LINKS

• SPAIN/GERMANY. "The Spanish government will lose out collecting VAT from Spanish galleries becausesales will inevitably go to foreign galleries with considerably lowerVAT." Authorities say they will consider proposals to reduce VAT on cultural goods and services, which crucially include sales of works of art, from 21% ("the highest rate on the continent") to 13%.
  
  Meanwhile, German galleries and dealers have managed to thwart, at least for now, the European Commission's attempts to get Germany to increase the rate of VAT on sales of art from 12% to 19%.
 
• LONDON. "To say we can’t afford to have the arts as part of our lives is an admission of defeat as a nation and society" - Sir Nicholas Serota on how further reductions of public funding of arts organisations will put them at risk of closure. See what the anticipated spending cuts finally came in at here.
 
• USA. The Dan Flavin Estate's change of heart regarding posthumous productions of the conceptual artist's light sculptures raises interesting questions regarding the legality of doing so given the uncertainty of Flavin's wishes in this regard as well as the impact the decision may have on the market value of works created by Flavin in his lifetime.
 
• USA. Donn Zaretsky on how the Michigan attorney general is not the first AG  in recent times to confuse the normative and legal aspects of deaccessioning.

Swedish Artists' National Organization (KRO) calls for tax incentives for private investments in art

STOCKHOLM. The Art Newspaper has reported that Sweden's KRO has called for tax incentives to encourage private investments in art. The organization is banking on the leader of the country's opposition party to back their proposal and push it forward to come into fruition but as Professor Emma Stenström is quoted as saying, above all the proposal opens the debate regarding funding of the arts. The UK recently engaged in a similar debate as the government announced a 30% cut in public funding last October but failed to accompany such cut with much-needed tax reforms to incentivize private donations. The highly anticipated tax incentives eventually did arrive and were announced last month. Perhaps a trend will develop throughout Europe away from the traditional European model of public funding towards the American model premised on private funding, the cornerstone of which are tax incentives.

UK to incentivise charitable donations the American way

LONDON. When UK public funding for the arts was cut by 30% last October, the question on everyone's mind was whether collectors would be able to make up the shortfall by increasing private donations such that the funding of cultural institutions would increasingly resemble that in the US. However, as this blog and many commentators pointed out, for this change in the funding structure to happen, the cut in public funding would have to be accompanied by the necessary tax incentives to induce charitable giving. The budget announced this week "unveiled several measures aimed at creating an incentive for would-be philanthropists to give more to culture" (more on the much-welcomed tax breaks from the FT.com).

As well as cutting inheritance tax by 10% for those who leave 10% of their estate to charity, the statement also "contained a long-called-for reform of Gift Aid." Gift Aid can now be claimed on small donations up to a total of £5,000 a year, per charity and much of the red tape surrounding Gift Aid has now disappeared (the government has created an online system as an alternative to filling out forms), cutting overhead costs for small organisations significantly.

LINKS

• WASHINGTON DC. More on how the changes to the US estate tax are likely to have an adverse effect on bequests. There's no denying that the fiscal advantages to donors are a significant factor motivating gifts to institutions so the combined effect of a lower rate (35%) and a higher exemption ($5m per person) will almost inevitably put off some donors. However, if the regime is amended in two years time, it could mean that those donors' bequests are merely delayed rather than forfeited.
• NEW YORK. Donald Judd former fabricator, Ballantine, is planning two conferences in New York and Berlin this year to discuss the "misconceptions connected to the artist's fabrication and conservation techniques" and his "extreme version of delegated fabrication." The discussions could raise some interesting questions on the relationship between fixing damaged art, authenticity and value ("there are unusually authentic ways outside the way of fixing most art that doesn’t diminish the value in Judd”). 

