"A body blow to the ability of museums to build collections"

Minnesota Public Radio has a piece on the new fractional gift law which you can read or listen to here. It chooses an odd defender of the new law: Pablo Eisenberg of the Georgetown Public Policy Institute, who says the old law was "a big boondoggle tax ripoff enjoyed by those who have the most money" and says the deduction for fractional gifts "ought to be abolished together." That's certainly one position, but it's not an argument for the law that was just passed, which, as I've discussed in earlier posts, leaves the deduction intact, and even adds some extra hurdles into the process (like the requirement that the entire donation be completed within 10 years or at the donor's death) -- but then creates tax consequences so costly to donors that they needn't have bothered with the extra hurdles, because no one's ever going to make a fractional gift under the new law anyway.

Kozinski on Fair Use

Georgetown law professor Rebecca Tushnet has a post up at her blog on a recent lecture given there by Ninth Circuit Judge Alex Kozinski entitled “Fair Use Revisited.” Kozinski uses the recent Dr. Seuss Enterprises v. Penguin Books (involving an account of the O.J. Simpson trial written in the style of Dr. Seuss and called The Cat NOT in the Hat) as an example of what’s wrong with current fair use jurisprudence:

“He finds it difficult to say the opinion is clearly wrong. When you apply a multifactor test with unclear factors, it’s difficult to be clearly wrong, though you can do it if you work at it. The real issue is that fair use doctrine is a red herring that we should just dump.”

Echoing a theme presented here on several occasions (e.g., here), he says “the [fair use] balancing process could have gone either way, and the result is uncertainty for future authors.”

Tushnet has a separate post on the question and answer period following the lecture here.

And no gels . . .

The Guardian has more on the aborted loan by Bill Gates of a Leonardo notebook to the Victoria and Albert Museum. The museum says it passed on the loan because of the "draconian" security measures Gates's team was requiring, including "airport-style" security: "having people being searched going in, having to leave all their metallic objects behind and so on." For their part, the Gates people say they have exhibited the object "more than a dozen times in major museums around the world" and "there is nothing we were asking of the V&A that was any different to what we have worked on with these museums."

Mistakes were made

The Childe Hassam painting floating around the Brooke Astor guardianship dispute moved back to center stage over the weekend. The New York Times reported Sunday that Astor's son overstated the cost basis of the painting on his mother's income tax return -- by more than $7 million. Astor paid $172,010 when she bought the painting in March 1970, but the basis reported on her 2002 tax return was $7.425 million, the effect of which was to significantly reduce the income taxes she was required to pay on the $10 million sale (she netted $8 million, after paying a $2 million commission to her son). Amended returns are reportedly being prepared showing the correct tax due, but there will also be interest to pay as well as the possibility of very significant underpayment penalties. My most recent post on the Astor matter is here.

Raging Bull

Bloomberg reports that sculptor Arturo Di Modica is suing Wal-Mart, North Fork Bank, and a bunch of others either for selling unauthorized reproductions of his famous "Charging Bull'' sculpture or using images of it in ad campaigns without his permission. The story of how the piece came to be installed near Wall Street is worth reading in its own right.

No deal

The Art Newspaper reports on a museum loan that fell through when the museum and the lender couldn't agree on all the terms of the loan. What makes it noteworthy is that the lender was Bill Gates, whose proposed loan of a Leonardo da Vinci manuscript to the Victoria and Albert Museum reportedly fell apart over issues of lighting and security.

Welcome to the Jungle

The San Francisco Chronicle reports that Guns N' Roses frontman Axl Rose is being sued by a Los Angeles gallery for allegedly breaching an agreement to buy a $2.3 million Andy Warhol portrait of John Lennon. The gallery is seeking $1.1 million in damages.

