# A Collection in a Charitable Foundation: The Private Museum and the FMV Deduction

> Private operating foundation §4942(j)(3): full fair market value deduction, 30% AGI ceiling, related use, self-dealing under §4941 and the 0.5% floor from 2026.

Author: Мария Плотникова — юрист, Family Office (https://wiki.private.law/authors/plotnikova)
Last modified: 2026-08-09T10:47:00.000Z
Canonical: https://wiki.private.law/en/private-museum-foundation
Topics: structures, investments
Jurisdictions: usa, uk, germany, switzerland, global
Product tags: estate-planning, wealth-planning, family-office
Semantic tags: estate-planning, wealth-planning, family-office

---

A collection is worth a multiple of what was paid for it, and the whole of that gap is latent long-term gain. Transferring the works to a family private foundation under §170(e)(1)(B)(ii) cuts the deduction back to tax basis: forty million of market value becomes three million of price once paid. §170(b)(1)(F)(i) lifts one category of recipient out of the cut-back — the private operating foundation as defined in §4942(j)(3). The deduction runs at full fair market value, the ceiling rises from 20% to 30% of AGI, and the board stays in the family. What follows: what the foundation needs in order to hold the status, the second barrier that POF status does not remove, and what the retained control costs.

> 🔗 **Related**
> [Art and taxes](https://wiki.private.law/en/art-tax-planning) · [The charitable deduction](https://wiki.private.law/en/charitable-deduction) · [Private foundations](https://wiki.private.law/en/private-foundations) · [Art and collectibles](https://wiki.private.law/en/art-collectibles-wealth) · [US estate tax](https://wiki.private.law/en/us-estate-tax) · [Philanthropy in the family office](https://wiki.private.law/en/philanthropy-family-office)

## The structure

The arrangement is assembled from three independent layers, and failure in any one of them devalues the others:

- **The deduction** — market value or basis; the fork sits in §170(e)(1)(B), where there are two barriers
- **The status** — §4942(j)(3): the income test plus one of three alternative tests
- **The control** — §4941: the family governs the foundation and keeps its hands off the foundation's property
> 🍓 The logic across all three layers is the same: full market value is deductible because the object works in public. The tests below measure precisely that — whether the foundation spends money on its own activity, whether the assets sit on display, whether the family extracts anything beyond reputation.

## The deduction fork: two barriers, POF clears one

The §170(e)(1)(B)(ii) barrier is the bare fact of a private foundation recipient, with a carve-out for foundations described in (b)(1)(F). Clause (F)(i) names the private operating foundation under §4942(j)(3) first; (F)(ii) extends the same treatment to a pass-through foundation that distributes 100% of the contributions received by the 15th day of the third month after the close of its taxable year. For a collection the second route is dead, yet the categorical line that "any non-operating foundation means basis only" is inaccurate.

The (i)(I) barrier is related use: the cut-back applies to tangible personal property "if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501". The recipient's status offers no help here: a POF that keeps a work in storage pending a future sale gets a basis deduction on exactly this ground. The shorthand "POF ⇒ FMV" holds only where both conditions are satisfied. A third cut-back, (i)(II), catches disposal by the donee without certification, and §170(e)(7) stretches that exposure across three years.

Capital gain property (defined at §170(b)(1)(C)(iv)) goes into a POF under the 30% contribution base ceiling of (C)(i): §170(b)(1)(A)(vii) puts (F) foundations on the list of 50-percent limit organisations. In an ordinary foundation (D)(i) governs instead — the lesser of 20% of the base and what remains of the 30% basket after amounts used under (C). Cash into a POF runs at 60% (§170(b)(1)(G)(i); after OBBBA the sunset has been struck from the provision and the ceiling is permanent), while for an artist his own work remains ordinary income property under §170(e)(1)(A), deductible at the cost of materials.

## §4942(j)(3): the income test plus one of three

The income test is mandatory in every case: "substantially all" of the lesser of adjusted net income and minimum investment return must be spent "directly for the active conduct" of the exempt activity. Treas. Reg. §53.4942(b)-1 reads substantially all as 85% and requires that the money be applied "by the foundation itself, rather than by or through one or more grantee organizations": grants count as an indirect means of carrying on the activity and score nothing.

