New Fractional Giving Rules May Hurt Art Donations

The following excerpts are from Jeremy Kahn, Museums Fear Tax Law Changes on Some Donations, NY Times, Sept. 13, 2006:

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. * * *

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.