发布时间：2008年08月01日
Jon and Mary Shirley used to give artwork by the likes of Jackson Pollock, Mark Rothko and Alberto Giacometti to the Seattle Art Museum. No longer. A federal crackdown on deductions for so-called fractional gifts of art has made donating too onerous for them.
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| Christie's |
Before, the Shirleys could donate small stakes in their artwork to the museum over time and reap increasingly larger deductions as their collectibles appreciated. But Congress changed the rules nearly two years ago, capping those deductions.
"There's just no point in doing it," says the 70-year-old Mr. Shirley, a former Microsoft Corp. executive. He says the couple has made no art donations to the museum since the rule change.
Museum directors say these restrictions -- which limit tax breaks for givers -- have crimped donations of valuable collections. "Many of the significant gifts we've had in our history have come from fractional gifts," says Kaywin Feldman, the director of the Minneapolis Institute of Arts. "The new law has virtually stopped new fractional gifts from being started. It's a real problem for us and other museums."
Now lawmakers, under pressure from museums, are mulling easing some of the restrictions. Sen. Charles Schumer (D., N.Y.) and Sen. Charles Grassley (R., Iowa) are working on a plan to once again allow partial-gift donors to take ever-larger deductions as their artwork appreciates, according to people briefed on the negotiations. The senators could attach the changes to other tax legislation by the end of the year.
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| Alberto Giacometti's 'The Dog' (1951) |
In the meantime, wealth advisers are steering donors away from fractional giving and toward an array of other complex art-giving vehicles, such as charitable-remainder trusts and donor-advised funds.
The Urge to Give
Despite the difficult donating terrain, the urge to give art remains strong. Art enthusiasts increasingly want to donate their collections while alive, advisers say. But it's increasingly important for donors to be very careful when making gifts of their prized pieces.
"People are very interested in doing things with their art during [their] lifetime," says Lynn Lederman, a senior vice president at Bessemer Trust, a New York firm that advises clients with at least $10 million in assets. This satisfies their philanthropic desires, can reduce the size of their estate for tax purposes, and lets them take active control over where their prized collection goes.
Donating art also shields them from a big tax bill. Though many collectors could make a bundle selling into a hot market, they'd be hit with a sharp federal capital-gains tax -- up to 28% -- on art and collectibles (as opposed to the lower 15% rate on stocks and bonds). That gives them an additional incentive to donate and take a deduction instead.
These deductions can prove sizable. While the stock market has stumbled and banks have collapsed, art's value has kept on rising. The Mei Moses Annual All Art Index, which tracks repeat-auction sales of the same works, posted more than a 20% return in 2007, according to Beautiful Asset Advisors LLC, the firm that compiles the index. That beat the Standard & Poor's 500-stock index by about 14.5 percentage points.
Though art doesn't beat the stock market every year, it has at times enjoyed several years of substantially outpacing traditional securities.
Besides tax planning, the fractional-gift strategy provided collectors an additional advantage: It allowed them to park their art in a museum for part of the year, then bring it home to enjoy for the remaining months, depending on the deal they negotiated. They could also claim increasingly larger deductions as the artwork appreciated over time, before the museum eventually took sole possession.
Here's how it worked: The donor would take a deduction based on the first contributed stake -- say, $4,000 for donating a third of a $12,000 painting. If the collector donated another one-third stake later, and the $12,000 painting had appreciated to $30,000, the next deduction would be $10,000. The donor could continue to take advantage of this until he gave away the entire interest in the artwork, and he could take as many years as he wished to do so.
Measures passed as part of a 2006 pension-reform law limited that sweet deal. Sen. Grassley has said that he led the charge for stricter rules after reading an article on the topic in The Wall Street Journal, alarmed that donors were taking bigger and bigger deductions while still keeping the donated artwork on their walls much of the time.
Today, it doesn't matter if that $12,000 canvas leaps in market value to $30,000; art contributors can't take ever-larger deductions if the donated artwork continues to rise in value. As far as the Internal Revenue Service is concerned, for deduction purposes, the value remains frozen at $12,000, the value at the time of the initial gift. Worse for donors, if the artwork happens to depreciate, later calculations are based on that lesser value.
Additionally, art givers now have only 10 years -- or until the donor dies, whichever comes first -- to hand the work over to a museum for good. Otherwise, the IRS recoups a portion of the deduction, plus interest and penalties.
New Restrictions
The Schumer-Grassley plan would ease some of these restrictions, but would add others, according to the people briefed on the negotiations. Collectors would once again be allowed to take bigger deductions over time as their art appreciated. But higher art values, for tax purposes, would be restrained by any deductions taken previously, under one option being discussed. For example, say a donor gave 10% of a painting valued at $100,000. For that initial gift, the donor could deduct $10,000.
But when calculating the next deduction for a partial gift in a later year, the painting would be valued at only 90% of its fair-market value. If in the later year the market valued it at $200,000, the IRS would peg its taxable worth at $180,000.
A collector would also be required to submit appreciated artwork valuations to the IRS's long-established art advisory panel for approval, the people familiar with the negotiations said.
On the other hand, the senators' revision would extend the 10-year deadline for a donor's complete divestment of artwork to 20 years, so long as the donor's initial gift was at least 10% and reached 20% within 10 years, these people said.
In a statement, Sen. Schumer said the plan would "restore the incentive for collectors to make donations to museums." Sen. Grassley, in his own statement, defended the stricter provisions passed in 2006 but signaled he was open to changes. He stressed that the process for codifying any fractional-giving reforms is "far from over."
Other art-donating vehicles come with fewer caveats but have enough twists and turns to merit consulting a wealth adviser or tax lawyer. With a charitable-remainder trust, for example, a collector can donate artwork to a trust, which then sells it and invests the proceeds. Because the trust is tax-exempt, the donor can take a deduction and avoid capital-gains taxes.
For a defined term, often until the donor's death, the trust uses the investment proceeds to make annual payments to the donor or other beneficiaries. At the end of the term, the trust's remaining amount goes to a charity preselected by the donor.
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| Franz Kline's 'Red Field' (1955) |
Another art-giving option is the donor-advised fund. New Yorkers Donald and Barbara Jonas used this vehicle in 2005 to divest themselves of about half of their collection of abstract-expressionist art, including works by Willem de Kooning and Franz Kline, which they began collecting in the 1970s.
The Jonases started by giving the works to the Jewish Communal Fund, a donor-advised fund, which auctioned the pieces at Christie's for about $44 million. The Jonases then "advised" the fund to use the bulk of the proceeds to start a foundation that aims to promote nurse recruitment and retention, and improve nursing practices.
The tax-exempt nature of the fund allowed the Jonases to avoid paying capital-gains taxes. But the Jonases could deduct only what they paid for the works years ago, as opposed to the current fair-market value.
That came as no surprise to the Jonases, but the detail spotlights a long-established pitfall donors should look out for: the "related use" rule. This rule says a donor can take a fair-market value deduction on a gift only if the receiving charity uses it for the group's tax-exempt purpose. Otherwise, the donor can deduct only the gift's original cost. A museum displaying a painting, for instance, would pass the related-use test, but a donor-advised fund or charitable-remainder trust often would not.
"We didn't pay a lot of money in those days for those works," says Mr. Jonas, 78, a co-founder of now-defunct retailing chain Lechters Inc. "Whereas today, it's out of sight."
Write to Mike Spector at mike.spector@wsj.com