One of three further tests under (j)(3)(B) must then be met: **assets** — the statute says "substantially more than half" of the assets must be devoted directly to the activity, and the 65% threshold comes from Treas. Reg. §53.4942(b)-2; **endowment** — distributions of not less than two-thirds of minimum investment return; **support** — from the general public and five or more exempt organizations, no more than 25% from any one of them and no more than one-half from gross investment income.

The museum scenario is built for the first. The same Treas. Reg. §53.4942(b)-2 names as qualifying "museum assets, classroom fixtures and equipment, and research facilities", and refuses to count investment assets even where every penny of their income goes to exempt purposes.

The arithmetic rests on §4942(e)(1): minimum investment return is 5% of the market value of assets net of acquisition indebtedness (the worked example in §53.4942(b)-2 still runs at an obsolete 6%), and property used directly in the exempt activity is excluded from the base. The museum building and the collection drop out, minimum investment return for a properly built private museum sits close to zero, and the income test becomes 85% of almost nothing. Compliance is measured over three years out of four or on a four-year combination basis — on the 2025 Form 990-PF this is Part XIII.

The prize for holding the status is exemption from the §4942 payout excise: 30% of undistributed income at the first tier, 100% at the second. The other excise stays for good: §4940(a) takes 1.39% of net investment income, and §4940(d) removes it only for an exempt operating foundation, which requires ten taxable years of public support and a governing body "at least 75 percent of whom are not disqualified individuals" — a family board fails that test.

## Public access: there is no standard

Quantitative requirements as to opening hours, days open or visitor numbers appear nowhere — not in §4942(j)(3), not in Treas. Reg. §53.4942(b)-1 and -2, not in Part XIII of Form 990-PF. The single textual anchor is Example 3 to Treas. Reg. §53.4942(a)-3, where the foundation is described as "engaged in holding paintings and exhibiting them to the public": exhibition is built into the characterisation of a museum foundation, while the metric is left unstated. What operates instead is the general §501(c)(3) test and a facts-and-circumstances review on audit.

Britain shows the other approach: under conditional exemption HMRC expressly requires access "without a prior appointment on at least a certain number of days each year". The obligation is framed as a number of days agreed property by property and recorded in the owner's undertakings. That scale does not reach an American foundation, but it shows what an access requirement looks like once a legislator decides to count it.

## The price of control: §4941

Of the six acts of self-dealing in §4941(d)(1), three touch a museum foundation: sale, exchange or leasing of property; furnishing of goods, services and facilities; and use of the foundation's income and assets for the benefit of a disqualified person. The first tier is 10% of the amount involved on the self-dealer and 5% on the foundation manager, "for each year"; the second tier, where the act is not corrected within the taxable period, is 200% and 50%. The cap for managers is $20,000 under each provision (§4941(c)(2), raised from $10,000 by the Pension Protection Act of 2006, §1212(a)(2)).

A foundation work hung in the donor's drawing room falls under Treas. Reg. §53.4941(d)-2(f)(1): "the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation shall constitute an act of self-dealing". The word "painting" is absent from the regulation — the list in paragraph (d) runs to office space, automobiles, auditoriums, libraries and parking lots — yet (f)(1) covers any asset without exception, the amount involved is computed on the market value of the use, and it accrues annually until correction. The boundary is drawn by (f)(2): an "incidental or tenuous benefit" is not self-dealing, and the regulation's own illustration is a building named after its donor. The family name on the façade is safe; physical enjoyment of the object is not. A buy-back is prohibited outright: §4941(d)(1)(A) permits no sale or exchange with a disqualified person at any price.

A curator's salary paid to a family member is permissible: §4941(d)(2)(E) and Treas. Reg. §53.4941(d)-3(c) take payment for personal services out of self-dealing where the services are reasonable and necessary to the exempt purpose and the amount is not excessive — the regulation refers expressly to §1.162-7 on that question. The circle of disqualified persons under §4946(a)(1) covers substantial contributors, foundation managers, holders of more than 20% of voting power or profits, family members, and entities in which such persons hold more than 35%. §4946(d) counts as family the spouse, ancestors, children, grandchildren, great grandchildren and the spouses of descendants, so siblings fall outside the circle by consanguinity, while a substantial contributor under §507(d)(2) is anyone who has given more than $5,000 where that exceeds 2% of all contributions received by the foundation.

