Sunday, October 24, 2010

UK public funding for the arts cut by almost 30%. "Can, and will, British collectors make up the shortfall?"

LONDON. As many had been fearfully anticipating for months, yesterday the British government announced that Arts Council England ("ACE") - "which distributes money to hundreds of arts venues, theatre groups and galleries" - is to have its budget cut by 29.6% (representing a £100 million cut in funds by 2014). National museums will take a 15% cut over the next four years assuming the ACE complies with the government's request that it limit cuts to "arts organisations" up to this amount. The government is alleged to have said that funding of the arts should follow in the steps of the US model and make up the cuts in public funding by increased private giving. What the government has thus far failed to do is introduce the tax incentives upon which the US model is predicated. US institutions are able to "survive" (an increasingly debatable statement) on private donations not because the system or society successfully encourage altruisim but because they reward it financially. The former Tate Britain director, Stephen Deuchar, said he knew of "certain donors [in Britain] who are just waiting for this to happen." As Boris Johnson, the Mayor of London, put it speaking at Frieze: "we need to be incentivised to give."

So what US tax incentives are British collectors waiting for then? There are several tax benefits for the private philanthropist making a charitable donation to a tax-exempt organization in the US (one falling under any of the tax-exempt categories in IRS 501(c)(3), (4), (6) or (19)). The most important of these is the immediate federal income tax deduction the donor gets when he itemizes the charitable donation in his tax return (the other two main forms of tax relief are the avoidance of capital gains tax on appreciated assets and an estate and gift tax deduction). The amount deductible depends on whether the donated art constitutes capital gain property or ordinary income property. If the artwork donated was owned for a minimum of 12 months and during this time it appreciated in value, it falls within the category of capital assets referred to as capital gain property and the donor can deduct the full fair market value ("FMV") of the donation on the date of the contribution subject to certain rules and conditions (including the requirement to file an appraisal in support of the deduction if the FMV is greater than $5,000). This means that a taxpayer can actually gain an advantage if he donates capital gain property obtained at a discount to the FMV. If, on the other hand, the artwork does not constitute capital gain property either because it was owned for less than a year prior to the contribution or it did not appreciate in value, it will constitute ordinary income property and the donor can only deduct his/her investment in the art (i.e. the cost of purchasing the art). In addition, the amount of the deduction in any individual tax year may be limited.

According to The Art Newspaper, "in Britain you get most tax breaks from the grave: the Acceptance in Lieu system reduces death duties by the value of the work of art donated. When alive, people who give over £25,000 a year (or £150,000 in six years) earn a tax deduction of 25% under the Gift Aid scheme, but if they give a work of art, they get nothing." Then there's the issue of public awareness of any existing tax advantages. Having lived in the US now for just over two years, I strongly agree with the article's statement that "tax incentives are known to everybody" in the US. This is true of people of all ages and backgrounds, personal and professional. However, the lack of knowledge in the UK should be a relatively minor concern because not only is it fairly easy to correct, it's also going to be the case that the donors who are likely to make the most meaningful donations (in quantitative if not also qualitative terms) will be well-versed on the subject and if not, their tax advisers will be.

Despite the case for incentivizing private giving through tax reforms in the UK being stronger than ever, I want to take this opportunity to draw attention to the often overlooked problem of institutions accepting excessively restricted private donations. Gifts, more often than not, come with strings attached. Museums, generally heavily biased towards collection-building, accept donations to hold on trust for the public only to find decades later that it is the donor who controls the artwork from his/her grave for the indefinite future. While I don't want to discourage private funding of institutions and I'm aware of and sensitive to the recent financial struggles of many institutions, in the US and the UK, in my opinion, a museum must retain a certain amount of flexibility in art collecting and should reject a donation if it reasonably foresees difficulties in the future in giving effect to the donor's intent. But most importantly, it is donors who must refrain from tying-up the art they donate. Gifts should be made outright, free from vague or cumbersome conditions that can, and often do, result in expensive litigation for the recipient institution. The UK should undoubtedly incentivize private funding of institutions to avoid the announced public funding cuts materializing into "redundancies, fewer exhibitions and programmes, reduced opening hours and smaller acquisition budgets." On the other hand, it is imperative that they consider the particular costs associated with private vs. public funding (I assume English trust law is as donor-friendly as common law in the US and NY State's recently enacted version of UPMIFA).

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