Museum loans as value enhancers

I can no longer find it anywhere online [update: here it is; thanks to Terry Martin], but Adrian Ellis has an interesting piece in the current issue of The Art Newspaper about the issues that arise when the holdings of art investment funds are shown in museums. As he points out, "when works of art are lent to a museum, their value is usually enhanced. The [lender] can then realise that value through resale of the work with the beefed-up provenance and price that its stint in the public domain accrues."

He also points out that this is not an issue that's confined to loans from art funds: "the relationship between art funds and public museums is in principle no different from that between other collectors or dealers and museums."

As if to prove the latter point, Michael Kimmelman has a piece in today's New York Times on the upcoming sale at Christie's of the four Klimts that have been exhibited since July at the Neue Galerie, alongside the portrait of Adele that the museum's founder, Ronald Lauder, famously bought for $135 million earlier this year. Kimmelman objects to the statement on the museum's wall label that “This acquisition [was] made available in part through the generosity of the heirs of the Estates of Ferdinand and Adele Bloch-Bauer":

"What exactly does that mean? ... There might be some generosity ascribed to the heirs in lending the paintings to the Los Angeles County Museum of Art and the Neue Galerie, were it not for the fact that the museums provided presale publicity of a sort that no auction house could organize. These museums added their prestige to the value of the collection, kindling interest in the artist ..."

Tyler Green takes issue (to put it mildly) with Kimmelman's criticisms of the Bloch-Bauer heirs for not "donat[ing] one or more of the paintings to a public institution" or, failing that, negotiating a sale to a museum "at a price below the auction house estimates of $15 million to $60 million." But I think Tyler gets one thing wrong in his post. He chides Kimmelman for suggesting that, if the heirs had donated one or more of the works to a museum, they would have gotten a tax break, but I think Kimmelman is actually right about that. It's true, as Tyler points out, that no federal income tax is due on restitution received by victims of the Nazis, but that doesn't mean the recipient can't take a tax deduction (i.e., get a "tax break") for donating any property she received to a museum. Tyler also says "the heirs have to pay no tax on the sale," but it's not clear whether even that's true. The pertinent law provides that "the basis of any property received ... as part of an excludable restitution payment shall be the fair market value of such property as of the time of the receipt." Now, the heirs may have a strong argument that the sales price this November is equivalent to the fair market value at the time they received the property; after all, less than a year will have gone by. But, for the reasons given by Ellis and Kimmelman, and especially in light of the enormous amount of publicity generated by the $135 million sale of the portrait of Adele, the IRS could perhaps argue that the values of the other four works have increased significantly since January or February (or whenever it was exactly that the heirs received the works), in which case tax would be due on the sale.

Difficult legal question of the day

Here's a question I can honestly say I've never had to answer: is it legal, in California, to paint a live elephant to look like pink wallpaper?

And after reading this story in The Guardian, about the latest from the British artist known as Banksy, I still don't know the answer. On the one hand, the Los Angeles Animal Services Department (ASD) granted a permit allowing the elephant to appear in Banksy's first exhibition in the U.S. But the head of the ASD is quoted as saying the paint that was originally used was "unsafe, and even illegal," leading him to order that a child-safe face paint be used instead. He goes on to say, though, that his agency wanted to have the permits revoked in their entirety, "but to do so may have taken five days, by which time the exhibition would be over." In any event, be on notice that "permits will not be issued for such frivolous abuse of animals in the future," at least not in Los Angeles.

Banksy's Wikipedia page is here. You can see The Elephant in the Room here.

Understatement of the day

The Free New Mexican had a story this weekend on the recent changes to the fractional gift rules with the following headline: "Tax-law change might discourage art donations."

In fairness, the article itself goes a bit further ("some say [the change] will effectively end the practice called 'fractional giving'"), but, like most other press reports on the change, it focuses on the requirement that the gift be completed within 10 years, rather than on the more serious problem -- the tax bite to the collector from any increase in value of the artwork over time.

