Changes in Charitable Donation Rules

The Pension Protection Act of 2006 (PL 109-280) signed by President Bush last August included several sections addressing charitable donation and appraisal requirements. The museum world and wealthy donors alike have expressed concerns about the chilling effect of this new legislation. Section 1218 is drawing the brunt of criticism.

Section 1218 addresses Partial Interest in tangible Donated Property. Fractional gifts of art to museums are a common practice that allows a donor to enjoy partial or even full possession of an art object over time as a ownership gradually transfers to the recipient institution. Despite fractional or even full ownership, receiving institutions often do not expect to take possession of the donated art until the death of the donor. Critics have charged that this practice allows the very wealthy to "donate their cake and eat it too," with no net benefit to the public at large.

The new law provides that a receiving institution must take full ownership of the donation within 10 years of the initial fractional gift, or the death of the donor, whichever comes first. The tax deduction would be lost and a penalty earned if this deadline is not met. Under prior law, there was no specific time frame for completing the transfer.

Moreover, once any fractional interest has been donated, the receiving institution must take possession of the art object for some period of time each year. No longer can the donor retain full possession, even if the institution is willing.

Most important, however, is the change related to the amount of the deduction a donor can claim on a gift donated in fractions over time. Previously the deduction amounted to the prorated Fair Market Value of the gift at the time of each fractional donation. With the thriving art market as it is, this practice accounted for appreciation and generally made each fractional gift more valuable than the last.

The new law requires that the donor use as the fractional donation basis, the lesser or the FMV at the time of the first fractional gift and the FMV at the time of all subsequent gifted fractions. In a bullish art market this essentially freezes the value of a work of art at an out-of-date and lesser value.

Heretofore, with an art market surging and limitations on the amount of charitable donations one can claim in relation to adjusted gross income, gifting in fractions over a long period of time gave a donor a successful tax strategy and the recipient museum a reliable increase to its permanent collection. Given the new legislation, museums are expecting donations to decrease. For this reason, the Association of art Museum Directors and other agencies have lobbied for a re-write of this part of the PPA.

They seem to have gotten their wish. Rep. Tom Udall (D-N.M.) and Rep. Phil English (R-PA). will soon introduce the "Promotion of Artistic Giving Act of 2007." The bill would require that donors must complete their fractional gifts within the donor's lifetime, rather than within 10 years, require an IRS review of donations' appraisal value for gifts valued at over $1 million and eliminate the unnecessary estate and gift tax implications relating to fractional giving contained in PPA.

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