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Tax Report Could Mean Tighter Restrictions on Donated Art

The U.S. Treasury loses more than $6 billion in annual revenue because of abuses in the management of tax-exempt organizations and valuations of the charitable contributions they receive, according to a report that was released on Jan. 27 by the Congressional Joint Committee on Taxation.

NEW YORK—The U.S. Treasury loses more than $6 billion in annual revenue because of abuses in the management of tax-exempt organizations and valuations of the charitable contributions they receive, according to a report that was released on Jan. 27 by the Congressional Joint Committee on Taxation.

The bulk of the proposals in the 435-page report focus on reining in questionable practices in the nonprofit sector—among them the use of foundations as tax shelters and what the report describes as “excessive compensation” and “self-dealing” of nonprofit directors, as well as curbing charitable deductions for donated noncash assets. The report looks at donations of property—particularly real estate, such as nature conservancies—that inflate a taxpayer’s deductions, but there may be some “spillover into the art world,” according to Marc Owens, a Washington, D.C., lawyer and former director of the division of the Internal Revenue Service (IRS) that oversees tax-exempt organizations.

The report recommends, for instance, that the basis of a deduction for donated property might be changed to its “basis value”—that is, what the donor paid for it, plus or minus some determination of appreciation—rather than the fair market value, which may be substantially higher.

Among the possibilities suggested is the complete elimination of the charitable contribution deduction; the committee contends that the tax code “should provide incentives only for contributions of cash because cash is of most use to charity, presents no valuation questions, and generally has no transaction costs associated with it.”

Another proposal concerns elimination of the ongoing use of property that donors give to a charitable organization. The report specifically focuses on donations of land conservancies to nonprofit organizations that, at the same time, allow the donor to continue using the land. The potential carryover into the art realm could apply to fractional gifts, whereby donors may give works of art to museums for part of the year, but still retain the objects for the remainder of that year, while receiving a tax deduction based on the value of the gift. Owens states that the potential “effect on the art world depends on how broadly Congress decides to write a rule” in the event that proposals in the Joint Taxation Committee’s report become law.

However, notes Owens, the IRS’s Art Advisory Panel, which was established in 1969 and evaluates appraisals of artwork submitted with tax returns, is “a mechanism already in place. Museums are not thought of generally as a source of tax issues, with the exception of occasional donation issues.”

Still another proposal would require the charity to obtain two sets of appraisals for objects that are donated to an organization and then sold by that organization—the first when the charity receives the item, and the second when selling it. The two sets of appraisals would presumably ensure that values are reasonably consistent and not inflated for the benefit of a donor.

Anita Difanis, director of government affairs for the Association of Art Museum Directors (AAMD), notes that there is “always a concern that actions taken by Congress or some agency of the government could impede the art museum’s mission.” She adds, however, that “museums don’t sell all that much” and that there are rules for moneys earned as the result of sales from their collections.

Of greater concern to Difanis was last year’s “Discussion Draft on Charities,” issued by the Senate Finance Committee, chaired by Sen. Charles Grassley (R-Iowa), that similarly offered a range of proposals for nonprofit governance.

In a response to the “Discussion Draft,” the AAMD made a point-by-point assessment, concluding that “the extraordinary costs and burdens of these proposals are eminently clear. The need for comprehensive change and the prospective benefits are not clear.”

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