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On show at the Museum of Modern Art in New York until the end of January is a retrospective of more than 100 paintings and drawings by the American minimalist artist Brice Marde. Some of the works are on loan from private collections and some are on loan from other museums and galleries, but several belong in part to MoMA and in part to a donor.

“Couplet IV”, for example, a striking 9ft-high oil on linen, painted in 1988-89, is a fractional and promised gift from Richard Fuld, Lehman Brothers’ chairman and chief executive, and his wife Kathy. “Lethykos (for Tonto)”, an earlier, four-panelled painting from 1976, is a fractional and promised gift from Marie-Josée and Henry Kravis.

Through fractional gifts, donors can support museums without having to give up their paintings or sculptures altogether. They give away a percentage of their work of art to a museum, usually with the understanding that the institution will take full possession at some point in the future, often after the death of the donor.

In the meantime, the museum is entitled to take the art for a part of the year equal to their percentage share. For the rest of the year, donors can continue to enjoy their treasured possession on their walls at home.

A big incentive to do this is that they can also deduct against US taxes the fair market value of the portion of the work that they have donated. If the artwork’s value continues to appreciate, they can benefit from that appreciation, and further percentage donations of the art work can also be written off against tax.

This little-known practice has been crucial in the expansion of American museum collections.

A study of the information cards next to art works displayed throughout MoMA reveals that many have come through fractional gifts. In fact, about 1,300 pieces in the collection either were fractional gifts that are now completely owned by MoMA or are ones that will be handed over at some point. The Guggenheim Museum, Boston’s Museum of Fine Art and the San Francisco Museum of Modern Art are among other high-profile collections that have also come to rely, in part, on this technique.

The rapid price appreciation of fine art, demonstrated at Christie’s $491m sale of impressionist and modern art in New York this month, has made fractional gifts even more important.

The most expensive pieces would never end up in museums unless they were donated, and fractional giving allows the donor to continue to enjoy their artwork at the same time as getting a tax benefit for assigning its long-term future to a permanent collection.

Stephen Clark, deputy general counsel at MoMA, says: “About a year and a half ago, MoMA was offered the opportunity to buy Matisse’s 1948 ‘Plum Blossoms’, part of the last series of oils he did before his health declined and he couldn’t paint in oil any more, but it was a price we couldn’t even approach. One of our trustees [Marie-Josée and Henry Kravis] bought it for us and immediately made a fractional gift to the museum. It went straight to the museum and was available to the public for six or eight months before the donors even saw it.”

Yet acquisitions in this manner could soon be a thing of the past. Museum directors fear the surprise inclusion of section 1218 in the Pension Reform Act, signed into law in August, will make fractional giving so unappealing that it will be wiped out altogether.

“It’s only been a couple of months so far, but I can tell you that we haven’t received any fractional gifts since the law changed,” Clark says.

The law addresses a concern the system was open to abuse because donors could get a tax break for a donated artwork that, in practice, might never leave their home before they died.

Now museums must demonstrate substantial physical possession of the property within the period of part ownership. If donors violate this, the Internal Revenue Service will recapture all deductions, plus interest, plus a 10 per cent penalty.

“I think that Congress thought there was widespread abuse and that financial advisers were saying ‘here’s a great tax dodge, just give a work of art to a museum and you don’t even have to part with the thing’,” Clark says. “First of all, most people don’t have museum quality art that’s worth giving. Second, to say nothing about the illegality of it all, the idea that a museum would be willing to wink and nod and pretend it’s getting the art when it’s not is ridiculous. Why would they do that? Curators are all about acquiring pieces as soon as possible.”

Yet the main sticking point of the new law is that donors now must completely hand over their property to the museum within 10 years of the first donation, something private bankers say will put off many younger donors.

“I was working with a client in July who was negotiating with a museum about giving part of his art collection in this manner,” says Doug Moore, head of estate and charitable planning for Citigroup Trust.

“This particular donor is in his fifties and, once the new law was passed in August, he immediately said he was no longer interested in partial gifting. He loves his artwork and the thought that he would only have it for 10 years as opposed to the rest of his life made it a non-starter.”

The new law presents other problems. Under the old law, donors could deduct against tax the fair market value of fractional donations and any subsequent donations. Now donors must obtain a qualified appraisal for each subsequent instalment of the gift, but would be obliged to use the lower of the original appraisal or the appraisal of subsequent instalments of the gift for purposes of their deduction. This means donors cannot benefit from the appreciation of their art while it is still partly in their possession.

Clark says the new rule governing possession of the art work could present problems for museums, too, because there are reasons why they sometimes choose not to exercise their right to possession of a fractional gift for short periods because the cost of transporting, insuring and exhibiting an important artwork can make it impractical. But while in some instances artworks remain with the donor until the complete work is given over, this is rare and there are as many cases in which MoMA has a fractional interest in a work, such as Picasso’s “Bather With Beach Ball” donated by Ronald Lauder in 1980, that hardly ever leave the museum.

To date, the evidence of donors shying away from making fractional gifts has been anecdotal but the impact could be dramatic if previous tax changes concerning art donation are any indication. The Tax Reform Act of 1986 included gifts of appreciated works of art in the alternative minimum tax, which, in effect, eliminated the fair-market value deduction for donors giving works of art to a museum. According to the Association of Art Museum Directors, over the following four years, gifts of works of art to museums decreased by 63 per cent.

The association is so concerned about the likely impact of the Pension Reform Act that it is lobbying for a technical correction. “We will be asking members to contact their representatives in Congress, giving examples of works donated to their museums through fractional gifts,” says Mimi Gaudieri, executive director at the Association of Art Museum Directors.

The new ascendancy of Democrats in Congress may be helpful, given that the concentration of powerful museums in New York have close relations with several Democratic legislators.

Clark is optimistic an amendment will be forthcoming. “I’m hopeful that we can talk to members of Congress, and in particular the Senate finance committee, and persuade them that fractional giving is a beneficial way of both adding to the art that is available to the American public, encouraging philanthropy and prompting collectors to act as responsible stewards of important artworks, because American museums rely on that.”

Copyright The Financial Times Limited 2017. All rights reserved.
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