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Fractional Gift Update

By Intellectual Property Law, Esq.

This morning's New York Times reports that "members of the Senate Finance Committee have agreed in principle" to "loosen stringent limits . . . that made partial gifts less advantageous for donors."

It's worth quickly running through some history here, because the story leaves out one important chapter. The Pension Protection Act of 2006 drastically changed the rules governing gifts of fractional interests in artworks to museums. As today's article notes, "the new rules led to a sharp decline in donations of art"; Anita Difanis of the Association of Art Museum Directors is quoted as saying they "stopped fractional gifts almost entirely." I summarized the problems with the new rules here. The main (though not the only) problem was what I referred to as the "mismatch" problem: if the work were to appreciate in value between the time of the initial gift and a subsequent gift, the excess value of the subsequent gift would be subject to gift or estate tax.

What the Times story leaves out is that in January of this year technical corrections were enacted which completely eliminated the mismatch problem. (It also fails to mention the Promotion of Artistic Giving Act, which was introduced last fall but seems to have stalled.) In fact, a major fractional gift to LACMA went forward not too long ago, but two disincentives to fractional giving remain in place, and it is on these that the current negotiations seem to be focused.

First, under current law the gift of the entire work must be completed within 10 years (or, if sooner, the collector's death). The Times says "amendments hammered out by aides to Mr. Schumer and Mr. Grassley would lengthen that to 20 years." (This, incidentally, is a step back from the Promotion of Artistic Giving Act, under which the deadline would be 9 months after the collector's death.)

Second, under current law the value of any additional contribution is determined using the value of the work at the time of initial contribution or at the time of the additional contribution, whichever is lower (which keeps the donor from benefitting from any increase in the value of the work). (I don't think I'd ever seen an explanation for this provision, but today's story says: "Art tends to appreciate after it is exhibited in museums, and Mr. Grassley?s concern was that donors were using partial gifts to bolster the value of the donation and thus the size of their deductions.") But "it now appears that Mr. Grassley is willing to allow donors to claim deductions for subsequent donations that reflect increases in the value of the portion of the artwork they still own."

Other proposed changes mentioned in the article include a requirement "that all partial gifts be subject to binding written contracts, to prevent heirs from reneging on the gifts after a donor?s death" (though, presumably, if that happens and the gift is not completed, the recapture provisions of the current law would kick in) and an increase in partial-gift-related reporting by museums.

Senator Schumer says "the changes could be attached to tax-related legislation sometime next week, or as an independent bill," and he "think[s] this will pass." Senator Grassley cautions that "any changes being looked at right now ? and that process is far from over ? also must work to stop the rich and powerful from hanging on to their art at taxpayer expense."

Full post as published by The Art Law Blog on July 10, 2008 (boomark / email).