its FMV. Then, the PPA added Section 170(e)(7)(A) to the Internal Revenue Code that, when applicable, puts a limit on the deduction.5 Under 170(e)(7)(A)'s limitation rule, a donor of appreciated artwork is limited to a deduction equal to his basis in the artwork, not the FMV, if the donee charity disposes of the property within three years of contribution.6

Importantly, 170(e)(7) also provides an exception to the limitation rule.7 The limitation does not apply if the contributed artwork is used, or intended to be used, in a manner related to the donee's exempt purpose.8 Under the Treasury regulations, a contribution of artwork will be for related purposes if: (1) the taxpayer establishes that the collection is not in fact put to an unrelated use by the donee; or (2) at the time of contribution it's reasonably anticipated that the artwork will not be put to an unrelated use by the charity.9

  • Example 1: A taxpayer contributes to a museum a painting that has an FMV of $1 million and a basis of $250,000. The museum displays the painting in its collection of similar art for two years. The transfer is not subject to the limitation rule (and therefore, even if sold within three years of its being contributed, the donor would be entitled to a $1 million deduction with no recapture).

  • Example 2: Let's assume the same facts as in Example 1, except that the donation is not to a museum but instead to a school that has no art-related function or purpose. The taxpayer is subject to the limitation rule, and the deduction is subject to recapture.

    The Internal Revenue Service has been quite generous in finding related use.10 But limits have been applied.11

    The effect of the rule and its exceptions is that a transfer that does not meet the related-use test and is sold within three years of its being contributed, causes the donor to “recapture” the excess deduction amount by including it in income in the year of sale. The amount included is treated as ordinary income.

  • Example 3: Let's assume the same facts as in Example 2 — with the added fact that the school sells the painting the third year after it was contributed. The taxpayer, who took a deduction for $1 million in Year 1, will have to report $750,000 in income in Year 3.

Gain to Donor

Generally, a donor of appreciated artwork to a qualified charity does not recognize gain at the time of transfer or when the artwork is later sold. There are, however, two exceptions to this rule: (1) a bargain sale; and (2) a sale by a charity as part of an overall plan.

Under the bargain-sale rule, the donor is treated as though he's received partial consideration in exchange for the appreciated property.12 The bargain-sale rule applies when a charitable deduction is “allowable.” “Allowable” has been held to include deductions available in the current year or future years.13 A deduction also is allowable even if it never reduces the donor's taxes.14 When a donor receives something in exchange for a contribution, he must demonstrate that the amount received was not equal in value to the contribution — and if it was, he's taxed on the “proportional gain.” The proportional gain is calculated by treating a portion of the transfer as a gift and a portion as a sale, then allocating a portion of the donor's basis between the gift and the sale.

  • Example 4: A donor contributes a painting worth $1 million with a basis of $400,000 to a charity in exchange for $200,000. The amount received is treated as the sale portion and the remaining value as the gift. One-fifth of the basis — 20 percent of $400,000, or $80,000 — is allocated to the sale. Therefore, donor's gain equals $120,000 ($200,000 minus $80,000).

    Often a taxpayer intends to enter into a bargain sale (that is to say, he makes a partial sale and partial gift of property to a charity). But a bargain sale also can be inadvertently triggered (although this does not usually happen with transfers of artwork; it's more often seen with transfers of mortgaged real estate.)15

  • Example 5: Let's assume the same facts as in Example 4, except that instead of receiving anything in exchange, the property is subject to a debt of $200,000. The “transfer” of the debt is treated as receipt of consideration. The result is the same; the donor has a gain of $120,000.

When a charity sells appreciated property shortly after receiving it, the transfer and the sale may be treated as though they are part of an overall plan to avoid tax. If such a plan is deemed to have occurred, the IRS will treat the donor as though he sold the property for cash, then contributed that cash to the charity. The donor still is entitled to a deduction equal to the artwork's FMV at the time it was contributed, but she also has to recognize the full amount of gain on the deemed sale.16

Fractional Interests

Generally, no charitable deduction is allowed for a gift of a fractional interest17 in artwork (and other tangible property.)18 Notwithstanding this general rule and although often undesirable, a contribution of an undivided fractional interest in artwork may qualify for a deduction if an exception applies: The deduction is available when the transfer consists of the donor's entire interest — even if his entire interest is itself a fractional interest.19

  • Example 6: A taxpayer has the right to use a piece of artwork during his life, that is to say, he has a legal life estate. He gifts his life estate to a museum. As a result, this taxpayer is entitled to a charitable deduction for the value of the life estate.

