Jay E. Rivlin
McDermott Will & Emery LLP
Jay E. Rivlin is a partner in
the law firm of McDermott
Will & Emery LLP and is
based in the Firm’s New York
office. He advises clients on
all aspects of their personal
legal needs, including estate
and tax planning, real estate,
business formation and
administration, succession
planning, family dispute
resolution, charitable giving
and private aircraft.
1 Charitable deductions for
income tax purposes may
also be available, under United
States tax law, for contributions
to certain split-interest trusts
(i.e., trusts with both charitable
and non-charitable beneficiaries).
A discussion on the tax
consequences of transfers
to split-interest trusts is beyond
the scope of this article.
Christie’s Bulletin for Professional Advisers
Winter Issue 2011
Volume 15 Number 2
charitable giving:
uk and us treatments
compared
The answer to the question of whether to transfer
an art collection during lifetime or at death will
largely be driven by the collector’s emotions rather
than the tax consequences. Does the collector
want to witness the accomplishment of his
charitable goals during his lifetime? Is the
collector willing to part with his art collection
during his lifetime?
This is Part 1 of a two-part article on
the subject of charitable giving, and
focuses on the US. It was written by
Jay E. Rivlin with contributions from
Christiana M Lazo. Part 2, giving the
UK perspective, will be written by
Martyn Gowar for publication in the
Summer 2012 issue of The Bulletin.
Art collectors often wish to fulfil their charitable
inclinations with their art collection, or their long
term preservation wishes for their art collection
through charitable giving. In either case, what
begins with a good intention too often quickly
develops into an overwhelming set of decisions.
This is true for the purely domestic collector, but
only more so for the international collector. While
the purely domestic collector may need to answer
when, who, how and what, the international
collector must also contend with the question
of where – where is the collector subject to tax
(or where will the subject be subject to tax) and
will the collector’s donations of his art collection
entitle him to a charitable deduction. This article
will provide an introduction to the additional
complexity that this question of where can add
to the international collector’s considerations by
examining the tax benefits that may be available
to a collector in two jurisdictions, the United States
or the United Kingdom.
When a collector determines that he may wish
to contribute his art collection (or part of it) to
a charitable organisation, he must first decide on
when he will do so. This means he must determine
if he will make the gift during his lifetime or at
his death. If he determines that he will make it
during lifetime, he must also determine if he will
make the gift this year, or the next, or the next, etc.
15
Once a collector has determined this answer
of when he may wish to make the transfer, the
international collector should consider whether
this transfer will qualify for a charitable deduction
(either for income tax or estate tax purposes).
For the international collector, this means
comparing the applicable laws of the jurisdictions
in which he may be subject to tax and structuring
his transfer in such a way to maximise the tax
benefits to which he will be entitled.
Lifetime Contributions
Under United States tax law, an individual taxpayer
is entitled to a charitable deduction for income
tax purposes for a transfer of property, without
consideration or economic benefit, to a domestic
charitable organisation. Domestic charitable
organisations include public charities and private
operating and non-operating foundations organised
in the United States.1 Except as permitted under
certain tax treaties, contributions by an individual
United States taxpayer to a foreign organisation
are not entitled to a charitable deduction for
income tax purposes.
16
2 There are significant rules
governing the substantiation
of this fair market value.
3 In addition, the individual
taxpayer may elect, with respect
to contributions to a public
charity, to reduce the value of
the contributed property to the
taxpayer’s basis in the property
in exchange for an increased
percentage limitation of 50%.
Christie’s Bulletin for Professional Advisers
Winter Issue 2011
Volume 15 Number 2
1. Income Tax Charitable Deductions when
a Foreign Organisation Ultimately Benefits
For the international collector, it is important
to recognise that this requirement does not
preclude a charitable deduction for income tax
purposes for a contribution to a charitable
organisation that benefits a foreign jurisdiction.
There are at least two ways in which this can
be accomplished.
2. Deduction Limitations
Generally, the amount of the charitable deduction
to which an individual is entitled under United
States tax law for a contribution of property to
a charitable organisation is the property’s fair
market value.2 This general rule is subject to
important limitations. These limitations are
outlined below, but even without the details
we can identify one important result of these
limitations on the international collector.
First, many popular foreign charitable organisations
have established ‘friends’ organisations in the
United States. These ‘friends’ organisations are
charitable organisations set up in the United
States that assist the foreign organisation.
Contributions to the ‘friends’ organisation
qualify for a charitable deduction for income
tax purposes provided the domestic ‘friends’
organisation retains sufficient control over its
assets. The donor may not specifically specify
a secondary grantee that must benefit. The
‘friends’ organisation may not solicit funds on
behalf of the foreign organisation or be required
to transfer its assets to the foreign organisation.
Thus, the collector may contribute his collection
to a domestic ‘friends’ organisation and this
contribution may ultimately benefit the foreign
organisation of interest to the collector. (The
status of any particular ‘friends’ organisation as
a public charity or private foundation will depend
on its operations and should be determined by
the collector before any transfer for the purposes
of applying the applicable percentage limitations
set forth below.)
In addition to the domestic ‘friends’ organisations
described above, any charitable organisation
may conduct some or all of its activities in a
foreign jurisdiction. Importantly, this includes
a private foundation that may have been created
by the collector or his family, provided certain
procedures are followed. A private foundation
making a grant to a foreign organisation must
exercise what is known as ‘expenditure
responsibility’ over the grant. Expenditure
responsibility is essentially oversight by the
private foundation of the use of the funds
by the receiving organisation.