## Valuation: where the number breaks

A qualified appraisal under Treas. Reg. §1.170A-17 is prepared by a qualified appraiser to USPAP standards: relevant coursework plus two years of experience, or a recognised designation; signature no earlier than 60 days before the gift; and a mandatory declaration acknowledging exposure under §6695A.

The thresholds come from the Instructions for Form 8283 (Rev. 12-2025): above $500 the form is filed; above $5,000 per item or group of similar items Section B is completed; from $20,000 for art a complete copy of the signed appraisal is attached. From $50,000 Art Appraisal Services enters: IRM 4.48.2.3(1) makes referral to AAS mandatory for a single work with a claimed value of $50,000 or more, and Publication 561 sets the same bar for a Statement of Value at a user fee of $8,400 for one to three items and $800 for each additional item. A second stage then follows: on the IRS's own description, works reaching the Commissioner's Art Advisory Panel are those "with individual values above $150,000", and selection within that band is left to the discretion of AAS.

The Art Advisory Panel report for FY2023: 195 items across 37 cases, $795,527,954 claimed against $778,581,500 recommended — and that headline of minus two per cent conceals the spread, with 63 items reduced from $150.5m to $81.4m and 29 increased from $107m to $159.2m.

Penalties: §6662(a) is 20% of the underpayment; a substantial valuation misstatement begins at 150% of the correct value with a minimum underpayment of $5,000; §6662(h) doubles the rate to 40% at the 200% mark. §6664(c)(3) allows a reasonable cause defence for a substantial overstatement only where there is a qualified appraisal and a good faith investigation of value by the taxpayer, and allows none at all for a gross misstatement. The appraiser answers under §6695A — up to 125% of the fee earned on the appraisal.

RERI Holdings I, LLC v. Commissioner (Tax Court, 2017), which reached the appellate court under the name Blau v. Commissioner (D.C. Cir., 24 May 2019, No. 17-1266), shows where the whole thing collapses before anyone argues about price: a $33,019,000 deduction on an interest bought for $2,950,000 and given to the University of Michigan seventeen months later. "RERI left blank the space for 'Donor's cost or adjusted basis'" — and that was enough. On the court's reasoning, an unusually large gap between the claimed deduction and basis is itself what alerts the IRS to a possible overvaluation, and the empty line kills that signal. The penalty was 40% under §6662(h)(1).

## OBBBA 2025: the 0.5% floor hits art first

From tax year 2026, §170(b)(1)(I) applies (OBBBA §70425): a deduction is allowed only to the extent the aggregate exceeds 0.5% of the contribution base. The ordering rules inside the provision decide the outcome — the floor is applied first to contributions under (D), second to those under (C), and only sixth to cash under (G). Capital gain property is consumed by the floor before anything else, so a collector who gives both works and money in the same year loses half a percentage point of AGI out of the value of the works. The disallowed amount carries forward under §170(d)(1)(C); for corporations §70426 introduced a 1% floor on taxable income against the retained 10% ceiling (§170(b)(2)).

The rewritten §68 (OBBBA §70111) reduces itemised deductions by 2/37 of the lesser of two amounts: the deductions themselves, and so much of taxable income as exceeds the threshold at which the 37% bracket begins — and §68(b) places this cut last in the order of application. The familiar line that "the benefit is capped at 35%" describes the outcome at the top rate: 37% × (1 − 2/37) = 35%. As a statement of the rule it is imprecise — a taxpayer wholly below the 37% bracket threshold falls outside §68 altogether. Meanwhile the Act says nothing at all about §4942 or operating foundations, and the increase in the foundation investment income excise that featured at House bill stage did not survive into the final text.

