Art lending collection treated as direct charitable use

Plain-English summary

A private foundation supported the arts through grants and planned to lend a donated and purchased collection of paintings and sculptures to public museums, galleries, schools, universities, and similar tax-exempt institutions. The works would be preserved in secure, climate-controlled storage when not on loan and would not be available for private use. The IRS ruled that the artwork would be used directly in carrying out the foundation's educational and charitable purposes. Its value therefore could be excluded when calculating the foundation's minimum investment return under section 4942(e). The IRS also ruled that amounts spent to acquire additional artwork for public exhibition would be qualifying distributions under section 4942(g)(1).

Ruling snapshot

• Question: Would an active public art-lending collection count as direct exempt use, and would purchases for that collection be qualifying distributions?
• Outcome: Approved
• Key authorities: IRC § 4942(e)(1), (g)(1); Treas. Reg. §§ 53.4942(a)-2(c) and 53.4942(a)-3(a); Rev. Rul. 74-498

Full text (IRS public release)

Internal Revenue Service                                Department of the Treasury
                                                        Washington, DC 20224

Number: 202342009                                       [Third Party Communication:
Release Date: 10/20/2023                                Date of Communication: Month DD, YYYY]
Index Number: 4942.00-00
                                                        Person To Contact:
------------------------------------------------        ----------------, ID No.
                                                        Telephone Number:
                                                        --------------------
                                                        Refer Reply To:
                                                        CC:EEE:EOET:EO3
                                                        PLR-104941-23
                                                        Date:
                                                        July 26, 2023

Foundation        = ------------------------------------------------------------------------------------
                    ------------------------------------------------------------
X                 = ---------------------
Style             = ------------------
Geographic Region = ------------------------------------------------------------------------------------

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

This is in response to your letter dated September 15, 2022, and additional information
submitted on May 28, 2023 and July 16, 2023, in which Foundation requested a private
letter ruling involving section 4942 of the Internal Revenue Code. 1

                                                   FACTS

Foundation is recognized as an exempt organization described in section 501(c)(3) and
is classified as a private foundation under section 509(a). Foundation provides grants
to other section 501(c)(3) organizations, specifically, museums and educational
institutions that support the arts. Foundation is primarily funded by cash donations from
relatives of X but occasionally it solicits funds from private individuals outside of X’s

1
 The Internal Revenue Code of 1986, as amended, to which all subsequent “section” references are
made unless otherwise indicated.
PLR-104941-23                                  2

family who are not affiliated with Foundation. Foundation has made cash grants to
several section 501(c)(3) organizations in support of the arts.

Family members of X acquired a collection of artwork, most of which is Style art from
Geographic Region by deceased artists with other works of art displayed in museums
and public institutions. Foundation represents that these artists have a well-established
place in art history. The collection consists of fine art painting and sculpture. X’s family
members have donated several of these works of art to Foundation and are planning on
donating additional works from their collection to Foundation. Foundation intends to
hold this artwork not for sale or investment but for an educational lending program.
Foundation will lend this artwork to qualifying section 501(c)(3) public museums,
galleries, educational organizations such as schools or universities, and other similar
institutions for public exhibition and to make available to the general public the cultural
and artistic enjoyment of the art, to promote public interest in, and knowledge of, the
visual arts, and to further research and study pertaining to historic art and artists.
Foundation represents that all art it owns will be packaged, stored, protected, and
preserved in a secure room with adequate climate controls and protection from natural
light that is designed for such purposes, and will not be available for private use. The
secure room in which the art will be stored will be either owned or leased by
Foundation.

Foundation also has a collection of books and publications about art and art history that
it lends to section 501(c)(3) organizations for educational purposes. In the coming
years, Foundation intends to solicit donations to purchase additional artworks that are in
line with its existing collection and that similarly will be used to lend to section 501(c)(3)
organizations that support the arts and education. Foundation also holds quarterly
meetings to discuss funding for grants and to strategize for the collection and lending of
the artworks.

