Don't Give Me That!: Tax Valuation of Gifts to Art Museums

I. IntroductionImagine the following hypothetical: In 1959, Ms. Bums bequeathed to the Springfield Museum of Modern Art her collection of European Secessionist art from the early 1900s. In 1959, Springfield was a growing city that provided ample funding for its various culture and arts venues. Since that time, the economy of Springfield has become increasingly depressed, forcing the city to withdraw almost all funding for its museums and libraries. In the meantime, the value of Ms. Burns' art has skyrocketed and is the centerpiece of the museum's collection. The museum's operating budget barely meets basic operating expenses, leaving no funds for the restoration needed for some of the more valuable Secessionist pieces. As a result, many of the earliest and most valuable pieces are kept in storage to prevent further deterioration. In an effort to focus its collection and increase its public visibility, the museum would like to sell the later Secessionist pieces and use the proceeds to restore the earlier ones. If the sale occurs, the museum will have the most unified collection of early Secessionist art in the United States. The problem is that Ms. Burns' donation expressly restricted the sale of any of the works. According to the gift instrument, the Springfield Museum must hold the works in perpetuity. This scenario illustrates the problems facing both small and large museums across the country. Although it would not completely resolve the problem, the Internal Revenue Service (IRS) should address the problem in this situation by using deduction valuation procedures at the time of the original donation to discourage restrictions on the alienability of donations to museums.Most art museums' operate as either charitable trusts2 or nonprofit corporations.3 With either organizational structure, the museum has a duty to provide a social benefit to the public at large or a reasonably large class thereof. This Note concerns only publicly supported tax-exempt art museums organized as either charitable trusts or nonprofit corporations. These museums have been determined by the IRS to be tax-exempt under I.R.C. § 501(c)(3)4 and have demonstrated that they receive a substantial part of their support from governmental units and the general public.5 Funding for these museums comes from private donations, grants, and limited revenue-producing activities.6 Further, the collections of these museums are largely dependent on donations.7Like the hypothetical Springfield museum, many museums are rich in assets8 but struggle to meet basic financial needs for operational expenses.9 One way that museums deal with this problem is through deaccessioning10 either to acquire new assets or to meet operational expenses. Recent trends in the museum profession also lead museums to deaccession. Museums are generally becoming more focused in their collecting and are less likely to keep objects that are extraneous to their mission.11 In addition, because of increased knowledge and heightened regard for the importance of proper storage and conservation combined with the cost of those activities,12 museums are more likely to deaccession objects that are not clearly furthering the museum's mission.13 Two standards guide museum professionals in making deaccessioning decisions. First, the legal standard sets the floor by determining when deaccessioning is and is not allowed.14 Next, the professional ethics standard defines when deaccessioning should occur.15Museums may encounter a number of difficulties in trying to deaccession a donated work of art. The legal standard for permissible deaccessioning is generally determined with reference to the method of acquisition.16 If the pieces were acquired by gift and if the donor imposed a restriction on the alienability of the gift, either by requiring that the museum keep or display the piece in perpetuity or affirmatively denying the museum the right to sell the piece, the museum has a duty to abide by the donor's wishes. …