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. _____________________________________________ ========================================================= Important Subscriber Information: The Museum-L FAQ file is located at http://www.finalchapter.com/museum-l-faq/ . You may obtain detailed information about the listserv commands by sending a one line e-mail message to [log in to unmask] . The body of the message should read "help" (without the quotes). If you decide to leave Museum-L, please send a one line e-mail message to [log in to unmask] . The body of the message should read "Signoff Museum-L" (without the quotes).