The Wall Street Journal reports that "reacting to museums' complaints of sharp declines in art donations, a bill announced Friday by Sen. Charles Schumer ... could revive the practice of so-called fractional gifts."
Some brief background is probably in order. The Pension Protection Act of 2006 drastically changed the rules applicable to fractional gifts -- essentially bringing about an end to fractional giving. The most serious problem was what I referred to as the "mismatch problem": if the work appreciated in value between the time of the initial gift and a subsequent gift, the excess value of the subsequent gift would have been subject to gift or estate tax. In early 2008 technical corrections were enacted fixing the mismatch problem, but, as I noted at the time:
"[The technical corrections] do not, however, change the requirements that (1) the gift be completed within 10 years (or, if sooner, the collector's death) or (2) the value of any additional contributions be determined using the lesser of the value of the work at the time of the initial contribution or the time of the additional contribution (thus depriving donors of the benefit of any increase in the value of the work over time). So, while the corrections do bring fractional gifts back from the dead (as evidenced by the recent major gift to LACMA), there still remain some disincentives to fractional giving."
The new bill focuses on these two issues, and basically tracks the "agreement in principle" among members of the Senate Finance Committee that was described in a New York Times article in July of last year:
First, it was reported that "amendments hammered out by aides to Mr. Schumer and Mr. Grassley would lengthen [the 10-year donation period] to 20 years" -- and that's exactly what the new bill provides.
And second, it was said that Grassley appeared "willing to allow donors to claim deductions for subsequent donations that reflect increases in the value of the portion of the artwork they still own." That is also now reflected in the bill.
There's one other important change to note. Back in 2006, when this problem first surfaced, I mentioned a New York Times article which said that proponents of the change were concerned about "abuse" by collectors who "received upfront tax deductions for works that will not appear in museum collections for decades, if ever." Senator Grassely was quoted 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 then:
"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 .... This would deal with the concerns ... 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)."
As we've seen, the new bill does the second thing: it sets an outside date of 20 years for completion of the gift. But it also does the first: it overrules Winokur by providing that, for every five-year period, the work must be "in the physical possession" of the museum (and "used in a use which is related to a purpose or function constituting the basis for the donee organization's [tax] exemption") for a portion of the time "substantially" equivalent to its fractional interst (so, for example, a museum with a 20% interest in a painting must take physical possession of the painting for roughly one year out of the five). The WSJ story interprets this provision as requiring that the museum "exhibit the artwork in proportion to its ownership interest over every five-year period" (my emphasis), but it's not clear to me whether keeping a work in storage, or perhaps making it accessible to scholars, would satisfy that requirement. If not, then the donor may have to extract a promise from the museum, as a condition of the gift, to exhibit the work in compliance with this provision.
Very briefly, a few other points about the bill. First, like the Pension Protection Act, it provides that no deduction will be allowed unless all interests in the work were owned by the donor and the donee immediately before the contribution (although it contemplates the issuance of regulations covering "cases where all persons who hold an interest in the property make proportional contributions" of their interests).
Second, the initial fractional contribution must be at least 10%, and it must be pursuant to a "written binding contract" which requires (a) that a total of at least 20% be contributed within 11 years and (b) the rest be contributed within 20 years.
Finally, for works (as distinct from interests) worth more than $1 million, the donor has to attach to her tax return "a statement of value obtained from the Internal Revenue Service." There are also additional reporting requirements for museums.
You can read the bill, S. 1605, here.
