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 that it will stem the flow overseas of American-owned masterpieces and reverse a trend among collectors to sell their rapidly appreciating 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 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.).
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. 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 or her taxes the $50 million that it might bring at auction today.
Under the 1986 law, there were minimal tax advantages to art donors, who often were reduced to deducting only the original purchase price. As a result, there was a reported 60 percent decline in the volume of paintings, sculptures, photographs and other valuable art donated to cultural institutions across the country.
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.
There has been a widespread perception that the 1986 tax law prohibits donors' deduction of appreciated value of artworks, but the law is not as 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 that generally wipes out much of the tax advantage of donating valuable works of art.