Artwork remainder transfer would be a completed gift

Plain-English summary

A surviving spouse proposed transferring legal title, naked ownership, and the remainder interest in a valuable art collection to two foreign museums while retaining possession, a life interest, and a usufruct until death. The deed barred the taxpayer from selling or otherwise disposing of the artwork, although specified outside events could permit revocation. The taxpayer asked the IRS to treat the arrangement as an incomplete gift because possession would pass at death. The IRS concluded that the taxpayer retained no power to change the disposition to the museums and that the revocation conditions did not depend on the taxpayer's actions. The transfer therefore would be a completed gift if the deed became effective. Because the deed itself required a favorable ruling that the gift was incomplete, the requested favorable condition was not satisfied.

Ruling snapshot

• Question: Would the proposed artwork transfer remain incomplete for federal gift tax purposes while the taxpayer retained a life interest and possession?
• Outcome: Denied: the transfer would be a completed gift if effective.
• Key authorities: IRC §§ 2501 and 2511; Treas. Reg. §§ 25.2511-1 and 25.2511-2(b)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201825003                                              Third Party Communication: None
Release Date: 6/22/2018                                        Date of Communication: Not Applicable
Index Number: 2501.00-00
                                                               Person To Contact:
-------------------                                            ----------------, ID No. ------------------
--------------------------------                               Telephone Number:
------------------------------------------                     ----------------------
                                                               Refer Reply To:
                                                               CC:PSI:04
RE: -----------------------------------------                  PLR-128461-17
                                                               Date:
                                                               March 9, 2018




LEGEND

Taxpayer          =        ----------------------------------------------
State A           =        ----------------
State B           =        --------------
Date 1            =        ------------------------
Date 2            =        --------------------
x                 =        ------------------
Country           =        ----------
Museums           =        ---------------------------------------------------------- --------------
Spouse            =        --------------------
X                 =        ------
Y                 =        ----------




Dear -------------:

This letter responds to your authorized representative’s letter of September 14, 2017,
regarding the gift tax treatment of proposed transfers of artwork pursuant to a Deed of
Transfer.

FACTS

The facts and representations submitted are summarized as follows. Taxpayer is a
United States citizen and resident of State A. Taxpayer currently owns a collection of
artwork (“artwork”) that Taxpayer and Spouse collected during their lifetime. The
artwork is situated in Taxpayer’s primary residence in State A and Taxpayer’s
PLR-128461-17                                2

secondary residences in State B and Country. Spouse died on Date 1. Taxpayer is
now the sole owner of the artwork.

On Date 2, prior to Spouse’s death, Taxpayer and Spouse entered into a Deed of
Transfer (“DOT”) with two museums (“Museums”) located in Country. Under the DOT,
Taxpayer and Spouse agreed to donate the artwork to Museums, with possession of the
artwork to transfer to Museums on the death of the second of Taxpayer and Spouse.
Museums desired to accept the artwork to effectuate Taxpayer and Spouse’s donative
purpose and enhance its collection of artwork. The estimated value of the artwork at
the time of the execution of the DOT was $x.

The DOT, as it currently applies to Taxpayer as the surviving spouse and sole owner of
the artwork, provides that Taxpayer shall grant to the Museums the legal title, naked
ownership and remainder interest in and to the artwork. The DOT further provides that
Taxpayer shall expressly reserve for her benefit a life interest and usufruct in and to the
artwork. The life interest and usufruct shall automatically expire on the death of
Taxpayer.

Section 3.1 of the DOT provides that the parties intend for the transfer of artwork to not
qualify as a completed inter vivos gift for United States gift tax purposes on the basis
that Taxpayer is not releasing dominion and control over the artwork until her death. If
Taxpayer receives a favorable ruling on the gift tax treatment, the donation under the
DOT is deemed to take effect as of the date of the favorable ruling. If Taxpayer does
not obtain a favorable ruling, then the DOT does not come into force.

Section 3.2 imposes certain conditions subsequent. If any of the conditions subsequent
are not satisfied, Taxpayer would have the option to revoke the transfer of the artwork.
The conditions subsequent, which apply during the life of Taxpayer are: (i) Museums
must comply with the requirements regarding the housing, display and exhibition of the
artwork as set forth in the DOT (applicable to artwork delivered to Museums prior to
Taxpayer’s death pursuant to Section 4.1.1); (ii) the X law principles currently governing
in Country must not be replaced by Y law; (iii) Museums must not become privately
owned; and (iv) the tax laws of Country must not change to cause Taxpayer to become
subject to taxation in Country during Taxpayer’s life or upon death in connection with
the transfer of the artwork.