There is one error near the end of the piece. "Congress," it notes, "accidentally wiped out an earlier provision in tax law that allowed artists to donate their own work and take a fair-market deduction." That change, in 1969, may or may not have been bad policy, but it certainly was no accident. See, for example, this statement from Senator Leahy last year ("Congress changed the law for artists more than 30 years ago in response to the perception that some taxpayers were taking advantage of the law by inflating the market value of self-created works").

More on the Astor Painting

The Santa Fe New Mexican has a story today on the painting involved in the Brooke Astor lawsuit. The New Mexico connection is that the buyer of the painting was Santa Fe dealer Gerald Peters. The sales price on the 2002 sale to Peters was $10 million, but the painting was reportedly resold later for more than $20 million to an unnamed buyer. Earlier posts on this here and here. Peters made a previous appearance in the blog here.

"The death of fractional gifts" (UPDATED 2X)

Too busy with the day job today, but did want to call attention to this New York Times story today on the recent tax law changes governing fractional gifts of art (previously discussed here and here). I'll have more to say about the story later (I hope). In the meantime, see Lee Rosenbaum's take here.

UPDATE: The Times article is a little misleading in that it gives the impression that the major problem with the change is that it forces donors to complete the donation in a shorter time period. It opens by saying "proponents of the change" point to "abuse" by "wealthy donors" who "received upfront tax deductions for works that will not appear in museum collections for decades, if ever." And it quotes Senator Grassley, the chairman of the Senate Finance Committee, which drafted the new rules, as saying: “It isn’t right for a donor to get a big tax break for supposedly donating a painting that hangs in his living room, not the museum, all year. A painting in a private living room doesn’t benefit the public.” As I said in an earlier post, those problems, to the extent they are problems, could have been solved with the following two changes:

1. By overruling the Winokur rule that the museum’s legal entitlement to possession for a portion of the year was sufficient to secure the deduction, even if it never took actual possession. This would eliminate Senator Grassley's concerns about a painting hanging in the collector's living room all year.

2. By requiring that the collector transfer her remaining interest to the museum by some outside date (the new Act chose the earlier of (i) ten years after the date of the initial contribution or (ii) the taxpayer’s death). This would deal with the concerns of "proponents of the change" about works not appearing in the museum's collection "for decades, if ever" (though the first change, overruling Winokur, would ensure that, from the beginning, the works would appear in the museum's collection for at least part of each year).

By increasing the "price" of a fractional gift, these changes would certainly reduce their number. But I don't think they would eliminate them. What really accounts for "the death of fractional gifts" is what I referred to in earlier posts as the "mismatch" problem: that if the artwork has appreciated in value between the time of the initial gift and a subsequent gift, the excess “actual” value of the subsequent gift over the limited amount deductible under the new law will be subject to gift or estate tax. That's the part that leads people to say it'd be "insane" to make a fractional gift under the new law. The Times story alludes to this only briefly, noting near the end: "Under the new changes, there could also be significant estate tax penalties if donors make fractional gifts and then die while the work is still in their possession." Again, the "mismatch" problem is much broader than that. It would be more accurate to say there will be significant adverse tax consequences any time a donor makes a fractional gift and then the work appreciates in value.

FURTHER UPDATE: The Maine Antique Digest has a story up here.

Loving v. N'Namdi

The New York Law Journal today has a decision ($) from the Southern District of New York denying a motion for partial summary judgment by the estate of artist Al Loving in a lawsuit against his longtime dealer, George N'Namdi.

The estate sought three things. First, it asked for an order directing the gallery to account for all works delivered to it by Loving. The Court pointed out that to get an accounting you have to first show a breach of fiduciary duty -- and since pretrial discovery hadn't even begun, no such showing had been made here. (The Court did note that the estate could get essentially the same thing through the discovery process itself; the process is really the remedy.)

Next, the estate asked for an order directing the gallery to return all of Loving's unsold work. The Court again found the request premature: the dealer claimed to have already returned everything or agreed to make it available for pick-up at the gallery. Given that discovery hadn't yet started, there were "no facts from which to conclude that the defendant is withholding any of Loving's works." (The estate argued that the order was necessary "because of the defendant's past recalcitrance," but the Court felt that begged the question: the past recalcitrance had to be established during discovery, not simply asserted.)

