Art Lending, Leasing, and Self-Dealing Rules: Case Study

By Bruce R. Hopkins, EditorJanuary 27, 2014 | Print

The IRS has ruled that various lending of art, leasing, and other transactions between a private foundation and disqualified persons will not constitute acts of self-dealing, due to the applicability of various exceptions and “special rules” (Priv. Ltr. Rul. 201346011).


A private operating foundation (Foundation) has as its primary activity the operation of a museum. A disqualified person with respect to the Foundation (Grantor) owns a collection consisting of a library portion and an artifacts portion. The library portion consists of books, documents, photographs, and memorabilia about artifacts generally (Library Collection). The artifacts portion consists of artifacts selected for their historical, social, technical, or aesthetic significance (Artifacts Collection). The Grantor plans to transfer ownership of both of these collections to a revocable living trust (Trust), of which the Grantor is the trustee. The Trust thus also is a disqualified person.

The Grantor is currently lending the Library Collection to the Foundation without charge. The Trust will pay all expenses for the betterment of this collection. The Foundation will pay all repairs and maintenance, preservation, and safekeeping costs of the Library Collection.

The Grantor is proposing to loan, through the Trust, the Artifacts Collection to the Foundation. The Trust is to provide office and display space for the Foundation’s exclusive use in a building that it owns, without charge, and provide office equipment, furniture, and supplies, and accounting services and other general and administrative services. A company, wholly owned by the Grantor (Company) (and thus also a disqualified person), occupies the portion of the building not used by the Foundation. The Foundation and the Company will share the cost of the building’s maintenance.

The Foundation will transport artifacts for exhibition at public events and use certain artifacts in competitions. The Foundation will pay the expenses for transportation, insurance, and the like. The Trust will pay all capital expenses that improve an artifact, such as restoration.

The Foundation plans to hire employees to perform certain low-level conservation tasks. The Company’s employees will perform specialized conservation tasks that require many years of study to master, particularly inasmuch as the results must satisfy museum-quality standards for historical artifacts.

Neither the Grantor nor the Trust has claimed a charitable contribution deduction with respect to the Library Collection or the Artifacts Collection. Following the death of the Grantor, the assets of the Trust are to be transferred to a public charity.


An excise tax is imposed on each act of self-dealing between a disqualified person and a private foundation (IRC § 4941). Acts of self-dealing are defined (IRC § 4941(d)(1)). Exceptions and other “special rules” are provided (IRC § 4941(d)(2)).

Self-dealing includes the furnishing of goods, services, or facilities between a private foundation and a disqualified person (IRC § 4941(d)(1)(C)). This type of furnishing is allowed, however, if the furnishing is without charge and if the goods, services, or facilities furnished are used exclusively for charitable purposes (IRC § 4941(d)(2)(C)) (without-charge exception). The furnishing exception is available even if the foundation pays for transportation, insurance, or maintenance costs incurred in obtaining or using the property, as long as the payment is not made to a disqualified person (Reg. § 53.4941(d)-2(d)(3)).

A lease of property between a private foundation and a disqualified person generally is an act of self-dealing (IRC § 4941(d)(1)(A)). An exception is available, however, for leasing arrangements without charge, even if the foundation pays for janitorial services, utilities, or other maintenance costs as long as the payment is not made to a disqualified person (Reg. § 53.4941(d)-2(b)(2)).

The payment of compensation by a private foundation to a disqualified person generally is an act of self-dealing (IRC § 4941(d)(1)(D)). Pursuant to an exception, however, the payment of compensation to a disqualified person for personal services that are reasonable and necessary to carrying out exempt purposes is not self-dealing if the compensation is not excessive (IRC § 4941(d)(2)(E)) (personal services exception). Personal services are those that are professional and managerial in nature (as reflected in the examples in Reg. § 53.4941(d)-3(c)(2)).

Self-dealing does not occur where the benefit received by a disqualified person from a private foundation is incidental or tenuous (Reg. § 53.4941(d)-2(f)(2)) (incidental benefit exception). Public recognition is an incidental benefit.


Noting that the Foundation will be borrowing the Artifacts Collection from the Trust without charge and exhibiting it to the public, the IRS ruled that the transaction will not be self-dealing due to the without-charge exception. This is the case even though the Foundation will be paying for transportation, insurance, conservation, and maintenance costs. These payments will not be made to disqualified persons. The IRS emphasized that the artifacts are of “lasting interest and value,” that the museum engages in public outreach through the use of volunteer tour guides and charges affordable admission fees, and that a charitable contribution deduction is not being claimed.

The provision to the Foundation by the Trust of exhibit space was also held to be protected by the without-charge exception. The IRS noted that use of the facility is for the Foundation’s charitable mission and that the Company will pay its portion of occupancy costs directly to unrelated service providers.

As to the matter of compensation, the IRS wrote that the services the Foundation proposes to acquire from the Company are “very specific technical services” for the conservation of exhibits, being “similar to the services an anthropologist or archeologist would provide with respect to artifacts.” These services were held to be professional in nature, reasonable and necessary for a museum, and assumed to be reasonable—and thus eligible for the personal services exception.

The IRS further held that the participation by the Grantor and/or the Company in certain show or event activities on the Foundation’s behalf, and the acknowledgment of these persons, are not forms of self-dealing because of the incidental benefit exception. [12.4(a)]

Commentary: This case study nicely illustrates the rigidity and unnecessary breadth of many of the private foundation general regulatory rules. Unwarranted strictness is proven by a panoply of (saving) exception and special rules.

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