If you’re considering donating a work of art to a foreign museum, you might assume it’s as simple as handing over the piece and taking a U.S. federal income tax charitable deduction. Unfortunately, when it comes to U.S. income tax law, it’s not that straightforward. U.S. income tax rules generally don’t allow donors to deduct gifts made directly to foreign organizations. However, there are ways to structure a gift to a foreign museum so you may still qualify for a federal income tax charitable deduction. Here’s what you need to know before donating art to a museum outside the United States.

Donating works of art directly to a foreign museum

Can you claim an income tax deduction?

Technically, yes — but with a big caveat. A foreign museum can apply to the IRS to be recognized as a tax-exempt charity in the United States. To do so, it must file an application (IRS Form 1023) and receive formal approval called a “determination letter.” If the museum has this letter, then a U.S. donor, who’s a collector, may be able to make a direct, income-tax-deductible gift based on the item’s fair market value.

The problem? Very few foreign museums go through this process. It’s uncommon for them to seek tax- exempt status in the U.S., and most donors will find that their foreign museum of choice hasn’t done so. Still, it’s worth checking. You can do a “tax-exempt organization” search on the IRS’s website. If the museum is listed and in good standing, you may be able to make a direct donation and potentially qualify for a U.S. income tax charitable deduction. The amount that donors can deduct each year is also subject to adjusted gross income limits, which vary based on the type of charity that receives the donation and whether the related-use rules (discussed below) are met.

If the museum has a determination letter in good standing, in order to claim an income tax deduction based on the work’s fair market value, the donor must:

• Have held the artwork for more than one year
• Obtain a qualified appraisal within 60 days of the donation (the appraisal must be attached to the donor’s income tax return if the art is appraised at $20,000 or more)
• Complete IRS Form 8283 – Noncash Charitable Contributions and include it with the donor’s annual income tax return (if the appraised value is above $5,000)
• Receive a contemporaneous written acknowledgement from the foreign museum, which must put the donated work to a related use
• Deliver the work to the foreign museum

If the foreign museum doesn’t have a determination letter, don’t give up hope — there may still be another route.

What’s an American “Friends Of” group?

Many well-known foreign museums are supported by what’s called an “American Friends Of” (or AFO) group. These are nonprofit organizations set up in the

United States as public charities under section 501(c)(3) of the tax code. Their mission is to support a foreign museum through educational programs and exhibitions, and sometimes by acquiring and donating works of art to the museum. These groups accept donations from U.S. individuals, foundations and businesses. While cash and publicly traded securities are the most common types of donations, the groups sometimes accept art as well.

There’s no official directory of AFO groups. So if you’re interested in donating to a foreign museum, your best bet is to contact the museum directly and ask whether such a group exists. If it does, donors should use the IRS online tool to confirm its tax-exempt status before moving forward with a donation. AFO groups exist for many prestigious museums, including:

• American Friends of the Louvre
• American Friends of the British Museum
• American Friends of the Hermitage
• American Friends of the Uffizi
• American Friends of the Prado

Unfortunately, not all foreign museums are associated with an AFO group, so donors need to do their homework.

How does the donation process work?

If an AFO group is open to accepting your donation, you’ll likely go through a detailed review process that includes:

• Providing a qualified appraisal of the artwork
• Documenting provenance
• Documenting title
• Covering transport and insurance costs
• Possibly contributing additional cash or stock to help the organization pay for ongoing administration costs to maintain the artwork in its permanent collection

If the AFO group agrees to accept the donation, a formal gift agreement will be drawn up. This contract typically transfers title and outlines how the gift will be used. This agreement should not be confused with contemporaneous written acknowledgement that the AFO must provide after the gift is made. The latter is needed in order to claim a federal income tax charitable deduction.

Why does the “related-use” rule matter?

Here’s a crucial tax detail: To claim a federal income tax charitable deduction based on the artwork’s fair market value (rather than just what you paid for it), the charity must use the item in a way that’s related to its mission. This is known as the “related-use” rule.

For art donations, that generally means the U.S. charity will use it for public display, education and/or research. If the AFO group sells or disposes of the piece within three years of receiving it, it must report the sale on IRS Form 8282. If that happens, and the IRS finds the museum use was not related to its charitable mission, your deduction may be reduced — sometimes dramatically.

Instead of deducting the full value of the artwork, you may only be allowed to deduct your income tax basis, which in most instances is what you originally paid for the artwork. This not only reduces your federal income tax savings but could result in additional taxes, penalties and interest. To avoid this outcome, many AFO groups commit to lending the artwork to the foreign museum for at least three years to help satisfy the related-use rule and protect your federal income tax deduction.

What happens after three years?

Once the three-year period is up, the AFO group must have the freedom to decide what to do with the artwork. Most often, it will regrant (that is, donate) the piece to the foreign museum it supports. Note, however, that the AFO group cannot promise upfront to do this. If it did, the IRS could argue that the group was simply a “conduit” being used to sidestep the rule against donating directly to foreign charities that don’t have a determination letter. That could jeopardize the donor’s federal income tax charitable deduction. Instead, a donor may express a preference that the artwork eventually be transferred to the museum, but the ultimate decision must rest with the AFO group.

Donating art to a foreign museum without a U.S. partner

Is an income tax charitable deduction still possible?