    There is an important caveat: If the fractional interest was created for the purpose of circumventing the IRC's general rule regarding gifts of fractional interests, no deduction will be allowed.20 Generally, this happens when a donor makes two transfers of his artwork, the first to a non-charitable beneficiary, then a second to a charitable beneficiary. In determining whether the transfers are based on a “circumventing purpose”, the IRS looks at the donor's intent at the time of the transfer (that is to say: Did the donor intend his transfer to allow him a charitable deduction when he otherwise would not be entitled to it?) A number of factors are considered in determining the donor's intent, including: his history of charitable and non-charitable gifts, the relationship of non-charitable donee, as well as the interest transferred to non-charitable and charitable donees. IRS guidance on the subject highlights that the Service gives great significance to the amount of time between the creation of the interest and the contribution to charity.21

  • Example 7: A taxpayer transfers her life estate in a painting to her son and one month later gives the remainder interest in the painting to a museum. It's highly probable that the IRS will deem the transfer to the son and the museum as part of a plan to circumvent the general rule; no deduction will be allowed.

    A deduction also is allowable when a donor, owning the entire or partial interest in a piece of artwork, contributes a fraction of the interest to two or more charities and retains no interest himself. The fact that the transfer to any one charity does not consist of the donor's entire interest is not relevant. Instead, the controlling fact is that after all transfers, the donor has transferred his entire interest to charities.22

  • Example 8: A taxpayer owns a painting and gives to one museum the right to use the painting for 20 years. He also arranges that, at the end of 20 years, another museum will get the painting. This taxpayer is entitled to a deduction for the full value of the painting.

    Lastly, a donor who retains an interest in the artwork after transfer of a fractional interest to a charity may be entitled to a charitable deduction if the donor, or the donor and the charity, held all interests in the artwork immediately before the contribution.23

  • Example 9: A taxpayer retains his artwork but transfers a 50 percent interest in a painting to a museum and retains the other 50 percent interest. Because the donor and the donee own all the rights immediately before the contribution, the donor may be entitled to a deduction.

    Be aware, though, that the PPA put limitations on the availability and amount of this deduction.24 First, the donor must transfer all of the retained interest to the donee charity before the earlier of (1) 10 years after the initial contribution; or (2) the donor's death.25 If the donee charity is no longer in existence, a transfer to another qualified charity satisfies the rule. Also, the donee charity must have had “use” of the property during the retained period. The use requirement is satisfied if the donee charity (1) had substantial physical possession of the artwork during the period of time when the donor retained an interest in the artwork; and (2) used the artwork in a manner related to its exempt purpose.26 The “retained period” is the period of time in which the donor retains an interest in the artwork. Note that this rule takes you back to the first rule. In other words, the donor can retain an interest, but cannot do so for more than 10 years. If the donor fails to satisfy either requirement, the donor must recapture, as ordinary income, the amount of the previously claimed deduction. In addition, the statute imposes, against the donor, a penalty equal to 10 percent of the amount of recapture.

    The PPA also makes donations less desirable by limiting the amount of deduction available.27 Basically, the amount of deduction on the “second” contribution (that is to say, the contribution of the retained interest) is limited to the lesser of the value at time of initial contribution or the value at the time of the additional contribution.

  • Example 10: A taxpayer grants a 50 percent interest in a painting in Year 1 when the painting's FMV was $1 million. In Year 5, when the painting is worth $2 million, he contributes the other 50 percent interest. The taxpayer's deduction in Year 5 is limited to 50 percent of the value at initial contribution, or $500,000.

  • Example 11: Let's assume the same initial facts as in Example 10, but in Year 5, the painting is worth only $800,000. Still, the taxpayer is limited to a deduction in Year 5 of 50 percent of the value, but of the value in Year 5, not the initial year value, or just $400,000

    When first enacted, the PPA applied the same valuation limitation rule in the estate and gift tax context. The result: taxpayers were whipsawed.

