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Because of its nearly infinite variety, tangible personal property is one of the most interesting types of property contributed to charity. This text defines tangible personal property, reviews the income tax rules associated with its transfer, discusses its compatibility with various planned giving vehicles, and provides guidance for its ownership and disposition.

Tangible personal property is one of the most interesting types of property contributed to charity because of its infinite varieties. The most common types of tangible personal property contributed to charity include: artworks, jewelry, gems, and other collectibles; motor vehicles, watercraft, and aircraft; livestock, harvested crops, cut timber, and other agricultural products; as well as items of business inventory or equipment.

Tangible personal property is frequently given on an outright basis. However, it can also be transferred through split-interest planned giving vehicles such as charitable remainder trusts.

Tangible Personal Property Defined

The Code and Regulations applicable to charitable contributions do not provide a definition of tangible personal property. IRC §48, which deals with investment credits, defines tangible personal property as:

"[a]ny tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Thus, buildings, swimming pools, paved parking areas, wharves and docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, such property as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which is contained in or attached to a building constitutes tangible personal property for purposes of the credit allowed by section 38."

The only definition of tangible personal property in a charitable context is found in IRS Pub. 5261

"The term tangible personal property means any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars."

The only specific example of tangible personal property for charitable contribution purposes found in the regulations involves a gift of a future interest in a chandelier that is attached to a building.2 If the chandelier is to be severed from the property when the gift becomes complete, it is tangible personal property. Conversely, if the chandelier is to remain attached to the real property that is also contributed, it will also be considered real property.

Tangible personal property are objects that can touched, excluding cash, securities and real estate and is distinguishable from intangible personal property. For example, although currency can be touched, it is considered intangible property unless it has numismatic value as a collectible. Other examples of intangible personal property include patents, copyrights, royalties, installment obligations, insurance and annuity contracts, partnership interests, checks, securities and other negotiable instruments.

Income Tax Considerations

Transfers of tangible personal property present specific and special issues for income tax charitable deduction purposes. Questions to be asked in determining the allowable income tax deduction include:

Can the property be placed to a use that is related to the charitable donee's tax-exempt purpose; and

Is the property held by the donor for investment purposes, held primarily for sale to customers in the ordinary course of a trade or business, or held as qualified research property; and

Is the gift one of a present or future interest in the tangible personal property?

Related Use Rule

It is only where the use of tangible personal property is related (as defined more fully below) to the tax-exempt purposes of the donee charity that the donor is allowed a fair market value deduction for the contribution of that property. Thus, the amount of the available charitable contribution deduction and the percentage limitation applicable to its use depends on the relation between the tangible personal property and the tax-exempt purposes of the charitable donee. Reg. §1.170A-4(b)(3)(i) of the regulations provides:

"(i) In general. The term "unrelated use" means a use which is unrelated to the purpose or function constituting the basis of the charitable organization's exemption under section 501 or, in the case of a contribution of property to a governmental unit, the use of such property by such unit for other than exclusively public purposes. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use. If furnishings contributed to a charitable organization are used by it in its offices and buildings in the course of carrying out its functions, the use of the property is not an unrelated use. If a set or collection of items of tangible personal property is contributed to a charitable organization or governmental unit, the use of the set or collection is not an unrelated use if the donee sells or otherwise disposes of only an insubstantial portion of the set or collection. The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one that would have been unrelated if made by the charitable organization."

The regulations further require the taxpayer to provide proof that the property is in fact not being placed to an unrelated use by the charity, or that it is reasonable to anticipate that the property will not be put to an unrelated use. For example, if an individual donates a painting to a museum and it is of the type normally retained by the museum, it is reasonable for the donor to anticipate, unless he or she has actual knowledge to the contrary, that the painting will not be put to an unrelated use by the donee. Whether or not the object is later sold or exchanged by the donee is immaterial.3>

IRS, in a series of private letter rulings, has given guidance as to when the gift will be deemed one for a related use.

In Ltr. Rul. 7751044, a donor requested a ruling on the contemplated gifts of three sets of lithographs to X museum, Y council and Z Foundation.

The museum wrote it would display the lithographs in the museum or as part of its lending collection and confirmed that such uses would further the public's appreciation of art.

The council wrote that it would use the lithographs in connection with its art program at a year round camp, display the lithographs at its center for retarded children and loan the lithographs to retarded children to display in their homes. The council also confirmed that those uses would further the appreciation of art by the children affected.

