Art
Donating Tangible Assets: Alternatives To Selling Art, Collectibles - Part One

Donating to one’s own private foundation
For an artist or collector who wishes to transfer ownership of a
collection, a private foundation (either operating or
non-operating) offers yet another option. Unlike a publicly
supported charity, such as an art museum that depends on
fundraising for its operations, a private foundation is funded
and controlled by an individual, family, or corporation. It
therefore offers some of the benefits associated with donating to
a publicly supported charity, but with a greater level of
control. There are many reasons why an artist or collector might
want to create a private foundation:
* The donor can retain a level of control over the foundation,
including holding the collection within it. He or she can make
sure the pieces stay together, determine where, how often, and
how they are displayed, and ensure that they’re on exhibit
instead of languishing in storage.
* The art can remain a permanent holding of the foundation:
Because a private foundation can own and hold any type of asset
(unlike donor-advised funds, which typically require the donor to
sell the asset first and then donate the proceeds), the
collection can remain in the permanent possession of the
foundation.
* A foundation may hold collectibles and other tangible property
strictly as an investment (with no intention to display it
publicly). Alternatively, if the tangible property is publicly
displayed or actively used by the foundation in carrying out its
mission, the donation may be classified as a charitable use
asset. As we will explain, there are a number of advantages to
designating the contribution as a charitable use asset.
* If created during his or her or lifetime, the donor can
personally experience the joy of directly sharing the collection
with the public.
* Unlike donor-advised funds and other charitable vehicles that
typically liquidate donations of tangible property immediately
upon receipt, a private foundation can accept and hold them
indefinitely. The artist or collector therefore avoids having to
sell the collection quickly and, potentially, at distressed
prices.
* If contributed during the collector’s lifetime, the collector
receives an income tax deduction for the donation’s fair market
value, provided the foundation is an operating foundation and
that the donated tangible property is put to a related use. For a
non-operating (or grantmaking) foundation, or where the donor is
also the creator of the donated collection, the deduction is
limited to cost basis (or the lower of fair market value and
basis if the property is depreciated at the time of
donation).
* The donor can involve his or her family members in the
foundation. Not only will family members have hands-on experience
of philanthropy, but if their work is helpful and appropriate,
they can also be paid a salary that is commensurate with the
foundation’s size and the individual’s experience, time,
commitment, and responsibilities.
* Whereas a museum might want to sell off lesser examples of a
collection or even part with the collection altogether if its
curatorial priorities change, a private foundation can preserve
all options for the donor and future foundation directors. The
collection can be sustained in perpetuity, grow over time, or be
sold in part or in whole.
* Private foundations can employ a wide variety of IRS-sanctioned
philanthropic capabilities related to its mission. These might
include awarding music school scholarships to talented street
buskers, making loans to cash-strapped museums to mount new
exhibitions, or running programs that help artists inspire and
beautify their communities with public murals.
If the donor decides that setting up his or her own charitable organization is the way to go, there are two distinct categories of private foundations to consider: (1) non-operating foundations and (2) operating foundations. Stay tuned for Part Two in which we discuss these options and highlight the benefits of donating to a private foundation.
Footnotes:
1. For a definition of tangible personal property for charitable
purposes, see IRS Pub. 526.
2. The IRS recognizes this fact and provides a “blockage
discount” in valuing collections for estate tax purposes.
3. Consult a tax advisor prior to making a donation of art or
other valuable collectible.
4. The donor would include in his or her income the deduction
originally claimed minus the basis in the property when the
contribution was made.
Jeffrey Haskell, J.D., LL.M., is chief legal officer for Foundation Source, which provides comprehensive support services for private foundations. Contact him at jhaskell@foundationsource.com. Stephen Pappaterra, attorney at law, serves as Counsel for the law firm of Earp Cohn, P.C.