  • Example 12: Again, let's assume the same facts as in Example 10. The taxpayer is entitled to a charitable gift deduction in Year 1 of $500,000 and another $500,000 in Year 5. But, in Year 5, the 50 percent interest is worth $1 million. The result is that the taxpayer is treated as having made a $500,000 charitable gift and a $500,000 non-charitable gift subject to gift tax.

    This result was unintended. Congress addressed this inequity as part of the Technical Corrections Act (TCA) passed on Dec. 19, 2007.28 Under the TCA, the value, for gift and estate tax purposes only, of the additional contribution is the value at the time of additional contribution.

  • Example 13: Apply the same facts as in Example 12 but, under the TCA, the taxpayer's charitable gift deduction is $1 million — so there's no gift tax liability. Note that the income tax deduction still is limited to $500,000.

Lending Artwork

For many reasons (a wish to retain control or a lack of desire to relinquish ownership permanently, etc.), many donors prefer to lend artwork rather than donate it outright. But don't assume that a loan to a charity is benign. A number of issues and rules can create adverse consequences for donors.

The tax consequences of loaning artwork are different from those of transferring it outright. First, a lender is not entitled to a charitable income tax deduction.29 Second, under the general statutory rules, loans of artwork to charities are treated as taxable gifts to the lender.30 Note, though, that there is a special IRC section that provides that certain loans of artwork to charities are not transfers.31 To qualify for this exception, the loan must meet the three Q's: “qualified work of art,” “qualified charity” and “qualified use.” According to the IRC:

  1. A qualified work of art “means any archaeological, historic, or creative tangible personal property.”32
  2. A qualified charity means any 501(c) organization other than a private foundation.33
  3. Qualified use means use that “is related to the purpose or function constituting the basis for its exemption under section 501.”34

Under the laws of most states, a loan of artwork may vest ownership in the museum.35 Most state statutory schemes provide for a transfer of title to the museum that either is based on or references the state's unclaimed property law. Basically, a museum that has been loaned artwork will acquire title to the piece if after a period of time the lender fails to contact the museum about the artwork. The requirements regarding “contact,” statutory periods and other elements vary. So, before a loan is made, closely scrutinize the applicable state's statute governing the transfer.

  • Example 14: A donor lends to a Florida museum a painting that will be used by the museum until such time as the lender requests the property back. The museum has the property for 30 years and serves the donor with a notice basically terminating the loan. The donor fails to respond to the notice within the statutory period. Title to the painting passes to the museum.

Except when title is transferred to the charity, any artwork on loan to a charity is still owned by the donor. This concept is important for a couple of tax purposes. First, for estate-tax purposes, the full value of the artwork is included in the lender's gross estate. Second, for the expatriation tax rule, the full value of the artwork will be included for purposes of the “net worth test.”36

Good Advice

Donating or loaning artwork to a charity can fulfill important goals for clients, among them: it can create tax advantages, satisfy philanthropic goals and maintain the art for future generations. But, all transfers must be approached carefully and knowingly to ensure the goals are fully met — and that no unintended consequences are triggered.