To the extent that the collector has limited United
States Federal income tax liability, the charitable
deduction for income tax purposes will be of limited
value to the collector since the limitations are
computed as a percentage of the individual
taxpayer’s adjusted gross income. Thus, the
international collector may wish to structure
his transfer to a charitable organisation during
his lifetime in order to satisfy the income tax
charitable deduction requirements of the
jurisdiction in which the deduction will most
benefit him.
The income tax charitable deduction to which
an individual is entitled for a contribution to a
charitable organisation is limited to a percentage
of the individual’s 'contribution base' (adjusted
gross income without regard to net operating
loss carryback) in the year of contribution. The
exact percentage will vary depending upon the
type of organisation receiving the contribution.
In each case, amounts which cannot be deducted
in the year of the transfer may be carried forward
for up to a maximum of five years.
Generally, an individual is entitled to a maximum
deduction for aggregate contributions to public
charities of 50% of the individual’s contribution
base in any year. This 50% rule is subject to an
exception, particularly important in the conversation
of contributions of art, for long-term capital gain
property. An individual is entitled to a maximum
deduction for contributions of long-term capital
gain property to public charities of 30% of the
individual’s contribution base in any year. This
maximum deduction of 30% is only available to
the taxpayer if the contributed property is put to
‘related use’ by the charitable organisation and
Either transfers to domestic ‘friends’ organisations is not sold within three years of receipt. Property
or transfers to any other charitable organisation will be ‘related use’ property if it is related to
the charitable organisation’s exempt purpose
that conducts activities in a foreign jurisdiction
may enable the international collector to transfer or function. If the contributed property is not put
to related use by the organisation receiving the
his collection to a domestic organisation that
qualifies for the charitable deduction for income property, or if the property is sold within three
years of receipt, the individual’s deduction is
tax purposes while still accomplishing his
limited to the individual’s basis in the contributed
charitable goals abroad.
property.3 This can be a substantial limitation.
Christie’s Bulletin for Professional Advisers
Winter Issue 2011
3. Timing Considerations
for Lifetime Contributions
International collectors should also bear in mind
the timing rules of the jurisdiction in which they
An individual is entitled to a maximum deduction may wish to take the deduction. In order to take
for aggregate contributions to private non-operating a charitable deduction under United States tax
foundations of 20% of the individual’s contribution laws, the transfer must be completed by the end
base in any year. As with public charities, a special of the calendar year.
rule applies to contributions of long-term capital
gain property to private non-operating foundations. 4. Retained Interests in the Art
This deduction is available only to the extent that Collector – Fractional Interest Gifts
aggregate contributions to public charities have
Finally, in speaking of lifetime gifting, it is common
not already exceeded 50% of the individual’s
for the collector to wish to retain some interest
contribution base in any year.
in the art collection while also completing a
transfer to a charitable organisation that will
qualify for a charitable deduction for income tax
purposes in the current year. The collector may
suggest a loan, rather than an outright gift, to a
charity. Under United States tax law, a loan will
not qualify for an income tax charitable deduction.
The collector may also consider a transfer to
a private foundation which he may control and
then may seek to have the private foundation
‘store’ the artwork on the collector’s walls.
United States tax law has developed strict rules
and imposes excise taxes (at a minimum) for
a self-dealing transaction such as this.
Private operating foundations are treated the
same as public charities with respect to the
percentage limitations for contributions.
Volume 15 Number 2
17
Contributions at Death
In a purely domestic scenario, there are two
distinct advantages under United States tax law
for contributions at death. First, estates, unlike
individuals, are entitled to a full charitable
deduction without the percentage limitations
applicable to contributions during lifetime
and without regard to whether the charitable
organisation is a public charity, private operating
or private non-operating foundation. Second,
contributions to charitable organisations that
are not organised under the laws of the United
States are eligible for deductions. As you may
recall, during lifetime, only contributions to
domestic organisations are entitled to charitable
deductions. Unfortunately for the international
collector who dies a nonresident decedent of the
United States, this second advantage is not
available. Contributions to charitable organisations
by nonresident decedents qualify for an estate
tax charitable deduction only if they are made
to domestic organisations.
The full charitable deduction without percentage
limitations is still available to the international
collector. However, as with the charitable
deductions for income tax purposes, for the
international collector this deduction will be of
limited value if the international collector is not
Under current United States tax law, however,
the collector may still have an option available to subject to an estate tax in the United States.
him. The collector may still transfer an undivided Under current United States tax law, the United
States Federal estate tax will be imposed on the
fractional interest in artwork to a charitable
value of any property owned by a decedent who
organisation (i.e., the collector would own 49%
is neither a resident nor a citizen of the United
of the artwork and the charitable organisation
States if such property has a situs in the United
51%) provided that certain rules are satisfied.
States. This will include artwork held individually
These rules include the following: (1) after the
transfer all interests in the artwork must be held by the decedent and located in the United States
at death. Decedents who are neither a resident
by the taxpayer and the donee organisation, (2)
later gifts of the interests may be subject to certain nor a citizen of the United States are currently
limitations on value and (3) all remainder interests allowed a limited exemption equal to the first
in the contributed artwork are transferred to the $60,000 of value on the property (unless a tax
donee organisation within 10 years after the initial treaty applies). The current United States estate
tax is imposed at graduated rates of up to 35%
transfer or death of the donor.
of the value of the property. A contribution of
artwork to a charitable organisation that qualifies
for the charitable deduction can help to mitigate
this otherwise hefty cost.
The all-inclusive details of either United States
or United Kingdom tax law are beyond the scope
of this article. Sophisticated professional advice
will allow collectors to navigate this complicated
territory, however, and we do hope that this article
will serve as an important primer to collectors
and will encourage them to recognise that, with
proper professional advice, each collector’s
respective goals can be accomplished.