Thursday, March 10, 2016

Tax Law Winter 2016

1. WASHINGTON DC The Senate Finance Committee is scrutinizing nearly a dozen private museums opened by individual collectors, questioning whether the tax-exempt status they enjoy provides sufficient public benefit to justify what amounts to a government subsidy. Senator Orrin G. Hatch of Utah, the committee’s Republican chairman, sent letters this month to small galleries like the Brant Foundation Art Study Center in Greenwich, Conn., and Glenstone museum in Potomac, Md., as well as Eli and Edythe Broad’s new $140 million art museum in Los Angeles, asking for information about visiting hours, donations, trustees, valuations and art loans.

Republican committee staff members said the inquiry was part of a broader effort by Mr. Hatch to re-examine bedrock institutions, including museums and private universities, that have long enjoyed preferential tax treatment.

“Tax-exempt museums should focus on providing a public good and not the art of skirting around the tax code,” Mr. Hatch said in an email statement. “While more information is needed to ensure compliance with the tax code, one thing is clear: Under the law, these organizations have a duty to promote the public interest, not those of well-off benefactors, plain and simple.”
Senator Orrin G. Hatch of Utah sent letters of inquiry this month to several galleries.
Zach Gibson / The New York Times

A broad debate about the personal and corporate tax system has emerged yet again as an important element in the presidential campaign. But little attention has been paid to the longstanding charitable deductions for museums, nonprofit theaters and other institutions — an exemption that is zealously defended by both donors and recipients.

The Hatch letter noted that “charitable organizations have an important role in promoting good in our society,” but questioned whether “some private foundations are operating museums that offer minimal benefit to the public while enabling donors to reap substantial tax advantages.”

“Such an arrangement would be inconsistent with the letter and intent” of the law, it added.

The letters were sent after an article in The New York Times earlier this year that examined the proliferation of tax-exempt private museums created by wealthy art collectors, sometimes in their own backyards. Some of the galleries severely limit public access, closing their doors to outsiders for several months at a time, shunning signs and advertisements, and requiring visitors to make advance reservations.

As investors have poured money into the skyrocketing art market, financial consultants and tax experts have said that many wealthy individuals are looking to convert their personal collections into private foundations or museums as a way of reducing their tax bills.

Founders can deduct not only the full market value of the art they buy, but also the value of cash and stocks they donate. The cost of insuring, conserving, warehousing and other expenses associated with a masterwork’s upkeep are also tax-free.

Internal Revenue Service guidelines are vague when it comes to establishing the degree of public benefit that justifies an art institution’s tax-exempt status. But public access and adequate signage are both considered prerequisites, according to previous agency rulings. There are also strict restrictions on displaying the art in a donor’s own home.

Aaron W. Fobes, the spokesman for the finance committee, said the panel’s “concerns are confined to a small number of private foundations and are not something that is symptomatic of a larger problem in exempt organizations.”

Some tax experts have questioned whether some of the small, out-of-the-way museums that are on or close to a donor’s property — like the Brant study center (founded by the newsprint magnate Peter Brant) or Glenstone (created by Mitchell Rales) — meet I.R.S. guidelines.

Philippa Polskin, a spokeswoman for Glenstone, said in an email that the museum was “gathering information in response to the questions sent by Senator Hatch and looks forward to sharing information with the committee about their efforts to build Glenstone into a world-class museum.”

Since the end of September, she said, “with future reservations already received, Glenstone is tracking toward a 12-month attendance of around 25,000 visitors.” She added that the number of visitors is expected to increase four- or fivefold when a planned expansion is completed.

The Brant Foundation did not respond to requests for comment, but it had previously defended the art center’s charitable work and public service.

Other institutions that were sent a letter, like the Rubell Family Collection in Miami and the newly minted Broad museum, are on an altogether different scale, however.

The Rubells’ 45,000-square-foot contemporary art center, located in a former Drug Enforcement Administration warehouse in Miami, helped revitalize the surrounding Wynwood neighborhood when the family opened it in 1993. The center reports that tens of thousands of people visit the center every year.

Mr. Broad’s grand three-story museum, which opened in September, is one of the most ambitious ventures of its kind in recent decades. Mr. Broad, who has donated millions to other nearby cultural institutions, including the Los Angeles County Museum of Art and the Museum of Contemporary Art, has been active in transforming that stretch of downtown Los Angeles into a cultural hub. The Broad Foundation did not respond to requests for comment, and the Rubell Family Collection declined to comment.

Several well-established art institutions, like the Isabella Stewart Gardner Museum in Boston, the Frick Collection in New York, the Phillips Collection in Washington and the Barnes Collection in Philadelphia, grew out of a wealthy art collector’s private purchases.
PATRICIA COHEN November 29, 2015
Follow Patricia Cohen on Twitter: @PatcohenNYT
The New York Times Company

2. NEW YORK CITY As both art dealing and collecting become more professionalized and higher prices raise the stakes for all concerned, legal issues loom ever larger in the art world. In the months ahead, I expect to see this become apparent in calls for new regulations, increased client focus on tax compliance, and progressively more complex sales contracts.

Certainly the issue of oversight has been around for a long time. Auction houses face some regulation, but private sales remain largely unconstrained—a wild, wild West. The issue resurfaced this past winter following economist Nouriel Roubini’s mention of it at Davos. I wouldn’t expect to see legislative developments in the near future, but the discussion heightens awareness. Similarly, lawsuits such as the one brought by collector Dmitry Rybolovlev against dealer Yves Bouvier, with accusations of excessive commissions, drew attention to the opaqueness of art world transactions. Clients read the headlines and then ask about drawing up proper agreements that spell out all parties’ rights and obligations.

We are also hearing a lot more questions from clients about free ports and related ways to manage tax liability. As individual artworks become more expensive and more people look at art as an asset class, it makes sense that such tools attract more attention. Free ports do not serve a purpose for collectors who want the work on their walls, but for investors, the aim is to store the work between purchase and resale to avoid sales and use taxes. There have been other examples globally, and even some earlier ventures in Delaware, but Fritz Dietl’s new space there is really the first one created in the United States for the purpose as it is understood today. Delaware is one of only five states with no sales or use tax.

On another tax issue, New York State authorities are expected to continue auditing galleries. These investigations grew out of concerns that sales tax exemptions for works shipped out of state were being applied too liberally. So on the one hand, State authorities are worried about losing out on revenue, while on the other, galleries and collectors give thought to compliance, at the same time weighing strategies to decrease liability. These are not schemes, they are legal strategies. In light of today’s stratospheric prices, it becomes all the more important for our clients to know what course is open to them.

One of the more intriguing recent developments has been increased focus on a scientific approach to authentication. On the technological front there is the invention of tagging with electronic DNA. But that is just one response to a backlash against connoisseurship as the foundation for authenticating works. It’s a fallible technique, and with prices where they are, more buyers are saying they want something more than an expert saying he or she can identify the work of an artist. For some time there have been companies that base opinions on physical evidence such as paint samples. Once, such techniques were used only after a lawsuit had been filed. But now we are seeing collectors raise the issue of making such tests part of presale due diligence. With everyone aware of csi-style forensic science, it makes sense that its role in the art world is expanding.
The following essay is by Mari-Claudia Jimenez, Art Law Partner, Herrick, Feinstein LLP.

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