Contributions of Fractional Interests in Tangible Personal Property
The Pension Protection Act of 2006 (PPA) imposes requirements for determining the charitable deduction permitted for gifts of fractional interests in tangible personal property.
What contributions are affected?
These requirements apply to contributions made after August 17, 2006.
What is tangible personal property?
In IRS Publication 526, Charitable Contributions, tangible personal property is defined as “any property, other than land or buildings, that can be seen or touched.” Examples of tangible personal property include furniture, books, jewelry, and artwork.
What is a fractional interest in tangible personal property?
While many donors will contribute property outright, occasionally a donor will want to contribute property but retain some rights to the property. A fractional interest is a portion of the donor’s entire rights to the property. For example, a donor may contribute a 25% interest in a painting or coin collection to a museum, giving the museum the right to possess and control the item for three months of each year.
Is a donor permitted to receive a deduction for contribution of a fractional interest in property if the donor doesn’t own all of the interest in the property?
No, unless an exception is made by the Treasury Secretary. Generally, if the donor shares the property with another individual or entity (other than the charity to which the fractional interest is to be donated), a deduction will not be permitted. The PPA permits the Secretary to make an exception to the rule if every person with an interest in the property makes a proportional contribution to that person’s own interest.
What happens if the charity does not take substantial physical possession of the property or doesn’t use the property for an exempt purpose during the period of time ending with the death of the donor or ten years after the initial contribution?
The donee’s income and gift tax charitable deduction for all contributions of interests in the property will be recaptured plus interest. The donor will also be subject to an additional tax of 10 percent of the amount recaptured.
What is the value of a charitable deduction for the initial contribution of a fractional interest?
The PPA does not change the charitable deduction for the initial contribution. If the donor contributes the property to a charity that will use the property for its charitable purpose, the donor will likely receive a deduction equivalent to the fair market value of the interest it contributed.
What charitable deduction is permitted for subsequent contributions of interests in the same property?
The charitable deduction permitted under income, gift, or estate tax rules for additional contributions of interests in the same property is limited to the lesser of the following:
- The value used when determining the deduction available for the initial contribution
- The fair market value of the item at the time of the subsequent contribution
Does a donor eventually have to contribute all interests in the property?
Yes. A donor’s income tax or gift tax charitable deduction(s) related to the gifts of fractional interest of particular property will be “recaptured” if a donor does not contribute all of the donor’s interest in the property before the earlier of the donor’s death or ten years after the initial contribution. Interest on the recaptured amount will also be due. The donor will also be subject to an additional tax of 10 percent of the amount recaptured.
What happens if the charity to which the initial contribution was made ceases to exist?
The contribution of any remaining fractional interests may be contributed to another organization described in Section 170(c). Section 170(c) organizations include charities, government, certain veterans' organizations, fraternal societies, and cemetery corporations.
How are these rules applied if a donor made a contribution of a fractional interest prior to or on August 17, 2006?
These provisions of the PPA do not apply to contributions made prior to or on August 17, 2006. If a donor makes an additional contribution of a fractional interest in the same property after August 17, 2006, the additional contribution will be treated as the first fractional contribution for the purposes of the provisions described above. For example, if an individual contributed 25% of her interest in a painting to a museum in 2005 and makes a subsequent contribution of 25% interest in September 2006, the contribution in September 2006 will be treated as the first fractional contribution.
Disclaimer
The information provided in this resource is based on our continuing analysis of the Pension Protection Act. Every effort has been made to ensure the accuracy of this information. Due to the complexity of the PPA and the fact that many of these provisions introduce issues that are new to the Internal Revenue Code, this information is subject to change. Please check back here and on the IRS website (www.irs.gov) for updates. This information is not a substitute for expert legal, tax, or other professional advice and we strongly encourage grantmakers and donors to work with their counsel to determine the impact of the PPA and related guidance on their particular situations. This information may not be relied upon for the purposes of avoiding any penalties that may be imposed under the Internal Revenue Code.