Last, the estate asked for an order compelling the gallery to pay fifty percent of any sales of Loving's artwork not already paid. Here again, since the pertinent facts (including precisely how much the estate was owed) had not yet been developed in discovery, the request was denied as premature.

It's not clear why exactly the estate bothered moving for summary judgment at this stage. The gist of the Court's decision seems to be, "You can get everything you're asking for through discovery -- why are you bothering me?"

Loving, who died last year of lung cancer, was the first black artist to receive a solo show at the Whitney (1969). You can read a brief obituary here (scroll down). He has a stained-glass piece in the Broadway/East New York subway station in Brooklyn, which you can see here.

Seeing the Light

The Los Angeles Downtown News has a piece on neon artist Lili Lakich, who's about to publish a book about her career, called Lakich: For Light. For Love. For Life. The story mentions her lawsuit several years back against Pulitzer Prize-winning architecture critic Ada Louise Huxtable over the use of one of Lakich's sculptures on the cover of Huxtable's book The Unreal America: Architecture and Illusion. Apparently the case settled for $40,000 after two years, but it also seemed to cause an irreparable rift between Lakich and the Museum of Neon Art, which she co-founded with fellow neon artist Richard Jenkins in 1981. Lakich says it was because "the museum's directors did not back her in the lawsuit against Huxtable," but the article fails to spell out how exactly they should have helped. In any case, it seems like another example (stressed here before) that, in litigation, even when you win you often lose.

"All of the leads have dried up"

That odd case of a disputed Pollock stolen last November from the Everhart Museum in Scranton remains unsolved. Earlier posts here and here.

Some Sun-light on the Fractional Gifts Problem

Kate Taylor has an excellent piece in this morning's New York Sun about the recent change in the law regarding fractional gifts to museums, which I wrote about earlier this week here. She does a good job explaining how dramatic a change this is -- the director of government affairs at the Association of Art Museum Directors says, "any tax adviser would say to somebody with that kind of wealth, ‘You're insane to do this [i.e., make a fractional gift]'" -- and gets a quote from the senior counsel for the Senate Finance Committee on the reasoning behind the change: "Very wealthy people were taking huge deductions, and keeping the art at their homes. ... It wasn't going to the public benefit, or only in many, many years." He called the changes "a pretty commonsense way of dealing with it."

I'm not sure that's right. If your concern is people keeping the art at their homes, all you really need to do is reverse the Winokur rule (which, as I noted in the earlier post, simply required that the museum be given the right to possession of the work for a portion of the year, not that they actually exercise that right). If you didn't think that went far enough, then something like the new rule requiring that the entire interest be donated to the museum within 10 years (or at the donor's death if sooner) might make sense. But what doesn't make sense -- and isn't a "pretty commonsense way of dealing with it" -- is the rule that locks the donor in to the value of the work at the time of the initial gift (unless it happens to have gone down, in which case she gets stuck with the new, lower value), which creates the potential "mismatches" that bring about the tax nightmares I described in my earlier post. As the above quote from the AAMD indicates, all that does is ensure that there will be no fractional giving at all (and, if that's what Congress hoped to achieve, they could have just done so directly).

Taylor reports that the AAMD is lobbying the Senate Finance Committee to change the law, "and hoping to reach a compromise."

Art Thief Jailed

The "alarm systems specialist" who stole a $65 million 16th century gold sculpture from Vienna's Art History Museum in 2003 has been sentenced to four years in prison. BBC News story here. You can see an image of the sculpture, "Saliera" by Florentine artist Benvenuto Cellini, here. An earlier story on the theft is here. The Wikipedia entry on the piece is here.