## Alternatives

- **DAF** — barrier (ii) does not bite and the ceiling is 30%, but a sale of the asset by the sponsoring organisation produces unrelated use under (i)(I) and a basis deduction. The reason it fails lies in related use; liquidity is secondary
- **Fractional gift, §170(o)** — later fractions are valued at the lesser of the value at the initial fractional contribution and the current value; where the conditions break down, recapture under (o)(3) plus 10% on top
- **CRT** — §170(a)(3) defers the deduction for a future interest until the intervening interests expire; §664(d): payout of 5–50%, a term of up to 20 years, remainder of at least 10%
- **A bequest to a public museum** — no lifetime deduction, a full exemption under §2055, no running costs and no §4941 exposure; the zero option against which the economics of a POF are measured
## Popular, and it ends badly

| The practice | The appeal | How it ends |
| --- | --- | --- |
| Set up a POF and hold the collection in storage until prices improve | A market value deduction at 30% of AGI with no exhibition costs | §170(e)(1)(B)(i)(I): unrelated use cuts the deduction to basis whatever the foundation's status, and disposal within three years without certification adds recapture under §170(e)(7) |
| Take a couple of the foundation's works home "for a while" | The things are the family's and they hang where they always hung | Reg. §53.4941(d)-2(f)(1) — use of the assets by a disqualified person: 10% of the amount involved every year until correction, 200% if it is not corrected within the taxable period |
| Buy a work back from the foundation at an independent valuation or above it | The deal favours the foundation and the valuation is external | §4941(d)(1)(A) prohibits a sale or exchange with a disqualified person outright. The fairness of the price is irrelevant |
| Claim market value and leave the basis line on Form 8283 empty | "Basis has nothing to do with an FMV deduction" | RERI Holdings: the $33m deduction was disallowed in full on substantiation grounds, with a 40% penalty under §6662(h)(1) |

## Q/A

### **How many days a year must the museum be open?**

There is no standard: neither §4942(j)(3), nor Treas. Reg. §53.4942(b)-1 and -2, nor Part XIII of Form 990-PF contains a quantitative requirement. The anchor is the characterisation "holding paintings and exhibiting them to the public" in Example 3 to Reg. §53.4942(a)-3, together with the general §501(c)(3) test. Access is tested on the facts at audit, so the schedule, the attendance figures and the programme are documented as though a threshold did exist.

### **How public is the foundation's reporting?**

§6104(b) bars disclosure of donors' names and in the same breath excepts private foundations from the bar; §6104(d)(3)(A) is built the same way. A private foundation's Schedule B is a public document, and Part VII of Form 990-PF discloses the compensation of officers, directors, trustees and foundation managers.

### **What scale justifies the structure?**

Real budgets give the bearings: Glenstone Foundation (EIN 20-5938416) — FY2024 expenses of $64,781,193 on assets of $2,987,597,855; Broad Art Foundation (EIN 95-4664939) — $7,196,134 on assets of $786,292,386; Brant Foundation (EIN 06-1470051) — $3,085,298 on assets of $94.6m, with four of five directors carrying the Brant name and all reporting zero compensation. The lower bound reads as several million dollars of annual expenditure.

> 🍓 §170(e)(1)(B)(ii) cuts the deduction back to tax basis; §170(b)(1)(F)(i) lifts the private operating foundation of §4942(j)(3) out of the cut-back: full market value and a 30% AGI ceiling, where an ordinary foundation gives 20%. POF status does not clear the second barrier — related use under (i)(I) will collapse the deduction to basis if the work is not exhibited. The status rests on the income test (85% of the lesser of adjusted net income and minimum investment return, grants not counting) plus one of three: assets at 65% under Treas. Reg. §53.4942(b)-2, endowment at two-thirds of MIR, support from five or more exempt organizations. The economics are made by §4942(e)(1): exempt-use assets are excluded from the base of the 5% minimum investment return, so for a genuine museum the bar sits close to zero. The 1.39% excise under §4940(a) stays, and the §4940(d) relief is out of reach for a family board. Control costs §4941: a work on the donor's wall is 10% a year, and a buy-back is prohibited outright. From 2026 the 0.5% AGI floor is charged first against capital gain property — which is to say, against the art.

