The Fractional Gift Fracas

It’s a bit like closing the museum door after the donors have already escaped: The Association of Art Museum Directors is now lobbying for a change in a law that Congress has already passed—Section 1218 of the 2006 Pension Protection Act, a provision that radically alters the rules for giving fractional gifts of art to nonprofit institutions. Museum officials say this change could be a deal-killer for many donors.
[Note: Links to legislation on the federal government’s “Thomas” legislative website expire, so if you want to read the text of Section 1218, you must do your own search: Go here, type in “2006 Pension Protection Act,” click the tab for “Enrolled Bills” and hit the “Search” button. Then scroll down to Section 1218. Just more bureaucratic red tape from Washington!]
What museum professionals object to most is a new rule that prevents donors who give a fraction of a work’s value from taking advantage of that work’s increased value when they subsequently donate an additional portion. In the case of a work given in 25% installments, the second tax deduction would previously have equaled 25% of the value of the work at the time of the second donation. But under the new rule, that second tax deduction will be limited to 25% of the work’s original value (its appraised value at the time of the first fractional donation), or its value at the time of the second donation, whichever is LESS. The chance to take fractional-gift deductions based on a work’s appreciation in value is lost.
For the best explanation of all the complications and ramifications of this new law, consult my favorite blogging attorney: Donn Zaretsky of The Art Law Blog. Start with his Sept. 6 entry and then go to Sept. 8. Mainstream Media articles on this subject are here and here.
Zaretsky suggests a compromise solution: Instead of imposing conditions that will decimate donors’ incentives to make fractional gifts, Congress could make smaller modifications to curb possible abuses. It could require that museums take physical possession of fractionally given art for the portion of the year that they are legally entitled to do so. (If a donor gives a fractional gift of 25% of an artwork’s value, the museum is entitled to take possession of it for 25% of each year. But museums have not always exercised that right.)
Zaretsky further observes:
If you didn’t think that went far enough, then something like the new rule [in Section 1218] requiring that the entire interest [in a partly given work] be donated to the museum within 10 years (or at the donor’s death if sooner) might make sense….
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.
Nothing about this issue appears, at this writing, in the Advocacy section of AAMD’s website, which details its lobbying on artists’ charitable deductions and other legal issues.
Who is keeping an eye on this ball?