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New Bill Would Loosen Limits on Fractional Giving

Little more than a year after Congress tightened rules governing fractional gift-giving, lawmakers and art organizations are seeking to overturn at least some of the stricter standards.

NEW YORK—Little more than a year after Congress tightened rules governing fractional gift-giving, lawmakers and art organizations are seeking to overturn at least some of the stricter standards.

Last month Congressman Tom Udall (D-N.Mex.) introduced legislation aimed at restoring earlier rules governing fractional gifts. Udall says tighter limitations on donations of valuable artworks, which were passed into law a year-ago August as part of the 2006 Pension Protection Act, have “suffocated a time-honored method of giving that has made many of our national treasures available to the public.”

Udall’s bill would likely be attached to a larger tax bill as an amendment if one works its way out of the Ways and Means Committee and comes up for a vote by the full House of Representatives.

Fractional contributions allow donors of art objects to retain physical possession of them for at least part of the year, while taking successive annual tax deductions for the gifts over what is usually the span of several years, as opposed to a onetime deduction.

Institutions are given the right, but not the obligation, to borrow a work. For instance, a museum that receives a 10 percent fractional gift may borrow the work for one-tenth of the year in that corresponding period. Making a gift fractionally enables art collectors to better plan their estates—preparing for eventual donations of valuable objects without having to part with them completely during their lifetimes. At the same time, the recipient institutions are assured that these artworks will eventually enter their collections.

Some key provisions in the Pension Protection Act were spearheaded by former Senate Finance Committee chairman Sen. Charles Grassley (R-Iowa, still a ranking member of the committee). He, among others, had raised concerns that fractional gifts not only meant wealthy collectors could take sizable tax deductions for gifts they never actually gave, but also allowed these taxpayers to deduct ever-higher amounts as the objects rose in value (ANL, 9/19/06, pp. 1-3).

The Pension Protection Act stipulates that the length of a fractional gift can be no longer than ten years, that collectors can deduct only the original appraised value, and that museums have “substantial physical possession of the property” during this time, instead of letting it stay with the collector.

The new legislation, titled “Promotion of Artistic Giving Act of 2007,” would restore the open-ended length of the gift, requiring only that the donation be completed within nine months of the death of the donor; and it would allow, once again, for escalating value deductions, based on changing market values, during the term of the gift, so long as these higher appraisals have been reviewed by the Art Advisory Panel of the Internal Revenue Service.

Additionally the bill would repeal the requirement, set forth in the Pension Protection Act, that museums have “substantial physical possession of the property” during the donation process.

Udall was joined at a recent news conference on Capitol Hill by Congressman Phil English (R-Penn.), cosponsor of the bill, who noted that it would “maintain tax incentives to encourage modern-day art collectors to continue with their gifts . . . while, at the same time, ensuring that our tax laws are not abused.”

Museums Envision ‘Increase in Giving’

The legislation drew strong support from the 190-member Association of Art Museum Directors (AAMD). Executive director Millicent Gaudieri told ARTnewsletter that fractional gifts of artworks to museums around the country “decreased dramatically” after passage of the Pension Protection Act.

“We were all quite stunned by the inclusion of these provisions limiting fractional gifts in the law,” Gaudieri says, “and many donors decided that it was not advantageous for them to give right now to museums.”

Ford Bell, president of the American Association of Museums (AAM), also weighed in on the matter. “While taxpayers ought to be protected from abusive tax shelters,” he told ARTnewsletter, “there is public benefit when museums expand their collections and increase public access to important works of art. Wealthy collectors have driven up the cost of art to a level beyond the reach of museums, which lack the resources to compete in the marketplace for new acquisitions.”

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