## Sources

- [26 U.S. Code §170](https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partVI-sec170.htm) — the (e)(1)(B) cut-back, the POF carve-out in (b)(1)(F), the 30% and 20% ceilings, future interests in (a)(3), fractional gifts in (o)
- [26 U.S. Code §4942](https://www.law.cornell.edu/uscode/text/26/4942) and [§4940](https://www.law.cornell.edu/uscode/text/26/4940) — the POF definition in (j)(3), the 30/100% payout excise, the 5% minimum investment return, the 1.39% excise and its removal
- [26 CFR §53.4942(b)-1](https://www.ecfr.gov/current/title-26/section-53.4942(b)-1), [§53.4942(b)-2](https://www.ecfr.gov/current/title-26/section-53.4942(b)-2) and [§53.4942(a)-3](https://www.ecfr.gov/current/title-26/section-53.4942(a)-3) — 85% and 65%, museum assets, grants, the 6% rate, Example 3
- [IRS — Private Operating Foundations](https://www.irs.gov/charities-non-profits/private-foundations/private-operating-foundations), [the timing of the tests](https://www.irs.gov/charities-non-profits/private-foundations/determination-of-compliance-with-operating-foundation-tests) and [Form 990-PF (2025)](https://www.irs.gov/pub/irs-pdf/f990pf.pdf) — the advantages of the status, three years out of four, Part XIII and Part VII
- [26 U.S. Code §4941](https://www.law.cornell.edu/uscode/text/26/4941), [26 CFR §53.4941(d)-2](https://www.ecfr.gov/current/title-26/section-53.4941(d)-2) and [§53.4941(d)-3](https://www.ecfr.gov/current/title-26/section-53.4941(d)-3) — the acts and rates of self-dealing, incidental or tenuous benefit, payment for personal services
- [26 U.S. Code §4946](https://www.law.cornell.edu/uscode/text/26/4946), [§507](https://www.law.cornell.edu/uscode/text/26/507) and [§6104](https://www.law.cornell.edu/uscode/text/26/6104) — disqualified persons, substantial contributors, the public status of Schedule B
- [26 CFR §1.170A-17](https://www.ecfr.gov/current/title-26/section-1.170A-17), [Instructions for Form 8283 (Rev. 12-2025)](https://www.irs.gov/pub/irs-pdf/i8283.pdf) and [Publication 561](https://www.irs.gov/pub/irs-pdf/p561.pdf) — qualified appraisals, the $500–$50,000 thresholds, Statement of Value and the user fee
- [IRM 4.48.2](https://www.irs.gov/irm/part4/irm_04-048-002), [Art Appraisal Services](https://www.irs.gov/appeals/art-appraisal-services) and [the Panel report for FY2023](https://www.irs.gov/pub/irs-pdf/p5392.pdf) — mandatory referral from $50,000, the Panel's "above $150,000" band, the statistics on 195 items
- [26 U.S. Code §6662](https://www.law.cornell.edu/uscode/text/26/6662) · [§6664](https://www.law.cornell.edu/uscode/text/26/6664) · [§6695A](https://www.law.cornell.edu/uscode/text/26/6695A) — the 20% and 40% penalties, reasonable cause, appraiser liability
- [Pension Protection Act of 2006, P.L. 109-280](https://www.govinfo.gov/content/pkg/PLAW-109publ280/html/PLAW-109publ280.htm), [§4966](https://www.law.cornell.edu/uscode/text/26/4966) and [§664](https://www.law.cornell.edu/uscode/text/26/664) — the §4941 rates and the $20,000 cap, fractional gifts, the §6662 thresholds, the DAF definition and CRT parameters
- [One Big Beautiful Bill Act, H.R. 1 (enrolled)](https://www.govinfo.gov/content/pkg/BILLS-119hr1enr/html/BILLS-119hr1enr.htm) and [26 U.S. Code §68](https://www.law.cornell.edu/uscode/text/26/68) — §70111, §70425 and §70426: the 2/37 reduction, the 0.5% floor and its ordering, the 1% corporate floor
- [Blau v. Commissioner (D.C. Cir. 2019), No. 17-1266](https://law.justia.com/cases/federal/appellate-courts/cadc/17-1266/17-1266-2019-05-24.html) — the appeal in RERI Holdings: a $33m deduction denied over an empty basis line, with a 40% penalty
- ProPublica Nonprofit Explorer: [Glenstone](https://projects.propublica.org/nonprofits/organizations/205938416) · [Broad](https://projects.propublica.org/nonprofits/organizations/954664939) · [Brant](https://projects.propublica.org/nonprofits/organizations/61470051) — assets, expenses and board composition of working POFs
- [HMRC — Capital taxation and the national heritage](https://www.gov.uk/government/publications/capital-taxation-and-tax-exempt-heritage-assets/guidance-on-capital-taxation-and-the-national-heritage) — the requirement of access without prior appointment under conditional exemption
*Last reviewed: August 2026*

