IRS Determines Donation of Artwork was a Completed Gift and Therefore Taxable

July 26, 2018

Appeal

Written on behalf of Feigenbaum Consulting

In a recent Private Alphabetic character Ruling, the Internal Revenue Service (IRS) considered whether a transfer of legal title and a residual interest in artwork donated to a strange museum accompanied by an understanding to transfer the balance of whatsoever retained interests after the decease of the owner could exist considered a completed souvenir for federal tax purposes.  The IRS decided that the transfer was a completed gift since the donor had relinquished dominion and control over the art, and it was therefore taxable.

What Happened?

The donor in question was a resident of the U.S. and owned a collection of artwork that was housed in the donor's master and secondary residences.  The donor's spouse had died and the donor became the sole owner of the art.

Prior to the spouse'due south decease, the donor and the spouse had entered into deeds of transfer (agreements) with two museums outside of the U.South.

Nether the terms of the agreements, the museums were granted legal championship along with naked buying and residual interests in the donated art, but the donor(s) maintained a life interest and the right to enjoy and use the property including physical possession of it (i.e. usufruct), while at least i of them were live.

The agreements specifically indicated that the donor(s) intended the donations to be incomplete lifetime gift for U.Due south. revenue enhancement purposes. They as well specifically noted that:

  • The agreements would but take effect if the surviving spouse received a ruling that the transfer would non plant a completed inter vivos gift for U.Due south. tax purposes;
  • The surviving spouse was permitted to revoke the transfer if a) any of the museums became privately endemic or b) tax laws in the relevant jurisdictions made the donation taxable during their lifetime or after their death or c) the surviving spouse delivered the artwork to a museum during his or her life and the museum violated the brandish requirements agreed to in the agreements.

The Law

The IRS imposes a tax on property transferred as a souvenir, and Treasury regulations distinguish between "complete gifts" (which are taxable) and "incomplete gifts" (which are not taxable).

The difference between a complete and incomplete gift is whether the donor retains "dominion and control" over the asset beingness gifted. If a donor relinquishes dominion and control over a souvenir and so that they no longer retain the power to alter its disposition, the gift is considered complete. Withal, if a donor leaves themselves with any power over the disposition of the gift, it may be considered partially incomplete or wholly incomplete, depending on the circumstances.

The IRS will examine every transfer of property, consider the terms and telescopic of the donor's power, and volition make a decision about the status of the transfer.

The IRS Determination

The IRS determined that the donor(s) transfer of legal title, naked ownership, and a residue interest in the artwork would plant a completed souvenir, despite the donor(s) retaining a life estate and usufruct.

This was mainly because, under the terms of the agreements, the donor(s) could not otherwise dispose of the artwork.  While some of the other conditions that were included in the agreements could happen (i.e. a museum could become privately owned, tax laws in the relevant jurisdictions could alter, etc.) and therefore nullify the transfer, none of those things were in the command of the donor(due south).

At Feigenbaum Police, we will piece of work with you, on both sides of the border, to create the best tax strategy for you. We work with each of our clients to create a personalized solution that will streamline compliance requirements and take reward of all bachelor opportunities to reduce their taxation burden. Our focus is on complex matters related to revenue enhancement planning for those with high net-worth. Contact u.s. for a custom tax plan. Our unparalleled knowledge of US and Canadian tax makes us leaders in this field.Reach out to learn more nearly how we tin help or phone call us at(905) 695-1269 or toll free at(877) 275-4792.

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