A fine Eastern Pende Panya-Gombe African mask. Coll.: David Norden
Prior to last month, U.S. tax law allowed art collectors to donate a portion of the value of a piece of art, take the charitable deduction and continue to enjoy a $10 million O’Keeffe hanging over the living-room mantel.
But last month, the president signed a bill called the Pension Protection Act that some say will effectively end the practice called “fractional giving.”
Only one section of the bill dealt with art. Other parts of the act made a financial savings plan called a Roth 401K permanent and restricted charitable deductions for used clothing and household items to organizations such as the Salvation Army.
The change in rules covering fractional giving was needed, proponents said, because wealthy donors abused the law by taking deductions for art that would not end up on the walls of U.S. museums for decades, or maybe ever.
But museum directors oppose the tax-law change. They have limited budgets and rely on charitable contributions for almost all their acquisitions — and many come as fractional gifts. Among the pieces of art donated to U.S. museums through fractional giving are the 53 paintings, drawings and watercolors that compose the Annenberg Collection of Impressionist and Postimpressionist masterworks at New York’s Met art Metropolitan Museum of Art.
“It is very important to get this reversed,” said George King, director of the Georgia O’Keeffe Museum. “It’s awful for museums. If gifts don’t come to us through this method, it’s not only the museum that suffers. It’s really the public.”
The new law, which took effect Aug. 17, places a ceiling on the value of the
Met Art at the time of the first fractional donation. Previously, the donor could take higher and higher annual deductions if the art appreciated in value — i.e., a capital-gain appreciation minus capital-gains taxes.
The law now stipulates museums take “substantial possession” of the work following the initial gift. In practice, some museums often have waived their rights to possess the painting or sculpture for a portion of the year. And the transaction has to be completed within 10 years — and not the lifetime of the donor.
Sandy Besser, a Santa Fe collector who has used fractional giving, said many donors will be discouraged by the requirement to establish the value of the piece at the time of the first fractional gift. “If you’ve bought good art, there’s the chance that it’s going to increase in value every year, sometimes dramatically,” he said.
But that doesn’t necessarily mean donors aren’t going to give art, he said. Rather, “It means clever tax attorneys are going figure out other things to do.”
Besser plans to dispose of many pieces from his collection of 4,800 objects over the next few years. His collection of 800 tribal art pieces will go on exhibit at the Museum of International Folk Art on Oct. 15, and he will be donating a large number of the objects.
Marsha Bol, director of the Museum of Fine Arts in Santa Fe, said the museum considered accepting fractional gifts once or twice in the past but decided not to, as have many other art museums.
“It’s only worth it to us if the gift is a half-million dollars or more,” she said. And the small fine-arts museum doesn’t get many offers like that.
But, she added, “I’d love to have a demand for it, and I could see in the future that we might. It’s really important as an option in this era when art is escalating so rapidly in value. It’s one of the only ways that art museums can hope to get high-dollar value artwork because we can’t afford to go out and buy it.”
For smaller gifts, however, transferring the art twice a year between the donor’s home and the museum is cumbersome and costly, she said. “If you have to ship a painting back and forth every few months, that’s a great expense. And it’s a hassle. That’s why we declined one offer.”
While the old law looked like just another tax break for the wealthy, Bol said from the perspective an art museum director, “it was a way to provide an incentive for donors who own valuable artworks to consider giving them to museums rather than sell them at Sotheby’s or Christie’s and pay capital-gains taxes.”
David Witt, former longtime curator at the Harwood Museum in Taos and now curator of the Ernest Thompson Seton art collection of The Academy for the Love of Learning, said the tax change could be “one more thing that might push (collectors) toward selling rather than giving.” While auctioning off art isn’t always bad, he pointed out, the environment for museums is “already difficult enough.”
Joyce Ice, director of the Museum of International Folk Art in Santa Fe, said the museum acquired a collection of textiles as a fractional gift. “It’s a tool that can be used, but it’s not the easiest to administer and it’s not our first choice,” she said. “It has to be a situation where there is something of high value.”
The change in the law will not have a great impact on the folk art museum, she said, because it collects fewer high-ticket items.
According to Besser, the “right people” will be fighting to repeal the tax-code change and “there will probably be some follow-through legislation to get rid of it.”
But history suggests that could be harder than they think. According to Witt, Congress accidentally wiped out an earlier provision in tax law that allowed artists to donate their own work and take a fair-market deduction. Today, they are only entitled to deduct the value of materials like paint and canvas. “It has been impossible to repeal,” he said.
Contact Anne Constable at 995-3845 or email@example.com.
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