United States: Tax Benefits And Pitfalls Of Private Museums*

Collectors who have run out of space to store or display their art at their homes inevitably confront the question of what to do with their spare art. Collectors who are considering their estate planning options might also question how their art figures into their legacy. The options typically considered are to sell, bequeath, or donate the art. This article describes a twist on the third of these options: the donation of one's art to a museum located on or near one's property, where the museum remains largely controlled by the donor and might be thought of as an extension of the donor's personal residence.

The choice between selling, bequeathing, or donating one's art is sometimes influenced by tax considerations. To illustrate how these considerations play out in real life, let's assume we have a collector who paid $10 over the years to amass a collection that today is valued at $100. Let's further assume that our collector's net worth (excluding art) exceeds the threshold for estate, gift, and generation-skipping taxes (i.e., for a married couple, $10 million plus upward adjustments for inflation), so we can be reasonably sure that a 40% tax will be levied on the fair market value of any art that our collector bequeaths or gives to a child.1 Our collector's options then appear to be:

1. Sell the art for $100 and pay tax on the gain. At the federal level, the long-term capital gains tax rate of 28% plus a 3.8% surcharge for the so called "Medicare Tax" should apply, for a cumulative federal tax liability of $28.62 on the $90 of gain.2 This leaves the collector with a net return of $71.38. Assuming this $71.38 is eventually given or bequeathed to the collector's children, an additional 40% gift or estate tax would apply, leaving the collector's children with $42.83.

2. Give the art to her children and pay gift tax on the $100. This should trigger a gift tax liability of $40, which the donor would be required to pay. The children would receive the art with a "carryover basis," meaning that the children would be liable for a capital gains tax and Medicare Tax in the cumulative amount of $28.62 upon their sale of the art, as described in the preceding example. This results in a $40 liability for the donor and a transfer of $100 to $71.38 of value to the donor's children, depending on when and whether this capital gains tax is incurred.

3. Donate the art to a museum and claim a $100 charitable deduction. As we can assume the donor is taxable at the federal level at a 39.6% rate plus a 3.8% Medicare Tax, this deduction can result in a tax savings of as much as $43.40. Assuming this $43.30 of tax savings is eventually given or bequeathed to the collector's children, a 40% gift or estate tax would apply, leaving the collector's children with $26.04.

The examples above provide a rough illustration for the idea that, after tax consequences are taken into account, selling and donating art can yield roughly the same amount of financial value. This is even more likely to be the case if state and local income taxes are figured in, as these additional taxes increase the cost of selling and, conversely, increase the savings to be had from donating one's art to a museum.

For those collectors who would like to partake in the charitable giving described above, but are reluctant to cede control over their collections to a wholly unrelated museum, the idea of establishing their own museum, with curators of their choosing, might be a welcome one. Some of these collectors might even prefer for such a museum to be located on or near their personal residence, or for the museum to display its art within their homes. The challenge for such an arrangement is in determining when a donor's control over a museum renders the museum ineligible for tax-exempt status. The applicable restriction is found in the Treasury Regulations on charities, which state, in relevant part, that "it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests."3

There are only a handful of authorities describing how this restriction is applied to a museum. Private Letter Ruling 8824001 appears to provide the most relevant guidance to persons considering this strategy. The donors described in this ruling were the sole contributors to a charity they had created, and the charity displayed sculptures on the donors' property. Some of the sculptures were viewable from the road, but most were obscured by a privacy hedge or fence. The donors permitted members of the public to tour the grounds upon request. The donors notified various art museums and schools of the opportunity to tour the grounds. The museum had almost 300 visitors per year.

The IRS ruled that this charity did not qualify for tax-exempt status because it ran afoul of the prohibition against operating for private interests. In arriving at this ruling, the IRS noted:

1. The absence of a sign to advise passersby of the museum's location;

2. That most of the sculptures were clustered near the donors' home and pool, as opposed to more remote and less personal portions of the donors' grounds; and

3. The fact that no effort was made to advise the general public of the opportunity for touring the grounds.

From the foregoing, we may infer that a museum located on or near one's property might qualify for tax-exempt status if it is well publicized, physically separated from the donor's personal living spaces, and is identified by signage.

Many donors, however, would be reluctant to create a museum on or near their residence if in doing so they must advertise the museum's location and invite members of the general public to visit. This option is likely to appeal only to donors with estates that are large enough to permit a remote portion to be set aside for a museum, at a distance from their personal residence that is sufficient to permit a measure of privacy. This appears to be the price one has to pay to qualify for a charitable tax deduction for art contributed to one's own museum, where the donor can manage the charity and, to a degree, appear to retain the work by keeping it close to home.


*  IRS Circular 230 Disclosure: To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained in this document (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Code of 1986, as amended (I.R.C.) or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
1  I.R.C. §§ 2001 and 2010.
2  The long-term capital gains tax rate from the sale of collectibles, including art, is 28%, whereas the long-term capital gains tax rate from the sale of stock is only 20%. I.R.C. § 1(h).
3  Treas. Reg. section 1.501(c)(3)-1(d)(1)(ii)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions