Recent Legislative Developments Regarding Fractional Gifts of Art
According to a recent Wall Street Journal article – “A Portrait of Art as a Tax Deduction” by Mike Spector, July 22, 2008 – lawmakers have been under increasing pressure from museums to ease restrictions imposed on collectors wanting to donate ”fractional gifts” of art to museums.
For the past two years, a federal crackdown on deductions for fractional gifts of art has made donating art less attractive to collectors. Prior to that time, art collectors could donate small stakes in their artwork to a museum over time and receive increased tax deductions as their artwork appreciated. In addition to favorable tax-treatment, the fractional gift strategy allowed collectors to hang their art in a museum for part of the year, but then bring it home for their own enjoyment for the remaining months, based on the terms of their agreement.
Concerned that donors were taking increasingly larger deductions while keeping so-called donated artwork on their walls, Congress changed the rules in 2006 by capping those deductions so that taxpayers could not receive future increased deductions as their artwork appreciated (although such deductions could shrink if the artwork decreased in value). However, museums are feeling the pinch because many of their significant works over the years have come from fractional gifts. Consequently, Sen. Charles Schumer (D., N.Y.) and Sen. Charles Grassley (R., Iowa) are working on legislation that will once again allow fractional gift donors to take increased deductions as their artwork appreciates. Such changes may be bundled with other tax legislation as early as year-end 2008.
Although the proposed Schumer-Grassley plan would lift some of the partial gift restrictions, it would add others, according to Spector’s sources. Yes, collectors would be permitted to take larger deductions as their art appreciated. However, higher art values would be limited by any deductions previously taken, under one option being discussed. In addition, collectors would have to submit certain paperwork – appreciated artwork valuations – to the IRS’s art advisory panel for approval.
On the positive side for donors, the senators' proposal would extend the current 10-year deadline for a donor's complete divestment of artwork to 20 years, as long as the donor's initial gift was at least 10% and reached 20% within 10 years, according to Spector’s sources.
In the meantime, until the fractional gift amendments pass, wealth managers are steering donors away from fractional giving and more towards other donor vehicles, such as charitable-remainder trusts and donor-advised funds.