La Lecture, Pablo Picasso (1932)

• LONDON. Last time Marie-Thérèse Walter made an appearance at auction, she sold for $106.5 million, setting a world record auction price for a work of art. Now she's set to return to auction for the first time since last May but this time in London not New York and at Sotheby's rather than Christie's. The estimate for La Lecture is £12-18m which seems somewhat conservative in light of her past performance (the estimate then for Nude, Green Leaves and Bust had been $80m though one of the main reasons it sold so well was specific to that particular painting - the work had not been in the market since 1951 and during that time, it was only publicly exhibited once in 1961). Aside from depicting the same protagonist, the two works are both dated 1932 and are characterized by equally intense, vibrant colors (albeit in distinct palettes). However, the upcoming painting is much smaller than its predecessor, size clearly being an important factor affecting an artwork's value. We'll see in a couple of weeks just how fond the market is of Marie. 

UPDATED: More on the European Commission's attempt to "define" art

A previous post discussed the European Commission's recent controversial classification of light and video-sound installations as not constituting art and therefore being subject to VAT at a rate of 20% (as opposed to 5% charged on artworks). The logic behind the regulation is inherently flawed given that VAT is said to be charged on the work's value as "sculpture" - clearly far greater than the value of its component light fitting parts. Pierre Valentin of Withers, London, who spoke to The Art Newspaper back in December, has now published an article in the opinion section of the site discussing in more detail the European Commission's move to "define" what is art or what is not art to be more precise. Valentin describes the European Commission's promulgation of EU regulation 731/2010, which overturns the decisions of two member states' (the UK and the Netherlands) tax tribunals, as a "mockery of the judicial process." But doesn't this case simply illustrate the fact that in the hierarchy of legislative sources in member states, EU law trumps national laws? Of course this doesn't justify the regulation in either substance or form (the reasoning is frankly absurd and there was no publicity or public consultation). However, the notion of the Commission taking a view on an issue different to that of two member states is hardly shocking. Furthermore, the "consensus" was among only two of the twenty-seven member states...

UPDATE: Yet one more article from The Art Newspaper on how the art world is "up in arms" over the "light bulb law"

LINKS

• Judith Dobrzynski reports on the newly-created ad-hoc advisory committee to the NY Board of Regents which is intended to aide the Board in coming up with a revised deaccessioning policy (see here on the expiration of the deaccessioning "emergency" regulations last October and the outcry that ensued).
• Art Market Monitor interviews Judith Pearson and Lawrence Shindell of ARIS art title insurance (see here on Argo Group's takeover of ARIS last November).
• Donn Zaretsky summarises the most significant changes to the federal gift, estate and generation-skipping taxes for 2011 and 2012. According to Forbes, the increase in the tax exemption to $5m means "that, except for the super wealthy, the tax benefits of giving through an estate plan have been wiped out."
• Gerard Malanga, former Warhol Factory assistant, is set to finally have his day in court in the longstanding dispute with the sculptor John Chamberlain over the silkscreen titled "315 Johns," estimated to be worth $5m. Malanga claims authorship and restitution alleging Chamberlain never acquired title and therefore did not have the right to sell it in 2000. Testimony given by Chamberlain's wife suggests the sculptor knew the work was not a Warhol; the Warhol Authentication Board though declared it an authentic piece in 2000, paving the way for its sale. The court, however, is not bound by the Board's declaration.

"This is a time when extreme creativity is needed in philanthropy"

Non-profits are facing increasingly uncertain times as private donations on which they rely almost entirely for funding and gifted artworks are growing smaller by the day. The combined effect of the financial crisis and the shrinking demographic of wealthy donors due to low birthrates in the Depression era was already a major blow to institutions but add to that the anticipated tax reforms (including the "hiatus from the estate tax") and the blow may well be crippling. The New York Times discusses how charities (and donors) are wrestling with tax uncertainty. Highly recommended for donors thinking about estate planning and alternative cost-efficient ways of making much-needed bequests.

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).

The estate tax's return explained

Art collections = estate planning = estate taxes... state AND now federal again?

The anticipated return of federal estate taxes- repealed as part of the Bush tax cuts of 2001- will affect many art lovers, and not in a good way. I would go into it in more detail but Forbes and Professor Bainbridge do a great job and offers some useful tips on how to minimize the impact of the dreaded return of this painful tax. NB- I could be wrong but shouldn't any and all trusts set-up always be irrevocable to avoid federal estate taxes?