That's Better

A month after "it's not our guilt," the Pompidou has offered “solemn apologies” and accepted full responsibility for the destruction of two works by American artists that it had borrowed for a recent exhibition. The owner of one of the works has been paid its insured value of $28,000, and the insured value of the other work ($60,000) will be paid "soon." In a nice additional touch, the museum has extended an invitation to the artists to remake the works at the museum’s expense. The New York Times story is here. More too at Bloomberg and The Art Newspaper.

More on the Astor Hassam

The New York Times has more details today on the Hassam painting in the middle of the dispute between Brooke Astor's son and grandson over her care, mentioned earlier here:

"Mr. Barth’s affidavit also notes that Mr. Marshall [the son] collected a $2 million commission for selling his mother’s Childe Hassam painting 'Flags, Fifth Avenue,' for $10 million in February 2002. The document explains that the commission was paid according to Mr. Marshall’s written instructions to his mother’s bank to transfer $1 million to his account. He himself signed two $500,000 checks for the other million. Mr. Warner, one of Mr. Marshall’s lawyers, has said that Mrs. Astor came up with the $2 million figure for her son."

The End of Fractional Gifts?

With little fanfare, the recently enacted Pension Protection Act has drastically changed the rules that apply to gifts of fractional interests in artworks. Unless the law is changed, the likely effect will be the end of fractional gifts of art to museums.

Bear with me here.

Gifts of fractional interests in art have been standard practice for years. Here’s how it worked. A collector would give a museum, say, a one-fourth interest in a painting and retain for herself the other three-fourths interest. The museum had to be given the right to possession of the painting for a quarter of each year (though, under the Winokur rule, it didn’t have to exercise that right). The collector got a current income tax deduction equal to 25% of the value of the painting, and she (or her estate) could get further deductions for additional contributions in the future, based on the then-current value of the painting (which the collector of course hoped would be higher than at the time of the initial contribution). Everybody was happy – both the museum and the collector.

Not any more. First, under the new law, Section 1218 of the Pension Protection Act of 2006, no deduction will be allowed unless all interests in the artwork were owned by the donor and the donee immediately before the contribution (unless everyone who holds an interest in the work makes a proportional contribution).

Second, if the collector fails to contribute her entire interest to the same museum before the earlier of (i) 10 years from the initial contribution or (ii) the collector’s death, then all previous tax benefits are recaptured -- with interest, as well as a 10 percent penalty.

Third, recapture also applies if during the 10-year period (or the period ending on the collector’s death if sooner) the museum fails to take “substantial physical possession” of the artwork – reversing the Winokur rule that the “legal right” to possession is sufficient – and “used the property in a use which is related to” its charitable purpose. It’s not clear whether keeping a work in storage would satisfy the latter requirement, or if a collector will instead have to extract a promise from the museum to actually display it to the public from time to time. (More on this so-called “related use” rule below.)

Fourth, and worst of all, the new law provides that the fair market value of any additional contributions shall be determined by using the lesser of (a) the fair market value of the work at the time of the initial contribution or (b) the fair market value of the work at the time of the additional contribution. This creates two problems for collectors. One, they’re deprived of the benefit of any increase in the value of the artwork over time. Say I donate 25% of an artwork to a museum at a time when the work is worth $8 million and, several years later, when the work is now worth, say, $20 million, donate the remaining 75%. Under the new law, my deduction for the latter contribution will be limited to $6 million (75% of the value at the time of the initial contribution), even though what I have donated is an asset worth $15 million (75% of $20 million, the value at the time of the later contribution).

Even worse – and this is the part that will likely mean the end of fractional giving to museums unless changed – the law sets up a potential mismatch between the work’s taxable value and its deductible value. To see this, suppose that tomorrow a collector gives a museum a one-half interest in a painting valued at $5 million. Her current deduction will thus be $2.5 million (putting aside the usual percentage limitations on charitable deductions). Suppose further that she dies several years from now, leaving the remaining one-half interest to the museum in her Will – but imagine that now the value of the painting has gone up to $6 million. Now the estate tax charitable deduction will be limited to $2.5 million (one-half of the value of the painting at the time of the initial contribution), but the full $3 million (one-half the painting’s current value) will be includible in the collector’s estate, leaving estate tax due on the $500,000 “spread.” Ouch.