                                 RULINGS REQUESTED

   1) The artwork owned by Foundation that is acquired through donations or
      purchases will constitute assets used directly in carrying out Foundation's exempt
      purposes and may be excluded from Foundation’s minimum investment return
      under section 4942(e)(1)(A) and Treas. Reg. § 53.4942(a)-2(c)(3).

   2) The amounts spent by Foundation to acquire additional art will constitute
      qualifying distributions within the meaning of section 4942(g)(1).

                                   LAW AND ANALYSIS

Section 4942(a) generally imposes an excise tax on the undistributed income of a
private foundation.
PLR-104941-23                                 3

Section 4942(c) provides that “undistributed income” is the amount by which the
distributable amount for such taxable year exceeds the qualifying distributions made out
of such distributable amount.

Section 4942(d) defines “distributable amount” as an amount equal to the sum of the
minimum investment return plus the amounts described in section 4942(f)(2)(C),
reduced by the sum of the taxes imposed on the private foundation for the taxable year
under subtitle A and section 4940.

Section 4942(e)(1) defines the term “minimum investment return” as five percent of the
excess of (A) the aggregate of fair market value of all assets other than those which are
used (or held for use) directly in carrying out the foundation’s exempt purposes, over (B)
the acquisition indebtedness with respect to such assets.

Section 4942(g)(1) defines the term “qualifying distribution” for purposes of section 4942
generally as any amount paid to accomplish one or more purposes described in section
170(c)(2)(B) or any amount paid to acquire an asset used (or held for use) directly in
carrying out one or more purposes described in section 170(c)(2)(B).

Treas. Reg. § 53.4942(a)-2(c)(2)(v) excludes from the assets taken into account in
determining the minimum investment return any asset used (or held for use) directly in
carrying out the foundation’s exempt purpose.

Treas. Reg. § 53.4942(a)-2(c)(3)(i) provides that an asset is used (or held for use)
directly in carrying out the foundation’s exempt purpose only if the asset is actually used
by the foundation in carrying out its exempt purpose or the foundation establishes that
its immediate use for such exempt purpose is not practical and that definite plans exist
to commence such use within a reasonable period of time. Assets held for the
production of income or for investment are not used (or held for use) directly in carrying
out the foundation’s exempt purpose.

Treas. Reg. § 53.4942(a)-2(c)(3)(ii)(c) provides that physical facilities used in charitable,
educational, or other similar exempt activities, such as works of art owned by the
foundation which are on public display, are examples of assets “used or held for use
directly in carrying out the foundation’s exempt purpose.”

Treas. Reg. § 53.4942(a)-3(a)(2)(i) provides that the term “qualifying distribution”
includes any amount paid to accomplish one or more purposes described in sections
170(c)(1) or 170(c)(2)(B). Treas. Reg. § 53.4942(a)-3(a)(2)(ii) provides that this term
includes any amount paid to acquire an asset used (or held for use) directly in carrying
out one or more purposes described in sections 170(c)(1) or 170(c)(2)(B).

In Example (3) of Treas. Reg. § 53.4942(a)-3(a)(7), a private foundation that engaged in
holding paintings and exhibiting them to the public purchased an additional building to
PLR-104941-23                                 4

be used to exhibit the paintings. This expenditure constituted a qualifying distribution
under Treas. Reg. § 53.4942(a)-3(a)(2).

Rev. Rul. 74-498, 1974-2 C.B. 387, 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 section
4942(e)(1)(A), and the value of the paintings is excluded in computing the foundation's
minimum investment return.

Section 4942 generally imposes an excise tax on a private foundation’s undistributed
income, as determined for any taxable year by the calculation of the foundation’s
distributable amount, which includes its minimum investment return. Assets used, or
held for use, in furtherance of a private foundation’s exempt purposes are generally
excluded from determining the minimum investment return. See section 4942(e)(1) and
Treas. Reg. § 53.4942(a)-2(c)(2)(v). The regulations list 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. Treas. Reg. § 53.4942(a)-
2(c)(3)(ii)(c).