  1. Suzanne Muchnic, “MOCA Gets Part of Nationwide Windfall,” Los Angeles Times, April 11, 2008.
  2. This was not the first time the Vogels made such a large donation. In 1992, they pledged more than 2,000 pieces to the National Gallery of Art in Washington. See “Two Collectors, Fifty Museums” artforum.com/news, April 11, 2008.
  3. Association of Art Museum Directors; Art Museums, Private Collectors, and the Public Benefit, January 2007.
  4. Ibid.
  5. Internal Revenue Code Section 170(e)(7)(A).
  6. IRC Section 170(e)(1)(B)(i); Treasury Regulations Section 1.170A-4(b)(3).
  7. IRC Section 170(e)(7)(B).
  8. The donee needs to make a certification of related use. P.L. 109-280, Section 1215(b)-(d); see IRC Section 170(e)(7)(D).
  9. Treas. Regs Sections 1.170A-4(b)(3)(i) and (ii).
  10. See Private Letter Rulings 8143029; 8208059; 9131053; 9833011; 7751044; 7911109; and 7934082.
  11. In PLR 8009027, a deduction was disallowed for a donation of a car to a college that didn't have car restoration as part of its curriculum.
  12. IRC Section 1011(b).
  13. See IRC Section 1011(b); Musgrave v. Commissioner., 80 TCM (CCH) (2000); Hodgdon v. Comm'r, 98 TC 424 (1992).
  14. Hodgdon, supra note 13.
  15. Guest v. Comm'r, 77 TC 9 (1981).
  16. See Revenue Ruling 60-370; Greene v. United States, 13 F.3d 577 (2d Cir. 1994), aff'g 806 F. Supp 1165 (S.D.N.Y. 1992).
  17. This discussion is limited to outright contributions, not contributions in trust.
  18. IRC Section 170(f)(3).
  19. Treas. Regs. Section 1.170A-7(a); PLR 8514028.
  20. IRC Section 170(f)(3) and Treas. Regs. Section 1.170A-7(a)(2)(i).
  21. See PLR 9124031, in which there was no indicia of tax avoidance, and therefore, the deduction was allowed when the grantor of a charitable remainder annuity trust transferred a retained annuity interest to a charity seven years after the trust was created. See also PLRs 200108012 through 200108014, in which voting stock subject to a voting agreement was donated to a charity eight years after the voting rights were transferred to a non-charitable beneficiary; this was not held to be in avoidance of IRC Section 170(f)(3)(A).
  22. Treas. Regs. Section 1.170A-7(a).
  23. IRC Section 170(o).
  24. Ibid.
  25. IRC Section 170(o)(A)(3)(i).
  26. There is no guidance in the IRC, Treasury regulations or Internal Revenue Service rulings or commentary as to what is “substantial physical possession.”
  27. IRC Section 170(o)(2); Staff of Journal of Comm. on Tax'n, 109th Cong., “Technical Explanation of H.R. 4, the Pension Protection Act of 2006,” J. Comm. Print 2006, pp. 307-308.
  28. Technical Corrections Act of 2007; H.R. 4839.
  29. IRC Section 2522(c)(2).
  30. IRC Sections 2501 and 2503.
  31. IRC Section 2503(g).
  32. IRC Section 2503(g)(2)(A).
  33. IRC Section 2503(g)(1)(A). Whether a loan to a foreign museum qualifies is unsettled. IRC Sections 2503(g)(2)(B) and 4942(j)(3); a private foundation for these purposes does not include a private operating foundation.
  34. IRC Section 2503(g)(1)(B).
  35. Association of Art Museum Directors, AAM Conference, May 2004; See Alabama 41-1-72 and 41-6-75; Alaska 14.57.200 to .290; Arizona 44-351 to 356; California 1899 to .11; Colorado 38-14-101 to 112; Florida 265.565; Illinois chap. 765 Section 1033/1 to 1033/50; Indiana 32-9-10-1 to 16; Iowa 305B.1 to .13; Kansas 58-4001 to 4013; Kentucky 171.830 to 849; Louisiana 25.345; Maine tit. 27, Section 601; Michigan 399.601 to .612; Mississippi 39-19-3 to 21; Missouri 184.101 to. 122; Montana 22-3-501 to 523; Nebraska 51-704 to 711; Nevada 381.009; New Hampshire 201-E.1 to .7; New Mexico 18-10-1 to 5; New York 233-a; North Carolina 121-7 (c) to (d); North Dakota 47-07-14; Ohio tit. 33 Section 3385.01-10; Oregon 358.415 to 440; South Carolina 27-45-10 to 100; South Dakota 43-41C-1 to 4; Tennessee 66-29-201 to 204; Texas 80.001 to .008; Utah 9-8-801 to 806; Virginia 55-210.35 and .36; Washington 63.26.010 to .050; Wisconsin 171.30 to .77; and Wyoming 34-23-101 to 108.
  36. IRC Section 877(2)(b).

Paul R. Comeau is the chairman and Alexander M. Popovich is an attorney at Hodgson Russ LLP in New York


Feminine Mystique — Richard Avedon captured French film star Brigitte Bardot's famous pout in this 1959 photo, shot in Paris. The picture sold for $181,000 at a Christie's auction on April 10, 2008, in New York.