The same problem applies to gifts as well. Using the same example, if rather than leaving the remaining one-half interest to the museum in her Will, the collector decides to complete the gift during her lifetime, she will have to pay gift tax on – but will get no income tax deduction for – the same $500,000 spread.

The new law applies to contributions made after August 17, 2006. The legislative history indicates that a contribution of a fractional interest before that date is not treated as the initial contribution for purposes of these rules, but the first additional contribution after the effective date will be (and so starts the 10-year clock ticking, for example).

If you’re so inclined, you can view the Joint Committee on Taxation’s 396-page "technical explanation" of the Act here.

In one other related provision, Section 1215 of the Act provides for recapture of any tax benefits claimed for donated property that does not get put to a “related use” (that is, a use related to the recipient charitable organization’s tax-exempt purposes). This provision automatically applies if the donee organization disposes of the property within three years of the date of contribution (with an exception if the organization certifies that the property was put to a related use or that it became impossible to do so). A $10,000 penalty applies to anyone who identifies property as having a related use knowing it is not so intended.

The Association of Art Museum Directors has been very active in pushing for a restoration of the income tax deduction for charitable contributions by artists of their own work -- without much success. By contrast, here's a change, with a potentially catastrophic impact on gift-giving to museums, that seems to have flown in completely under the radar. It will be interesting to see what happens once the meaning of these changes becomes widely understood. Here’s a start, from the Chicago Tribune last week.

"A symbol of the issues at the center of the case"

The New York Times had a piece this weekend on a painting -- “Flags, Fifth Avenue” (1917) by Childe Hassam -- in the middle of the nasty legal battle involving philanthropist Brooke Astor. Apparently Mrs. Astor's son sold the painting in 2002 for about $10 million, receiving a 20 percent commission in the process. The Times sees the painting "as a symbol of the issues at the center of the case: an ailing woman’s prized possession sold under circumstances that remain unclear, and questions about whether the proceeds from the sale were dealt with appropriately by her son." You can see an image of the painting here.

Today in Munitz Law

Barry Munitz's legal troubles don't seem to have ended with his departure from the Getty. The LA Times had a story this weekend about a lawsuit claiming that the California State University board of trustees illegally held a closed-door meeting to discuss his hiring earlier this year after his resignation from the Getty in February amid allegations that he misused Getty funds. (Munitz was chancellor of the CSU system from 1991 to 1998.)

The Times also reported Saturday that Getty officials had hired the LA law firm Munger Tolles & Olson to conduct a covert investigation of Munitz and other senior Getty officials last year (and for which Munger Tolles has billed the Getty more than $4 million). As part of his resignation, Munitz agreed to forgo more than $2 million in severance pay and return $250,000 to settle all claims. Among the things Munger Tolles looked at were the legal exposure of the Getty's trustees as Munitz's "bosses," and whether the Getty had grounds to invoke the "moral turpitude" clause to terminate his contract. According to the Times, "the records also show that the attorneys spent a substantial amount of time investigating Munitz's previously unreported use of Getty funds to advance the career of a German art student whom he hired as a 'senior advisor' and sponsored as an intern at another museum. They also reviewed his expenditures linked to a Russian researcher whose museum received a Getty grant." The Getty remains under investigation by the California attorney general.

Whitney Lawsuit (UPDATED)

The New York Sun reports today on a lawsuit that's been filed to try to block the Whitney's expansion. "The plaintiffs — two associations of residents and the owners of the Carlyle Hotel — claim that the Board of Standards and Appeals erred in granting the museum variances to zoning regulations, in order to allow the Whitney to go forward with its expansion, which includes a 178-foot stainless-steel-clad tower designed by the award-winning architect Renzo Piano."

UPDATE: The Gothamist has more.