You have to wonder who the lobbyists are for the art museums. As part of the Pension Protection Act of 2006, Congress amended Section 170 of the Internal Revenue Code to curb certain tax saving strategies utilized by art collectors. Nobody in the art world seems to have been aware of this provision as it worked its way through Congress, at least if you believe a recent New York Times article by Jeremy Kahn entitled Museums Fear Tax Law Changes in Some Donations (Sept. 13, 2006). The implicit threat coming from those quoted in the article: You and your...
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children (yes, the children once again—after all we did just go through a weekend dominated by Mark Foley’s resignation) will never see another piece of art if new Section 170(o) is allowed to stand.
Prior to the amendment to Section 170, art collectors routinely gave museums partial interests in works of art. In theory, the museum had the right to possess the works of art for a portion of each year. For example, if someone gave a museum a 20% interest in a painting, then in theory the museum was supposed to take possession of the painting for 20% of the year. In practice, many museums waived their right, according to the Times. That meant that art collectors continued to enjoy the art privately for years, but were able to claim a current deduction for the value of the partial interest. This practice flew in the face of the well-established rule that contributions of partial interests in property are not deductible. See Section 170(f)(3). It was the notion of co-ownership and use that permitted art collectors to side step the basic prohibition on deductions for gifts of partial interests. See Section 170(f)(3)(B)(ii). Should it then come as a surprise that Congress put an end to what had become a well- worn tax dodge?
There will be those in the art community who are offended by that characterization. However, the characterization is accurate when viewed in the context of Section 170, which places everyone on the cash method with respect to charitable contributions. See Section 17)(a)(1). In other words, if you want the deduction, you have to part with the property now.
Under the new rules, members of the collecting public are still allowed
a deduction for the partial interest, but in order to avoid recapture of that deduction,
the entire interest in the tangible personal property (the Mona Lisa)
must be transferred to the charitable beneficiary before the earlier of
(i) the taxpayer’s date of death or (ii) the date that is 10 years after the
date of the initial fractional contribution. Moreover, the recipient
of the fractional interest must take “substantial physical possession"
of the property when the initial contribution is made and hold it throughout the 10-year period. As a practical matter, the new provision ends gifts partial interests in works of art unless someone has reasons to time charitable contriubtion deductions.
Now we come to Agnes Gund, a former president of the Museum of Modern Art and currently a trustee. She told the Times,
If you are collecting because you love the art, you want to be able to enjoy the work while you have it and not give it away very soon.
So the public is supposed to finance the beautiful art hanging in Ms. Gund’s living room? Hey the Modern does have a design collection, so maybe the equitable answer under old law was for every American to donate his or her formica kitchen table to the Modern and claim a current income tax deduction for the gift. We assume Ms. Gund would scoff at such silliness: Only those with taste are entitled to finance their lifestyles with tax breaks.
The museum community is united. There will be no art left to museums under the new regime. Collectors will let their art pass to their estates, where their children will sell it to private collectors so that those greedy children can finance their lavish lifestyles at the expense of the museum community. This of course ignores certain realities. Those who assemble large collections don’t want them broken up. They want their taste and genius publicly recognized. In other words, it is very questionable whether the collections will really go the private route. Museums know all too well how much ego is tied up in these gifts, which is why they prominently display the donor's name on the plaque next to the painting. As a practical matter, the new law will create more uncertainty for museums. They will have more difficulty locking gifts up, meaning that they will have to continue to be nice to a collector until the he or she dies.
Given the firestorm that the new law has created and concern that
Americans lack culture, we can expect to see modification of the law
despite the fact that the new law does reach the right result from a
tax policy standpoint. Here is our proposal: Mr. Collector, you can
keep your paintings on your walls and still claim a current deduction
for the gift, but you must reduce the amount of the gift to its
actuarially-determined present value. Moreover, there is one rule in the Pension Protection Act that should be carried over to our proposal: The date of gift value
controls for purposes of valuing all subsequent gifts of partial
interests in the artwork. That last point is actually unfair, but it
has the advantage of voiding multiple valuations. As a practical matter, our proposal would all but eliminate staged gifts of a particular piece of artwork so the inequity shouldn't be a problem.
We aren’t interested in doing Congress’ work for it, but our proposal is probably best implemented by creating a “qualified partial artwork interest" construct. The provision creating the QPAI should outline the salient provisions required for a qualifying a gift as a QPAI. For example, Congress might want to specify who pays the cost of insuring and maintaining the artwork and what happens in the event of damage or theft. Our proposal looks very much like a specialized form of a charitable remainder trust for artwork. In fact, the valuation mechanism works just like the mechanism utilized for valuing the income deduction for charitable remainder trusts.
The art world may still complain and argue about the adverse impact on museums. However, universities seem to have survived and thrived under the charitable remainder trust regime. It is patently ridiculous for people to finance their collecting activity with current deductions for future gifts. Personal expenses and expenses for hobbies are not deductible. See Sections 183 and 262.
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