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Tax Benefits Spur ‘Fractional’ Gift-Giving to Museums

Soaring prices for art resulted in a substantial increase in the number of objects donated to museums in 2005, says Ralph Lerner, a prominent New York attorney and coauthor, with Judith Bresler, of Art Law. “Rising prices encourage people to donate,” he says. “The fact that the capital gains rate for the sale of artwork

NEW YORK—Soaring prices for art resulted in a substantial increase in the number of objects donated to museums in 2005, says Ralph Lerner, a prominent New York attorney and coauthor, with Judith Bresler, of Art Law. “Rising prices encourage people to donate,” he says. “The fact that the capital gains rate for the sale of artwork still stands at 28 percent discourages a number of these people” from taking pieces to market.

Tax levies on the sale of other capital assets, such as stocks and real estate, stand at a lower 20 percent. Past attempts to lower the collectible tax, such as legislation introduced by Senator Pete Domenici (R-N.Mex.), a Senate Finance Committee member, have not been successful (see ANL, 1/4/05).

So, rather than trigger a hefty tax by selling a work that has sharply appreciated in value, more and more collectors are instead opting to donate their art to museums, often for a substantial tax break that can be realized over a period of years. At museums across the country, directors and curators have noted a jump in the giving of the “fractional gift”—a type of donation that allows the donor to stagger tax benefits over a period of years for maximum benefit.

Fractional gifts encourage donors whose works have increased greatly in value in the current art market, says Jeremy Strick, director of the Museum of Contemporary Art (MOCA), Los Angeles, noting the “increasing prevalence of partial gifts.” The structure “works exceedingly well for museums,” he told ARTnewsletter, “and the gifts do come.”

Stephen Clark, counsel to New York’s Museum of Modern Art (MoMA), also described “stratospheric prices” that inflate “the dollar value of gifts” as a problem for would-be donors, requiring creative solutions. “People still give works to the museum outright, and it’s quite remarkable that they do,” he told ARTnewsletter. “But prices being what they are, many donors can’t use the tax deduction all at once.” (The Internal Revenue Service [IRS] limits the amount a taxpayer can deduct in a single year.) Clark calls fractional gifts “a great way to encourage people to give art.”

How It Works

A collector who, for example, donates a 10 percent fractional gift, gives the museum the right, but not the obligation, to borrow or exhibit the work for a corresponding time period during the year—in this instance, about 36 days. The donor is then entitled to take a tax deduction equal to 10 percent of the appraised value of the painting for that year.

With each succeeding year and successive fractional gift of the particular work, the museum is entitled to borrow the work for proportionally longer periods of time.

Donors may write off a certain percentage of the value of the artwork on an annual basis over a period of, say, five years instead of all at once. Lawyers and accountants on both the donor and museum sides negotiate this arrangement, at times establishing a binding agreement by which the object will eventually belong to the institution at some fixed point in time, although the piece may be in the donor’s possession until then.

“Museums have the right to possession, though perhaps not to actual possession, of the gifted artwork,” Lerner explains. “In some cases, a museum may be in the midst of an expansion and say to the donor, ‘Why don’t you hold on to the piece for a while?’”

Anita Difanis, governmental affairs director of the Association of Art Museum Directors, Washington, D.C., says museum administrators have accepted fractional gifts because, in a period in which “art has inflated in value, they are competing against the market.”

Seeking Safeguards and Consensus

The Senate Finance Committee has floated several measures, including one that would require a museum to sign binding agreements with donors, insuring that the objects do finally end up in the collections of the institution; and another stating that, in any given year, the museum be required to have physical possession of the objects for at least the portion of the year in which it owns the works.

While museum groups largely support the first idea, many of them oppose the second on the grounds that moving very valuable artworks annually is hazardous and expensive.

“Requiring works to go back and forth, as has been suggested in the Senate, would be risky to very delicate works of art and completely impractical for works such as a big Richard Serra outdoor sculpture,” Clark points out. “Works would have to be crated and shipped; it would be an administrative burden, and then we would in all likelihood just put the works in storage, for the interim anyway.”

Moreover, a 1988 ruling in United States Tax Court—on a case concerning a Pittsburgh collector who had challenged the IRS—established that the institution would not be required to take physical possession of the work in a given year in order for the donor to claim a deduction.

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