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.

UPDATE: NY's donor-friendly version of UPMIFA

Donn Zaretsky has posted on another article that accurately discusses the donor-friendly notice requirements under NY's version of UPMIFA. It also becomes apparent on reading the article how cumbersome it will be for institutions to comply with. For background see here.

"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).

NY State's version of UPMIFA is "more donor-favorable than perhaps any in the nation"

The New York State statute (the "Act") enacting NY's version of the Uniform Prudent Management of Institutional Funds Act ("UPMIFA") will undoubtedly impact the way not-for-profit institutions manage their endowment funds. The Act makes significant changes to the decades-old New York Not-For-Profit Corporation Law, providing, among other things, that institutions such as museums and universities are no longer required to seek a court order prior to invading the principal of an endowment fund when it is "underwater" (previously there was a bright line rule against doing so without first obtaining court approval). This gives trustees increased flexibility to manage endowment funds though governing boards are "still required to balance historic market performance and the need for current income against inflation, preservation of capital, and a number of other factors." The adoption of the Act also requires that major gifts be given "more attention than in the past and some charities will need to revist their investment strategies for these gifts."

Although not-for-profit institutions generally fall outside the scope of this blog, I nevertheless decided to cover this piece of legislation because several commentators have expresssed concern about how the Act will affect charitable donations, an issue pertinent to many art collectors in New York and elsewhere. Lee Rosenbaum, for example, has said that the new law will encourage "disregard for donor intent." However, according to Nixon Peabody, the Act is "more donor-favorable than perhaps any in the nation" i.e. DC and the 47 other states that have already enacted their own versions of UPMIFA. The Act contains detailed notice requirements under which donors are given special notice prior to "court-ordered and other modifications of restrictions" and charities will need to obtain donor consent to release or modify "certain restrictions in a gift instrument." For more information, click here to read Simpson Thacher's thorough analysis of the Act.

UPDATE: "Judge rejects AG's plan for Fisk art"

How did this happen, you might ask, given that AG Cooper did pretty much exactly what Chancellor Lyle told him to do? She'd previously rejected the Crystal Bridges Agreement as written and instructed the Tennessee Attorney General to come up with an alternative that would "enable the public- in Nashville and the South- to have the opportunity to study the Collection...," which the Court of Appeals had determined was O'Keeffe's intent and the Chancery Court had subsequently adopted. Apparently Fisk just happened to be the Nashville institution randomly chosen as the recipient and it was never O'Keeffe's intention to actually benefit Fisk itself. The proposal to relocate the Collection to the Frist Center in Nashville should therefore have been music to the Chancellor's ears.

Not so.

In yet another turn of events in the ongoing saga, it now appears that O'Keeffe did care about Fisk after all (!) and that by not mentioning Fisk the Court of Appeals had not necessarily meant to imply that O'Keeffe's intention was solely to benefit Nashville and the South. I'm glad to see that the Court has come to its senses and acknowledged that O'Keeffe didn't randomly choose Fisk as the recipient of a collection estimated to be worth $74 million simply because it was in Nashville. But I'm amazed at the Court's reluctance to admit its change of heart and the fact that it is exceedingly difficult for courts to determine a donor's intent with any kind of certainty. The latest decision states that the Court of Appeals had not decided or instructed the Chancery Court on "what the donor's intent was with respect to Fisk" (pages 4-5) which completely contradicts what the Chancellor said in her previous decision at page 13: "the Court has been instructed by the Court of Appeals that the purpose of the gift is clear. That purpose is to "enable the public- in Nashville and the South- to have the opportunity to study the Collection [....] Using this purpose as the benchmark, the Court must next compare the Crystal Bridges solution to see if it closely approximates Ms. O'Keeffe's purpose." The Fisk saga is now the perfect case example for illustrating the shortcomings of cy-près relief and the evidentiary issues related to donor intent.

In practical terms, this means it's back to the drawing board with respect to the Crystal Bridges Agreement which needs to be revised to more closely approximate O'Keeffe's purpose. At least the Chancellor was proactive and instructed the parties as to what revisions are required (see pages 2-4 and Exhibit 2 of the decision). Essentially, the proposed revisions to the Joint Ownership Agreement between Fisk and Crystal Bridges boil down to minimizing the risk of divesting Fisk and Nashville of the Collection. The Collection will go to Arkansas for 6 months of the year but there's little doubt it's coming back to Nashville for the other six.

Fisk and the perennial problem of "donor intent"

Donn Zaretsky recently posted that he couldn't get his head around how moving the Stieglitz Collection to the Frist Center as per the Attorney General's proposal announced last Friday would more closely approximate O'Keeffe's purported intent than keeping it at Fisk six months of the year in accordance with the Crystal Bridges arrangement. The real problem, however, is not determining which of the two alternatives is closer to O'Keeffe's charitable "intent." Rather, the problem as I see it is the fact that cy-près relief is grounded in a notion as malleable as "donor intent" (especially a late donor's intent) and that donors freely and frequently attach a plethora of conditions to their public donations.

Tennessee AG's Nashvillian proposal for the O'Keeffe donation to Fisk University comes as no surprise

At the end of last month, the Chancery Court for the State of Tennessee denied Fisk cy-près relief in respect of the Alfred Stieglitz Collection donated to the University by Georgia O'Keeffe because the proposed sale to the Crystal Bridges Museum in Bentonville, Arkansas, did not "closely approximate" O'Keeffe's intent for making the charitable gift. However, the Court did not rule out the sale all together- it merely rejected the Crystal Bridges Agreement as written at the time and ordered the Attorney General "to file a proposal with the Court for the display and maintenance of the Alfred Stieglitz Collection." Fisk would then be given an opportunity to respond and/or make any additional proposals.

Friday saw the deadline for the submission of the AG's proposal which called for the Collection to remain in Nashville and be displayed at the Frist Center for the Visual Arts until Fisk is in a financial position to care for and display the Collection. Given the Court of Appeals' instruction that the purpose of O'Keeffe's gift was to "enable the public- in Nashville and the South- to have the opportunity to study the Collection..." and the Chancery Court's finding that Bentoville fell outside the definition of "the South," it's hardly surprising that Attorney General Cooper's proposal is Nashville-based.

Much as I hate to admit it, this may well be as good as it gets for the 101-piece Collection. If Chancellor Ellen Hobbs Lyle were to decide the fate of the Collection on behalf of art lovers (we should be so lucky), I'd expect she'd go for the Crystal Bridges sale over Cooper's plan: the $30 million deal would rescue Fisk from the brink of closure and allow a far wider audience to view the Collection in a state-of-the-art museum while still partially complying with O'Keeffe's wishes by displaying the Collection in Nashville six months of the year. But she's not "free to move charitable assets from one institution to the next to maximize the utility of those assets in some broad sense." Oh no. She has to comply as closely as possible with the wishes of the late O'Keeffe, whatever they may actually be, even if it means perpetuating the current trend of only 10,000 visitors viewing the Collection in a typical year.

I get it- courts have fashioned cy-près so that it affords some relief without discouraging charitable donations. It is for the "greater good," the Chancellor said, that the law allows donors to tie-up cultural assets in this way. So I'm buying my ticket to Nashville to go see the gifted works because as long as the law lets donors control their donations indefinitely from their graves (others think this is fine), I can't imagine how the Crystal Bridges Agreement can possibly be revised to triumph over the Frist alternative. I just hope it is ultimately all about art as donors rejoice and make generous donations to celebrate.