The Minneapolis Star Tribune had a story yesterday on the change in the law governing fractional gifts of art, which I've written about several times (including here, here, and here). It reports that Minnesota Senator Norm Coleman is working with Senators Charles Schumer and Gordon Smith "on some minor legislative changes," though doesn't indicate what the changes might be.
As in most other press reports about the new law, there's no mention of the most important problem with it -- what I've been calling the "mismatch" problem. There's also one important misstatement: the article says "Museum officials are troubled by the new law's requirement that they take possession each year. If they own 20 percent of a sculpture, that means they must have it at the museum for 73 days each year" (my emphasis). There is no such requirement in the new law. Under the old law, the museum was required to have the right to possession of the work for a portion of the year equivalent to its fractional interest -- but the museum didn't actually have to exercise that right; legal entitlement to possession was sufficient. (This is the so-called Winokur rule, after the Tax Court's 1988 decision in Winokur v. Commissioner.) The new law does many things, but overrule Winokur does not appear to be one of them. Now, the museum has to take “substantial physical possession” of the work within the ten year/before death statutory period -- but there is no express requirement that the museum’s possession correspond to the fractional interest it’s been given (it just needs to be "substantial"), or, to the point made by the Star Tribune story, that it happen on a year to year basis. So if a collector gives a 25% interest in a painting to a museum, the deduction will presumably be allowed even if the museum never takes actual possession until the tenth year. The collector’s ability to retain possession while claiming a deduction seems to remain intact -- just as long as the museum takes “substantial physical possession” at some point within the statutory timeframe.
The flip side of this would be a collector who donates a fractional interest in a painting in November 2006 -- fully intending to convey "substantial physical possession" sometime in late 2007 -- but who dies suddenly in early 2007, without the charity having taken possession of the painting. Here, recapture of the charitable deduction would apparently apply. This is something that could perhaps be dealt with in regulations, but until then anyone who makes a fractional contribution would be wise to arrange for possession by the charity sooner rather than later. All of which, however, is probably academic at the moment since, as I've said, there isn't going to be anybody making fractional gifts -- at least pending the "minor legislative changes" Senators Coleman and Schumer are apparently working on.
