Congress Restores Tax Deductions for Gifts of Art

In furious budget negotiations at the close of the 101st Congress last week, lawmakers quietly gave the nation’s museums and cultural institutions an early Christmas gift: A one-year restoration of tax deductions for the full market value of donated works of art.

Lawmakers and supporters of the new law say it will stem the flow overseas of American-owned masterpieces and reverse a trend among collectors to sell their artworks rather than donate them to museums. The provision affects the nation’s wealthiest taxpayers, who were singled out for restriction of deductions in 1986.

Rich collectors, however, often are the major private holders of museum-quality artworks.

The little-noticed provision, part of the five-year deficit reduction act that included tax increases for the wealthiest Americans and hiked taxes on a variety of products from wine to gasoline, was pushed through by Sen. Daniel Patrick Moynihan (D-N.Y.) in the waning hours of the congressional session that ended Saturday.

Under the terms of the new law, wealthy donors will be allowed to deduct the appreciated value of their donated artworks and manuscripts to museums, galleries and libraries. So, for example, a collector who paid $80,000 for an extraordinary Vincent Van Gogh painting 43 years ago (as did the late Joan Whitney Payson for “Irises”) could now donate it to a museum and deduct from his/her taxes the $50 million that it would bring at auction today.

Under the 1986 law, there were minimal tax advantages to donors of artworks, who often were reduced to deducting only the original purchase price. As a result, there was a reported 60% decline in the volume of paintings, sculptures, photographs and other valuable art donated to cultural institutions across the country. The trend, which occurred in lock-step with a rush to sell off valuable artworks at auction, prompted museum officials to warn of irreversible flight of the nation’s cultural heritage to wealthy collectors overseas.

The change appears to have come at an opportune time in terms of the art market, collectors note. Wildly escalating prices have encouraged potential donors to sell their collections at auction during the last two years, and the 1986 tax law has reinforced that trend. But the art market is in the midst of a major correction. Traditional big-ticket sales of contemporary, modern and Impressionist art, scheduled to begin next week in New York, promise to be conservative. Estimated prices have reverted to 1988 levels, auction house officials say. No blockbuster paintings are scheduled for the November sales.

There has been a widespread perception that the 1986 tax law prohibits donors’ deduction of appreciated value of artworks, but the law is not a simple as that. Donors can deduct the fair market value of a donated artwork, but the deduction throws high-income donors into an alternative minimum tax bracket which generally wipes out much of the tax advantage of donating valuable works of art. “It’s still a benefit, but not as nice a benefit as it formerly was,” said Amy Parsons, a certified public accountant who handles the financial affairs of Los Angeles collector Marcia Weisman.

The 1986 tax law has had a negative impact on Weisman’s giving, according to Parsons. “I would think the change for 1991 would make a difference. We might be making more gifts,” she said.

Although cultural organizations had invested significant time and money in lobbying for return of the artwork deduction, few expected any success this year. The effect of the congressional action, said Anne Murphy, executive director of the American Arts Alliance, “is a 9.5, even 9.8, on a scale of 10.”

“I’m ecstatic. I can’t believe it made it through,” said Edward H. Able Jr., executive director of the American Assn. of Museums. “We have a lot of people in Congress who have come to understand that our cultural patrimony has been hemorrhaging out of this country through the auction block.”

The deduction restoration is limited to one year beginning Jan. 1. But museum and arts organization officials say they will return to Congress early next year to try to get the provision extended.

The deduction action closed out the latest chapter in an ongoing populist ideological dispute that has pitted Rep. Dan Rostenkowski (D-Ill.) the chairman of the House Ways and Means Committee, against arts community partisans, led by Moynihan. A Moynihan aide said the senator’s calculations showed there would be a $22-million net tax revenue loss to the Treasury Department as a result of artwork deduction changes in 1991.

Rostenkowski supported last week’s action, but, a spokesman said, the Illinois Democrat did so only to close out haggling over hundreds of details so the final deficit reduction bill could become law. Rostenkowski, the spokesman said, will oppose any extension: “It’s bad tax policy any way you look at it. It’s something that he was forced, in the quest for compromise, to acquiesce to.”

However, major tax-protest groups appeared to have no interest in joining battle on the issue. David L. Keating, executive vice president of the Washington-based National Taxpayers Union, said his group had taken no position on the artwork donation provision and probably would not.

“I think the change will be enormously helpful to museums,” said Philip Gersh, who, with his wife, Beatrice, has made important donations to the Los Angeles Museum of Contemporary Art. “But the museums will need to publicize this, to get the word out to collectors,” he said.

The one-year alteration in tax law permits donors to claim the full, appraised market value of artworks they give--but only if the institution to which the donation is made will use the object in its program. Thus, a painting or sculpture given to a museum or library that will display it or house it in its permanent collection is fully deductible. But giving a valuable object to a nonprofit organization--a yacht to a day-care center, for example--would not be fully deductable since the asset would likely be immediately sold to generate cash.

“If these people will only give if they get a federal tax subsidy, there is a question whether that is a particularly healthy situation to begin with,” the Rostenkowski aide said. He also asserted that decline in the volume of objects donated by wealthy collectors since 1986 has been offset by increases in cash donations by middle income taxpayers.

Cultural institutions said the value of donated objects nationwide--which increased to an estimated $103.8 million in 1986 from $79.1 million a year earlier in anticipation of elimination of the deduction in 1987--plunged last year to just $60 million. The actual number of artworks that museums received rose to 693,295 in 1986 from 356,496 in 1985 before dropping to 368,833 last year, according to the American Assn. of Museums.

“I think that, for calendar 1991, you will probably see boom-town donations of works of art,” said Earl A. Powell III, director of the Los Angeles County Museum of Art. “Certainly, this does restore the ability of museums to attract donations that formerly were the keystone in development of all institutions.”

Most museum directors declined to estimate specific effects of the tax change. Asked if a one-year tax change window would produce a volume of donations that museums might have trouble processing, Powell said, “I would be very happy to deal with that problem.”

Ellen Breitman, acting head of the curatorial department of Newport Harbor Art Museum, said, “I would imagine that our donations would go back up. I don’t know if it would happen all at once or more gradually, because the economy is in a slump right now and the arts climate is pretty dismal with the National Endowment for the Arts situation.”

“Once again, museums will be able to offer a viable incentive to collectors to offer their works for the widest possible audience,” said Steven L. Brezzo, director of the San Diego Museum of Art. “This isn’t just a window, it’s a picture window.”

Times San Diego County Arts Editor Susan Freudenheim and Orange County staff writer Cathy Curtis contributed to the research of this story.