Hi Everyone,

The following article is in this morning's NY Times online edition. I
thought it was important enough to paste on here for everyone on the
list to read.

Cheers!
Dave

David Harvey
Conservator,
Los Angeles, California  USA
__________________________________________________

New York Times
September 13, 2006
Museums Fear Tax Law Changes on Some Donations

By JEREMY KAHN
Directors and trustees of the nation's top art museums are preparing a
major lobbying effort to reverse a federal tax provision approved last
month that they say will significantly harm their ability to acquire
new artworks.

The tax law change, included in a little-noticed section of the
Pension Protection Act that President Bush signed into law on Aug. 17,
affects a practice known as fractional or partial giving, which has
become an increasingly popular method for collectors to donate to
museums. Proponents of the change say that fractional gifts — under
which an artwork is "donated" but can remain largely in the owner's
possession — have been abused by wealthy donors, some of whom received
upfront tax deductions for works that will not appear in museum
collections for decades, if ever. The changes apply only to fractional
gifts made after Aug. 17.

Among the thousands of works that have come to American museums
through fractional giving in the past 15 years are Cézanne's "Boy With
a Red Vest" at the Museum of Modern Art, Magritte's "Kiss" at the
Houston Museum of Art, assemblages by Joseph Cornell in the Bergman
Collection at the Art Institute of Chicago, and all 53 Impressionist
and Post-Impressionist works that make up the Metropolitan Museum's
Annenberg Collection.

The Modern alone has some 650 works in its collection that began as
partial gifts and has 600 more partial donations in the works, said
Marie-Josée Kravis, the president of the museum's board and a major
art collector. Ms. Kravis and her husband, the financier Henry Kravis,
have given a number of partial gifts to the museum, including
Matisse's "Plum Blossoms," valued at $25 million.

In partial gifts, a donor gives a percentage interest in a work of art
— say, 20 percent — to a museum or charity. The donor gets a tax
deduction for an equivalent percentage of the work's value. The museum
gets the right to hold the work for a portion of the year, in this
case 20 percent, or 73 days.

But the donor can continue to hold the art privately the rest of the
time, and in practice many museums have waived their right to possess
pieces at all except when they needed them for exhibitions. Donors can
then make further fractional gifts in subsequent years, helping to
spread out their tax deductions over a longer period. For museums,
works that start out as fractional gifts almost always become full
donations eventually.

Tax lawyers say that the new law, while not banning fractional gifts
outright, creates enough disincentives to end the practice
effectively.

"This is the death of fractional gifts," said Ralph E. Lerner, a
lawyer who specializes in art law at the firm of Sidley Austin in New
York.

Still, some members of Congress saw the previous law as ripe for abuse
and out of sync with most of the tax code, which does not allow
fractional gifts of tangible assets and which tends to require that
the public benefit for a charitable contribution occur in the same
year that the taxpayer takes a deduction for the gift.

"This is a question of fairness,'' said Senator Charles E. Grassley,
an Iowa Republican and the chairman of the Senate Finance Committee,
which drafted the new rules. "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."

But as the escalating prices for art sold through dealers and auctions
take many museums out of the market, art institutions point out that
they have become more and more dependent on donors for new
acquisitions. They view fractional giving as a critical way to attract
valuable donations and cement relationships with wealthy art patrons.

About 80 percent of new acqusitions at American museums now come
through donations. Major museum directors interviewed estimate that
fractional gifts account for only about 10 percent of these donations,
but that the works involved are often the most valuable and
historically significant pieces. Without such donations, many say they
worry that their ability to build collections will be severely
crimped.

"It is a body blow," Neal Benezra, director of the San Francisco
Museum of Modern Art, said of the new law.

Museum officials say they were blindsided by the severe limitations
placed on fractional giving, which were inserted into the pension bill
with little chance for public scrutiny.

"We are working with our museum directors, and they are working with
their representative in Congress to try to explain what a loss this
will be to the public," said Anita Difanis, director of government
affairs for the Association of Art Museum Directors.

Ms. Difanis said that Congress had no reason to change the previous
law in the first place. She cited a Treasury Department Inspector
General's report released last month that found that art represents
such a small fraction of all charitable contributions — less than 3
percent — that it was not worth revamping the I.R.S. rules governing
such donations.

The Association of Museum Directors has proposed to members of
Congress a number of revisions in the new law, Ms. Difanis said. The
major New York museums have also contacted Senators Hillary Rodham
Clinton and Charles E. Schumer, both Democrats, to voice their dismay.
Mr. Schumer said in an e-mail message yesterday, "We must try to right
this wrong."

So far, no new bills have been introduced. Still, Glenn D. Lowry,
director of the Museum of Modern Art, said he hoped Congress could be
persuaded to change the new law. "I hope that many of these changes
were not intentional," he said. "Once we explain to the Senate why
what was done with the best of intentions has ended up being a
disaster, I hope we can get things corrected."

The previous law on fractional gifts had two crucial advantages to
donors: by allowing multiple fractional gifts of the same work over
many years, donors could take advantage of a piece's appreciation. If
the art became more valuable, so did the tax deductions from each
subsequent fractional gift.

The other advantage was that donors could continue to enjoy having
works in their homes for a long time, sometimes until their deaths.

"It is really a driving force for people who are true collectors,"
said Agnes Gund, a former president of the Modern and still one of its
trustees. She has also donated a number of works to the museum as
fractional gifts, including "Cathedral," an Abstract Expressionist
painting by Hans Hoffmann, and "Flashlight," a Pop Art sculpture by
Jasper Johns.

"If you are collecting because you love the art, you want to be able
to enjoy the work while you have it and not give it away very soon,"
she said.

Most museums make donors sign contracts guaranteeing that the work
will eventually be given in full to the museum or bequeathed to it
upon the collector's death. (One notable exception was Gauguin's
"Still Life With Hope," which was sold at auction in 1996 by the
estate of the collector Joanne Toor Cummings, even though 20 percent
of it had previously been donated to the Met.)

Under the new law, a ceiling is placed on the value of a work of art
at the time of the first fractional donation, and the donor can no
longer get larger deductions for later fractional gifts if the art
appreciates. (If it declines in value, the taxpayer gets a lower
deduction for subsequent donations.)

The law also says that museums must take "substantial possession" of
the work of art following the initial gift and receive full ownership
and possession of the object within 10 years.

Museum directors, tax lawyers and art patrons say this will discourage
donations, particularly from younger donors, since collectors will now
hold on to works as long as possible to maximize the potential tax
benefit when they actually make the donations.

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. Some lawyers, including Neil T.
Kawashima of McDermott Will & Emery in Chicago, said that as a result,
they are now advising clients to stop giving fractional donations.

"You can't predict when you'll die or how much the painting will
appreciate, so my advice would be, don't do it," Mr. Kawashima said.

Mr. Lowry of the Modern and Sharon Cott, general counsel at the
Metropolitan Museum, said they had heard from donors who had been
advised not to make previously discussed gifts because of the new law.

Museum directors said that without fractional giving, more works of
art will ultimately end up in estates, where they are far more likely
to be sold off to private collectors than to art institutions.
_____________________________________________

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