ARTnewsletter Archive

New Senate Bill Would Restrict Tax Benefits of Donated Art

In the coming year Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, plans to continue his efforts to reform specific tax issues connected with charitable deductions. A spokesperson for the senator has told ARTnewsletter he plans to put forward legislation this year that would require museums, universities and other nonprofits to take

NEW YORK—In the coming year Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, plans to continue his efforts to reform specific tax issues connected with charitable deductions. A spokesperson for the senator has told ARTnewsletter he plans to put forward legislation this year that would require museums, universities and other nonprofits to take responsibility for appraising the value of gifts they receive instead of leaving it up to the donor, require all donations of more than $20,000 to be automatically referred to an Internal Revenue Service (IRS) panel for independent appraisal, and limit tax deductions for donations of objects to only five percent of their assessed value.

Noting how opposed he is to any changes that would require charitable institutions to provide their own appraisal of donated objects, Edward Able, executive director of the Washington, D.C.-based American Association of Museums (AAM), said he does not know whether there is a significant problem in faulty appraisals of gifts of appreciating property and, if so, how large a problem it is.

“There has been no systematic study of these gifts,” he pointed out. “The Art Advisory Panel of the IRS looks at a very small percentage of these gifts. They have never made a study of this issue, and what the panel sees may not be representative” of the entire field.

The nonprofit organization Independent Sector has begun a study of donation issues, at the request of Senator Grassley and the Senate Finance Committee, and its report is due in February. A member of Independent Sector’s task force on this issue, Able stated that “a number of issues need to be sorted out before legislation is proposed.”

Able added that the task force is considering whether there is a need for additional legislation or if self-regulation is working in the nonprofit field, as well as how successfully the existing laws are enforced.

Last year Senator Grassley called for reform in the way the IRS evaluates taxpayer deductions based on “in-kind” donations or gifts of appreciated property. A driving force behind Senate hearings on June 22 devoted to “Charitable Giving and Best Practices,” he stated that “it’s important for Congress to understand when, and how much, taxpayers are footing the bill for overvalued deductions for in-kind donations.”

Senator Grassley’s concern was spurred, in part, by a scandal involving a wealthy New Jersey publisher of pet-care books, Herbert Axelrod. In 1998 Axelrod donated four antique Stradivarius instruments to the Smithsonian Institution and claimed a $50 million tax deduction.

Some five years later, in February 2003, he sold 30 more instruments to the New Jersey Symphony Orchestra for $17 million, which he maintained was a greatly reduced price because of an appraisal stating that the instruments were worth $50 million. He claimed a deduction based on the difference between what the orchestra had paid him and the $50 million he claimed the instruments were worth (see ANL, 6/22/04).

In December, after extradition from Germany a month earlier, Axelrod struck a deal with the U.S. government, pleading guilty to a lesser charge. Charges of conspiring to defraud the IRS were dropped, since they are not an extraditable offense. Axelrod, who is scheduled for sentencing on March 14, faces up to three years in prison for aiding and abetting the filing of a false tax return.

Another senator, Pete Domenici (R-New Mexico), plans to continue his efforts to ease tax consequences for collectors who sell artworks that have appreciated in value. Senator Domenici has put forward a bill to equalize the tax treatment for sales of stocks, bonds and artwork.

In a written statement to ARTnewsletter, Senator Domenici said, “I remain committed to the passage of my arts and collectibles reform package. It is my strong belief that artists should be compensated for the true value of their works when they choose to make donations. While this will benefit individual artists, the real winners will be the public, who will have greater access to fine works of art. I also will continue to pursue tax reforms related to the tax status of arts and collectibles. I expect to reintroduce arts and collectibles legislation early in the 109th Congress.”

Art collectors have been pushing members of Congress to lower the capital gains tax on art and collectibles from 28 to 20 percent, the same level that is applied to the sale of stocks, bonds, real estate and other appreciating assets. The inequity dates from 1997, when the capital gains tax rates were lowered for almost all assets except art and collectibles.

A number of major museum directors and the principal museum associations in the U.S. have lobbied Congress to change the tax law that limits deductions for artworks donated by living artists to nonprofit institutions just to the cost of the materials used. Senators Domenici and Robert Bennett (R-Utah), along with Sen. Patrick Leahy (D-Vermont), have led the charge on this issue.

The deduction, which was an amendment to the Care Act, passed out of the Senate but was dropped in conference committee when it met its counterpart in the House of Representatives (the Faith-Based Initiatives Act). Senator Domenici plans to reintroduce the artist deduction bill in conjunction with the capital gains provision in 2005

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