Written on behalf of Feigenbaum Consulting
In a recent Private Letter Ruling, the Internal Revenue Service (IRS) considered whether a transfer of legal title and a remainder interest in artwork donated to a foreign museum accompanied by an agreement to transfer the balance of any retained interests after the death of the owner could be considered a completed gift 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.
The donor in question was a resident of the U.S. and owned a collection of artwork that was housed in the donor’s primary and secondary residences. The donor’s spouse had died and the donor became the sole owner of the art.
Prior to the spouse’s death, the donor and the spouse had entered into deeds of transfer (agreements) with two museums outside of the U.S.
Under the terms of the agreements, the museums were granted legal title along with naked ownership and remainder 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 one of them were alive.
The agreements specifically indicated that the donor(s) intended the donations to be incomplete lifetime gift for U.S. tax purposes. They also specifically noted that:
- The agreements would only take effect if the surviving spouse received a ruling that the transfer would not constitute a completed inter vivos gift for U.S. tax purposes;
- The surviving spouse was permitted to revoke the transfer if a) any of the museums became privately owned 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 display requirements agreed to in the agreements.
The IRS imposes a tax on property transferred as a gift, 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 being gifted. If a donor relinquishes dominion and control over a gift so that they no longer retain the power to change its disposition, the gift is considered complete. However, 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 scope of the donor’s power, and will make a decision about the status of the transfer.
The IRS Decision
The IRS determined that the donor(s) transfer of legal title, naked ownership, and a remainder interest in the artwork would constitute a completed gift, 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 change, etc.) and therefore nullify the transfer, none of those things were in the control of the donor(s).
At Feigenbaum Law, we will 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 advantage of all available opportunities to reduce their tax burden. Our focus is on complex matters related to tax planning for those with high net-worth. Contact us for a custom tax plan. Our unparalleled knowledge of US and Canadian tax makes us leaders in this field. Reach out to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.