I’m Shocked, SHOCKED, to Find that Art Collecting is Going on in Here!

Over the weekend, The New York Times published the next great exposé in the tax habits of the rich and famous, entitled Writing Off the Warhol Next Door: Art Collectors Gain Tax Benefits from Private Museums.   The article seems to be getting some play elsewhere, having been picked up by outlets like the Huffington Post and of course, that leader in Journalism, the Tax Prof Blog!   (Some of you may recall one of this article’s predecessors-in-kind at The Washington Post in 2005, Big-Game Hunting Brings Big Tax Breaks: Trophy Donations Raise Questions in Congress, which lead to the passage of Section 170(f)(15) – Special Rule for Taxidermy Property – effective for contributions made after 7/25/2006).

The article discusses the growing phenomenon of the “private museum.”  Although this term has no technical definition, the article uses it to refer to a collection of art that is given to a tax-exempt charitable organization controlled by the donor of the collection and located in close physical proximity to the donor.  This trend is arguably the offshoot of the enactment of Section 170(o) in 2006, which used to allow an individual to give only a fractional interest in a piece of art to a museum, and maintain possession of the art proportional to the fractional interest retained.

One problem that I have with the article is that it talks about collectors getting a tax subsidy for their investments in art.   At no time is it really made clear that in order for this to work from a tax perspective, the collector has probably given ownership of the art to the charity forever.  Thus, it is no longer the “collector’s investment”, and when the collector dies, that art (or the proceeds therefrom) remain in the public sphere in perpetuity.   The benefit is that he or she gets to go look at the art whenever they want to do so, as opposed to having to make an appointment on every other Tuesday at 1:43 p.m.

After culling through all the Sturm und Drang in the article, I think the article has three possible issues with the concept of the private museum, although I don’t think these arguments are made very clearly:

1. Is collecting and preserving art, in and of itself, “charitable” in a tax-exempt context?
2. Is it really the public educational component of the collection of art the thing that makes it tax-exempt?
3. Assuming it is charitable activity in one manner or another, is the ease of access of the original donor so significant as to overwhelm the otherwise charitable benefit afforded by having the collection in the public sphere (in other words, private benefit and/or private inurement)?

I wish the article had been a little more methodical on the law, and a little less TMZ, but I guess that wouldn’t make a very interesting piece for anyone other than … well, those of us who regular the Nonprofit Tax Prof Blog!

Of course, one should always follow the Internet axiom “Never Read the Comments,” but the most disturbing part of the article is that portion of the comments that see the private museum as just another tax loophole for the wealthy, adding to a continuing stream of de-legitimization of the tax code and the IRS, but that’s another blog post…

(P.S. As a general marketing matter, one should never use the term “have your cake and eat it, too” publicly with respect to a tax planning matter unless you really are trying to flag down the IRS and/or Woodward & Bernstein.   Just a thought.)

(P.P.S. Special shout out to our own Lloyd Mayer, who is quoted in the NYT piece.)

EWW