The foundation operates a residential facility for retarded children and would, it wrote, use the lithographs for display in art exhibits and for study in its art program. It also confirmed that appreciation of art would be furthered by such use.

IRS ruled that use of the lithographs by each of the above charitable donees would not be unrelated to its exempt charitable purposes and, based on the written statements of the organizations, it was reasonable for the donor to anticipate that the lithographs would not be put to an unrelated use by such organizations.

In Ltr. Rul. 8247062, a donor gave a painting to a retirement center that collected artworks for display in its public areas. In doing so, it believed it enriched and enhanced the lives of the residents and helped provide stimulation by keeping its residents motivated and alert with therapeutic value for the residents by stimulating artistic creativity. IRS ruled that such use of the painting would be related to the exempt function of the retirement center providing care for aged men and women.

In Ltr. Rul. 8204167, a charity organized to educate the public on Judeo-Christian Heritage provided a retreat where families could visit to strengthen and renew their relationships was given a houseboat. The houseboat would be used for meeting purposes and as a lodging facility. IRS ruled that such use was related to the organization's exempt purpose.

In Ltr. Rul. 8016116, a donor donated a rare oriental tree to an organization's botany department. IRS held the gift related to the donee's charitable functions.

In Ltr. Rul. 8143029, a donor gave four pieces of a collection of porcelain art objects to a tax exempt retirement center which would display those pieces in its dining hall and intended to keep them permanently for the benefit of its residents. IRS ruled that those uses were related to the retirement home's purpose of creating a living environment for its residents.

Also see Ltr. Ruls. 9131052 and 9833011.

But a gift of an antique automobile to a college was held to be unrelated because the car was not used by the school but stored in a professor's garage and the college did not offer courses in antique car restoration or like programs. See Ltr. Rul. 8009027.

If appreciated property is considered related to the public charity's exempt purpose, the deduction is based on fair market value and available to the extent of 30% of the donor's contribution base. If property is considered unrelated to the public charity's exempt purpose, the deduction is based on the lesser of its fair market value and its cost basis, and is available to the extent of 50% of donor's contribution base.4

Property Acquired for Passion or Investment

Collectors of tangible personal property are driven by a variety of forces: passion, status, curiosity, financial gain, tax relief. They generally fall into two groups: those who feel an emotional involvement with their collections, and others who view their collections as disposable assets. Some will have both characteristics.

Tangible personal property that is acquired for passion or as an investment is generally considered a long term capital gain asset, if it is held for more than one year. An example is a visual arts collection (or any part of it). Otherwise, the collection "is ordinary income property if 1) the donor created it, 2) the donor received it as a gift from the creator, 3) it is held as inventory by a dealer, 4) its sale would generate short term capital gain because it was held for one year or less."5

Collectors with charitable objectives are entitled to a full market value deduction for donations of tangible personal property provided that "the use by the donee institution must be related to its charitable purposes or functions. If not, the deduction is for cost basis only (or, if less, fair market value."6 Donors who meet the related use rule are allowed "a charitable deduction to full fair market value of the property on the date of the contribution base."7 "Any amount that exceeds the 30 percent limitation may be carried forward for five years, retaining its character as capital gain property."8 "If the contributed collection satisfies the related use rule, the taxpayer may elect to increase the 30 percent limitation to 50 percent of his or her contribution base. However, if that election is made, the amount of the deduction must be reduced by 100 percent of the appreciation in value of the collection."9 Thus, the deduction is limited to the donor's cost basis.

The donation of a visual arts collection to a museum is a related use gift as well as a donation to higher education or to a school that has space dedicated for the display of visual arts and provides art education. Gifts to other charities are appropriate too, but each must meet the above criteria.

For example, a collector has a contribution base of $150,000. He or she contributes a capital gain visual arts collection with a fair market value of $90,000, in which he or she has a cost basis of $40,000, to a museum. If the donation has a qualified appraisal prepared by a qualified appraiser, he or she is allowed a $90,000 deduction, of which $45,000 (30 percent of $150,000) is allowed with a carryover of $45,000.

However, if that visual arts collection is donated to a charity but not related to the charitable purposes or functions of that charity, the collector's deduction will be for a cost basis of $40,000; such a cost which is fully deductible with a 50 percent ceiling, and no carryover.

Here is a comparison between donors holding two long-term assets, stock and tangible personal property, such as a visual arts collection. Both assets have a fair market value of $90,000 and a cost basis of $40,000.