For U.S. taxpayers who want to donate a work of art to a foreign museum, the path to claiming a federal income tax charitable deduction is often complicated — especially when the museum doesn’t have a U.S. income tax exemption or an AFO group. But in certain cases, a deduction may still be possible by working with a donor- advised fund or a private foundation. Here’s what you need to know.

When there’s no U.S. tax-exempt group

Normally, to claim a charitable deduction for donating artwork, you must give it to a U.S. income-tax-exempt organization. If the foreign museum doesn’t have this status, and it isn’t supported by an AFO group, your options are very limited — but not necessarily exhausted.

Two potential paths remain:

• Donating to a donor-advised fund (DAF)
• Donating to a private foundation (PF)

Both types of organizations are allowed to make grants to foreign charities, including donations of art, but only under strict conditions.

How it works:

The two conditions for foreign grants

For a DAF or PF to regrant art to a foreign museum without facing federal tax penalties, one of the following conditions must be met:

1. Equivalency determination (ED). This is a process where a qualified tax professional makes a good- faith determination that the foreign museum is basically the same as a U.S. charity. It’s essentially a proxy to the foreign museum requesting a determination letter. It’s important to note that not all foreign charities will be able to satisfy the IRS’s documentation requirements due to a number of factors, including foreign tax laws, the museum’s organizational structure, the museum’s funding sources and different accounting practices.
2. Expenditure responsibility (ER). This is a more hands-on approach, where the DAF or PF must closely monitor how the foreign museum uses the donation. The DAF or PF must exert all reasonable efforts to establish adequate procedures to see that the grant is spent only for the purpose for which it’s made, obtain full and complete reports from the grantee organization on how the funds are spent, and make full and detailed reports on the expenditures to the IRS.

Exercising ER isn’t a practical fit for donations or works of art since the ER rules are aimed at monetary grants. With a physical asset like a work of art, tracking its use each year in a manner that will satisfy the IRS becomes much harder and much more expensive, since the DAF or PF will have to report such use on its annual tax return (IRS Form 990-PF).

If a DAF or PF doesn’t have an ED or exercise ER, the IRS will treat the regrant to the foreign museum as a “taxable expenditure,” and substantial penalties may apply. This also puts the donor’s federal income tax charitable deduction at risk. Let’s break these options down further.

Donor-advised funds: Limited but possible

Donor-advised funds are popular vehicles for giving. However, most DAFs only accept:

• Cash
• Marketable securities (like publicly traded stocks)

Some DAFs will accept more complex assets — such as real estate or private company shares — but only if they expect to sell those assets relatively soon after the donation and reinvest the cash proceeds in a diversified portfolio. If a DAF were to accept a work of art and then sell it in order to raise cash, the DAF would not meet the related-use rule, and the donor’s federal income tax deduction would be based on the lower of the work’s appraised value or its adjusted income tax basis.

That makes lifetime art donations to DAFs rare — and even more challenging if the art is meant to be shipped overseas. To satisfy the related-use rules so that a donor can claim a federal income tax charitable deduction based upon the work’s appraised fair market value, the DAF must have:

• The ability to store or lend the artwork for at least three years
• The ability to regrant the artwork after three years
• A process to meet either the ED or ER rules

Today, only a handful of specialized DAFs in the U.S. are equipped to handle donations of art that are earmarked for foreign museums. But if you can find one, and it agrees to accept your art and regrant it to the foreign museum under the proper procedures, you should be eligible for a fair market value deduction.

Private foundations: More flexible, less deduction

If no DAF will accept your donation of art, a PF may be another option. PFs have more flexibility to accept art, store it, and transfer it later to a foreign museum. However, there’s a big tradeoff: When donating art (or other tangible items) to a PF, your deduction is limited to the lesser of your income tax basis in the work (typically what you paid for it) or the fair market value at the time of the donation.

This rule can significantly reduce the value of your income tax charitable deduction if the artwork has appreciated in value. Still, for donors who care more about supporting a cause rather than maximizing their federal income tax deduction, a PF may be the right fit — especially if it’s already set up and capable of satisfying the IRS requirements.

Final thoughts

Donating art to a foreign museum can be a meaningful and generous act. But it’s essential to follow the right steps if you want to receive a U.S. income tax charitable deduction based upon the work’s fair market value.

The safest and most common path is to work with an AFO group. These organizations understand the tax rules and can help structure the donation properly. If no such group exists, it may be possible to explore alternatives, such as working through a donor-advised fund or a private foundation.

Before making any donation, consult with a tax advisor who has experience with charitable gifts and art. A little planning upfront can help ensure that your generosity is both impactful and tax smart.

Bank of America, N.A., is one of the most active lenders against fine art in the world. If you’re interested in using your collection to produce liquidity without selling, please reach out to your Private Bank advisor, who can provide access to Bank of America’s Art Services team.

Nonfinancial assets, such as closely held businesses, real estate, fine art, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations, and lack of liquidity. Nonfinancial assets are not in the best interest of all investors. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

Donor-advised fund and private foundation management are provided by Bank of America Private Bank, a division of Bank of America, N.A., Member FDIC and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”). Trust, fiduciary and investment management services are provided by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A., and its agents. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp., including Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”).