Thursday, September 14, 2006

"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.