More on “Jewel-Box” Museums

People are always asking me tax questions, as if I carry the code, all the regs, and annotations around in my pocket.  Of course I do, now that we have portable computers.  Oh yeah, I got more volumes in my pocket than the Library of Congress.  The Bible, War and Peace, Spider Man comics, all right in my pocket.  And my music library?  I got Credence and the Ohio Players.  

But I prefer social media because the truth is out there.  One of my tax risky relatives asked me whether its true that if you bury a family members in your back yard you can declare your homestead a cemetery and not pay any property taxes.  A family member deceased by natural causes only, of course.  He sent me the link, where someone with lots of cleavage talked about it confidently on social media.  I got a good laugh along with a whole eye full until Wifey walked in.  I dismissed it as seriously ridiculous.  But then Lloyd posted about an interesting, if previously unheard tax scheme last week regarding “jewel-box” museums.  Here’s more from Bloomberg Tax:

Private foundations are increasingly used by the wealthy to garner huge tax deductions and retain control and enjoyment of valuable assets through creation of so-called jewel-box museums.  

The scheme itself works something like this: You purchase an ostentatious mansion or historic property that might contain some art. It’s expensive when you purchase it, and its value skyrockets in the years to follow. You have no interest in selling the property, but you’re sitting on a mountain of value on paper. There must be something you can do to tap into that.

You decide to donate your property to a private foundation that you’d control, entitling you to myriad income tax deductions—at least in theory, if other requirements are met. For example, you’d need to provide some kind of public benefit through the property and the organization, and you couldn’t engage in so-called self-dealing.

But even the most stringent rules are only as stringent as their enforcement, so the deal sounds pretty good. You’d take a massive tax deduction, and the only expenditure you’d have to make would be for a “Sorry, We’re Closed!” sign to hang in the foyer.

Many tax abuses are roll-the-dice schemes—the transaction or plan is in a gray area or outright restricted, but the chance of being caught is so slim that a rational actor would proceed in hopes of falling through the cracks. These quasi-museum and art collection schemes are a quintessential example of this decision-making process.

As with most other enforcement activity, the gutting of IRS funding has reduced the agency’s ability to police the public benefits of private foundations. There simply aren’t enough agents and resources to audit more than a vanishingly small percentage of returns, much less make site visits to ensure these “museums” regularly admit the public. The rules for what qualifies as a charitable donation to a private foundation must be tightened.

Donations such as the one in the example above should require explicit reporting of when and how the property will be open to the public. In the case of a private art collection, the donor should outline how and where the art will be displayed and what steps have been taken to hire staff. Vague policy benefits only the wily. Requiring a private foundation, for example, to keep a historic property open 20 hours per week, during ordinary business hours, and at a reasonable admission cost would enable random audits for compliance.

So now I am looking around to see which of my relatives has one foot on a banana peel, the other close to a cemetery.  Gimme Shelter!

darryll k. jones