Section 4.1.1 provides that Taxpayer may renounce and waive her life interest and
usufruct by delivery of some or all of the artwork donated to Museums. During the
period of Taxpayer’s life interest and usufruct, Taxpayer shall retain physical possession
of the artwork. However, Taxpayer may not sell or otherwise dispose of any of the
artwork.

Section 4.1.3 provides that upon the termination of Taxpayer’s life interest and usufruct,
the artwork will be made readily available by Taxpayer or her representatives to
PLR-128461-17                                  3

Museums. Section 4.2 provides that the artwork will become integrated into and form
part of the public domain of Country and thus inalienable and exempt from seizure
under the laws of Country. Section 4.2 further provides that upon the acquisition by
Museums, the artwork is required to be installed in a special area of Museums’
premises specifically dedicated to the Taxpayer’s and Spouse’s collection.

Pursuant to Section 6.3, the DOT is governed by and construed in accordance with the
laws of Country, provided however, any conflict in interpretation or implementation of
any provisions of the DOT will be governed under the laws of the United States.

You have requested that the transfer by Taxpayer of interests in the artwork and the
agreement by Taxpayer to transfer, upon her death, the balance of the interest in the
artwork, as contemplated and defined by the DOT, would not be treated for federal gift
tax purposes as a completed gift of any portion of the artwork by Taxpayer upon receipt
of a favorable ruling.

LAW AND ANALYSIS

Section 2501 of the Internal Revenue Code (Code) imposes a tax for each calendar
year on the transfer of property by gift during the calendar year.

Section 2511(a) provides, in part, that the tax imposed by § 2501 shall apply whether
the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the
property is real or personal and tangible or intangible.

Section 25.2511-1(e) of the Gift Tax Regulations provides that if a donor transfers by
gift less than his entire interest in property, the gift tax is applicable to the interest
transferred. The tax is applicable, for example, to the transfer of an undivided half
interest in property, or to the transfer of a life estate when the grantor retains the
remainder interest, or vice versa.

Section 25.2511-1(g) provides that the application of the gift tax is based on the
objective facts and circumstances under which it is made, rather than on the subjective
motives of the donor.

Section 25.2511-2(b) provides that as to any property, or part thereof or interest therein,
of which the donor has so parted with dominion and control as to leave in him no power
to change its disposition, whether for his own benefit or the benefit of another, the gift is
complete. But if upon a transfer of property (whether in trust or otherwise) the donor
reserves any power over its disposition, the gift may be wholly incomplete, or may be
partially complete and partially incomplete, depending upon all the facts in the particular
case. Accordingly, in every case of a transfer of property subject to a reserved power,
the terms of the power must be examined and its scope determined.
PLR-128461-17                                  4

As § 25.2511-2(b) provides, the question of whether a transfer is a completed gift, and
thus subject to gift tax, turns on whether the settlor has abandoned sufficient dominion
and control over the property transferred to put it beyond recall. See Burnet v.
Guggenheim, 288 U.S. 280 (1933); Estate of Sanford v. Commissioner, 308 U.S. 39
(1939); and Smith v. Shaughnessy, 318 U.S. 176 (1943). It is settled that the donor’s
retention of an interest that is dependent upon the occurrence of an event beyond the
donor’s control does not amount to dominion and control over the property and will not
cause the transfer to be incomplete. See Smith v. Shaughnessy, 318 U.S. at 181;
Robinette v. Helvering, 318 U.S. 184, 187 (1943); Estate of Kolb v. Commissioner,
5 T.C. 588, 593 (1945); Mack v. Commissioner, 39 B.T.A. 220, 229 (1939).

In the present case, upon the effective date of the DOT, Taxpayer will transfer the legal
title, naked ownership and remainder interest of artwork to Museums while retaining a
life estate and usufruct. Under Section 4.1.1 of the DOT, during the period of the life
interest and usufruct, Taxpayer may not sell or otherwise dispose of any of the artwork.
Taxpayer retains no power to change the disposition of the artwork to Museums and is
expressly barred from doing so under the DOT. Although the transfer of the artwork to
Museums is subject to several conditions subsequent, the conditions that could cause a
revocation of the transfer are not dependent on any act of Taxpayer. Accordingly, we
conclude that Taxpayer’s grant to the Museums of the legal title, naked ownership and
remainder interest in and to the artwork, as defined by the DOT, would be a completed
gift for gift tax purposes, but for the condition precedent of receipt of a favorable ruling
on the gift tax treatment.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-128461-17                               5

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.


                                     Sincerely,

                                     Karlene M. Lesho

                                     Karlene M. Lesho
                                     Senior Technician Reviewer, Branch 4
                                     Office of the Associate Chief Counsel
                                     (Passthroughs & Special Industries)



Enclosures (2)
      Copy for § 6110 purposes
      Copy of this letter


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