Foundation has a history of furthering its exempt educational and charitable purposes
by supporting museums and educational institutions that support the arts through grants
of cash and by loaning its collection of books and publications about art and art history
to these types of organizations. Foundation represents that upon receipt of additional
artworks from X’s family members, it will engage in an art loan program whereby
Foundation’s art collection will be loaned to section 501(c)(3) organizations that support
the arts and education. The role Foundation will assume in making loans of artwork to
section 501(c)(3) organizations, managing the art collection, providing for its exhibition
and display, and holding it for exhibition, is similar to the active loan program managed
by the foundation described in Rev. Rul. 74-498. Similar to the revenue ruling, the
artworks owned by Foundation will constitute property used directly in carrying out its
exempt purposes within the meaning of section 4942(e)(1)(A) and shall not be included
for purposes of calculating its minimum investment return under section 4942(e)(1)(A)
and Treas. Reg. § 53.4942(a)-2(c)(3). In addition, Foundation’s expenditures to acquire
additional artwork to add to its collection for exhibit and display by section 501(c)(3)
organizations would be similar to the expenditures described in Example (3) in Treas.
Reg. § 53.4942(a)-3(a)(7) that constituted qualifying distributions. Acquiring additional
artwork for exhibition and display to the public, and not for private use, furthers
Foundation’s exempt purposes. Consequently, these expenditures will constitute
“qualifying distributions” within the meaning of section 4942(g)(1).

                                        RULINGS

Based on the foregoing, and assuming the accuracy of the facts and representations set
forth herein, we rule as follows:
PLR-104941-23                                  5

   1) The artwork owned by Foundation that is acquired through donations or
      purchases will constitute assets used directly in carrying out Foundation's exempt
      purposes and may be excluded from Foundation’s minimum investment return
      under section 4942(e)(1)(A) and Treas. Reg. § 53.4942(a)-2(c)(3).

   2) The amounts spent by Foundation to acquire additional art will constitute
      qualifying distributions within the meaning of section 4942(g)(1).

The rulings contained in this letter are based upon information and representations
submitted by or on behalf of Foundation and accompanied by a penalty of perjury
statement executed by an individual with authority to bind Foundation, and upon the
understanding that there will be no material changes in the facts. While this office has
not verified any of the material submitted in support of the request for a ruling, it is
subject to verification on examination. The Associate office will revoke or modify a letter
ruling and apply the revocation retroactively if there has been a misstatement or
omission of controlling facts; the facts at the time of the transaction are materially
different from the controlling facts on which the ruling was based; or, in the c ase of a
transaction involving a continuing action or series of actions, the controlling facts
change during the course of the transaction. See Rev. Proc. 2023-1, section 11.05.

This letter does not address the applicability of any section of the Code or Regulations
to the facts submitted other than with respect to the sections specifically described, and,
except as expressly provided in this letter, no opinion is expressed or implied
concerning the tax consequences of any aspects of any transaction or item of income
discussed or referenced in this letter.

Because it could help resolve questions concerning federal tax status, this letter should
be kept in Foundation's permanent records.

A copy of this letter must be attached to any tax return to which it is relevant.
Alternatively, if Foundation files a return electronically, this requirement may be satisfied
by attaching a statement to the return that provides the date and control number of this
letter.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to Foundation's authorized representative.
PLR-104941-23                                6

This ruling letter is directed only to Foundation. Section 6110(k)(3) provides that it may
not be used or cited as precedent.

                                          Sincerely,

                                          Virginia Richardson
                                          Senior Technician Reviewer
                                          Office of the Chief Counsel
                                          (Employee Benefits, Exempt Organizations,
                                          and Employment Taxes)

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