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## FAQ

### How many days a year must the museum be open?

There is no standard: neither §4942(j)(3), nor Treas. Reg. §53.4942(b)-1 and -2, nor Part XIII of Form 990-PF contains a quantitative requirement. The anchor is the characterisation "holding paintings and exhibiting them to the public" in Example 3 to Reg. §53.4942(a)-3, together with the general §501(c)(3) test. Access is tested on the facts at audit, so the schedule, the attendance figures and the programme are documented as though a threshold did exist.

### How public is the foundation's reporting?

§6104(b) bars disclosure of donors' names and in the same breath excepts private foundations from the bar; §6104(d)(3)(A) is built the same way. A private foundation's Schedule B is a public document, and Part VII of Form 990-PF discloses the compensation of officers, directors, trustees and foundation managers.

### What scale justifies the structure?

Real budgets give the bearings: Glenstone Foundation (EIN 20-5938416) — FY2024 expenses of $64,781,193 on assets of $2,987,597,855; Broad Art Foundation (EIN 95-4664939) — $7,196,134 on assets of $786,292,386; Brant Foundation (EIN 06-1470051) — $3,085,298 on assets of $94.6m, with four of five directors carrying the Brant name and all reporting zero compensation. The lower bound reads as several million dollars of annual expenditure.
§170(e)(1)(B)(ii) cuts the deduction back to tax basis; §170(b)(1)(F)(i) lifts the private operating foundation of §4942(j)(3) out of the cut-back: full market value and a 30% AGI ceiling, where an ordinary foundation gives 20%. POF status does not clear the second barrier — related use under (i)(I) will collapse the deduction to basis if the work is not exhibited. The status rests on the income test (85% of the lesser of adjusted net income and minimum investment return, grants not counting) plus one of three: assets at 65% under Treas. Reg. §53.4942(b)-2, endowment at two-thirds of MIR, support from five or more exempt organizations. The economics are made by §4942(e)(1): exempt-use assets are excluded from the base of the 5% minimum investment return, so for a genuine museum the bar sits close to zero. The 1.39% excise under §4940(a) stays, and the §4940(d) relief is out of reach for a family board. Control costs §4941: a work on the donor's wall is 10% a year, and a buy-back is prohibited outright. From 2026 the 0.5% AGI floor is charged first against capital gain property — which is to say, against the art.

---

## Factual claims

- The §170(e)(1)(B)(ii) barrier is the bare fact of a private foundation recipient, with a carve-out for foundations described in (b)(1)(F).
- The (i)(I) barrier is related use: the cut-back applies to tangible personal property "if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501".
- Capital gain property (defined at §170(b)(1)(C)(iv)) goes into a POF under the 30% contribution base ceiling of (C)(i): §170(b)(1)(A)(vii) puts (F) foundations on the list of 50-percent limit organisations.
- One of three further tests under (j)(3)(B) must then be met: assets — the statute says "substantially more than half" of the assets must be devoted directly to the activity, and the 65% threshold comes from Treas.
- The prize for holding the status is exemption from the §4942 payout excise: 30% of undistributed income at the first tier, 100% at the second.
- Quantitative requirements as to opening hours, days open or visitor numbers appear nowhere — not in §4942(j)(3), not in Treas.
- A curator's salary paid to a family member is permissible: §4941(d)(2)(E) and Treas.
- The thresholds come from the Instructions for Form 8283 (Rev.