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Schumer Seeks to Loosen Restrictions On Fractional Gifts

Responding to complaints from museum officials that three-year-old legislation limiting so-called fractional gifts has discouraged collectors from donating valuable artworks to institutions, last month Senator Charles Schumer (D–N.Y.) introduced a bill that would extend the period of time over which a fractional gift can be made and allow donors to claim annual tax deductions reflecting

NEW YORK—Responding to complaints from museum officials that three-year-old legislation limiting so-called fractional gifts has discouraged collectors from donating valuable artworks to institutions, last month Senator Charles Schumer (D–N.Y.) introduced a bill that would extend the period of time over which a fractional gift can be made and allow donors to claim annual tax deductions reflecting increases in an artwork’s value over the term of the gift. Giving valuable artwork to an institution creates a problem for many would-be donors, because they can’t take the full tax deduction on their donation; tax laws permit them to deduct only up to 30 percent of their adjusted gross income in a single year. In a fractional gift, an increasing share in a work is donated to a museum over a period of years. Spreading out the gift over a number of years provides an incentive for collectors to donate artworks valued in the hundreds of thousands or millions of dollars by permitting them to take full advantage of tax deductions and allowing them to retain possession of a work for much of that time.

The bill introduced by Schumer would amend the Internal Revenue Code to loosen some of the restrictions on fractional gifts included in the Pension Protection Act of 2006, which were put in place to address concerns that wealthy collectors could take sizeable tax deductions for donated works they did not actually have to turn over to a museum for decades. The current law stipulates that the time span of a fractional gift can be no more than ten years, that collectors can only take a deduction for the value of the work at the time of the donation, and that museums must have “substantial physical possession of the property” for the duration of the gift rather than letting it remain with the collector (ANL, 9/19/06, 11/13/07).

If passed, the new legislation would extend the period of a gift to up to 20 years and permit increases in the amount of the tax deduction if the market value of the work goes up. The bill would require the recipient museum to have the object in its physical possession for a period of time equivalent to its share in ownership rights after 20 percent of the value of the gift is made. Under the proposed law, however, a gift could be structured so that the institution would not achieve a 20 percent interest for as long as eleven years.

Ralph Lerner, an estates attorney and co-author of Art Law (Practising Law Institute), called the bill “a step in the right direction,” but noted that the legislation would make this type of gift more complicated for donors. Among the complications are the requirement that the donor obtain a statement from the Internal Revenue Service specifying the value of the donated object if it is worth more than $1 million, and the requirement that the recipient museum must make “use” of the donation. “As a practical matter, museums don’t exhibit things for a long period of time,” Lerner said, and the “back-and-forth” in physical possession of a valuable object between a donor and an institution may not be feasible for very heavy or very fragile pieces. “Still,” he added, “the bill is a good starting point.”

“We are very grateful for Senator Schumer for introducing it,” Janet Landay, executive director of the Association of Art Museum Directors, said of the legislation. Both she and Mary Sue Sweeney Price, director of the Newark Museum in New Jersey and a past president of the AAMD, said they would prefer an even longer period of time than 20 years. “What is certainly important about this legislation,” Price said, “is that by being more clear about fractional gifts in terms of what they are and how they are monitored, it removes any sense that there is something fishy going on.” The Senate Finance Committee has yet to schedule the bill for hearings or a vote.

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