October 31, 2023
IRS rules private foundation's expenses for acquiring artwork to loan to tax-exempt organizations are qualifying distributions, and artwork's value may be excluded from distributable amount calculation
In PLR 202342009, the IRS ruled that pieces of artwork acquired by a private foundation, which are used to carry out the foundation's exempt purpose, are assets that may be excluded from the foundation's minimum investment returns used in determining its required annual distributions under IRC Section 4942(c)(1)(A) and Treas. Reg. Section 53.4942(a)-2(c)(3). In addition, the IRS ruled that the foundation's expenditures to acquire the artworks are qualifying distributions under IRC Section 4942(g)(1).
The foundation, an IRC Section 501(c)(3) exempt organization and IRC Section 509(a) private foundation, is primarily funded by family members and gives grants to museums and educational institutions that support the arts. Family members want to donate additional artwork from their collection to the foundation, which intends to hold and use the artwork for an educational lending program, not for private use. The foundation will lend this artwork to qualifying tax-exempt public museums, galleries, educational organizations and other similar institutions for public exhibition. The foundation will store the artwork in a room that is designed for this use and owned or leased by the foundation.
To maintain its tax-exempt/private foundation status and avoid incurring excise taxes, a private foundation must annually distribute a minimum distributable amount, which is determined based on its minimum investment returns, with certain adjustments. IRC Section 4942 generally imposes an excise tax on a private foundation's undistributed income — the amount by which the foundation's minimum distributable amount each year exceeds its qualifying distributions for that year.
The minimum investment return generally excludes assets used, or held for use, to further a private foundation's exempt purposes. Under Treas. Reg. Section 53.4942(a)-2(c)(3)(i), an asset fulfills this requirement if it is actually used by the foundation in carrying out its exempt purpose or, if the immediate use of the asset is not practical, then definite plans exist to use the asset within a reasonable period.
Qualifying distributions are amounts paid to accomplish tax-exempt purposes or to acquire assets used (or held for use) directly in carrying out those purposes (IRC Section 4942(g)(1)).
Treas. Reg. Section 53.4942(a)-2(c)(3)(ii)(c) lists works of art owned by a foundation that are on public display as an example of assets used or held for use directly in carrying out a foundation's exempt purpose.
Revenue Ruling 74-498 "holds that a collection of paintings owned by a foundation formed to further the arts, that is loaned under an active loan program for exhibition in museums, universities and similar institutions, is being used directly in carrying out the foundation's exempt purposes within the meaning of [IRC S]ection 4942(e)(1)(A), and the value of the paintings is excluded in computing the foundation's minimum investment return."
The IRS concluded that artwork that is owned by the foundation and acquired through donations or purchases will constitute assets used directly in carrying out the foundation's exempt purposes, and therefore may be excluded from the foundation's minimum investment return under IRC Section 4942(e)(1)(A) and Treas. Reg. Section 53.4942(a)-2(c)(3).
The IRS also concluded that the foundation's expenditures to acquire additional art for its lending program will constitute qualifying distributions under IRC Section 4942(g)(1).
In reaching this conclusion, the IRS said:
Although this ruling does not break any new ground, it underscores the need for private foundations to carefully track and calculate both their qualifying distributions and the assets included (and excluded) in the minimum investment return used to calculate their required annual qualifying distribution amount, and to be sure that their expenditures further their charitable purposes. A private foundation that collects art, or other assets that it uses to carry out its exempt purposes, may exclude those assets from its minimum investment return.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor