The Denial of Fair Market Value Deductions to Artists Is Our Loss


Allison Reed


Hereís something else to blame on Nixon.

When Nixon donated his vice presidential papers and documents, he took a huge tax deduction. The deduction was outrageous enough to galvanize Congress into enacting an income tax provision to curb this "abuse." Since 1969, "creators" donating their own work can deduct only their costs, rather than the donationís fair market value, from their taxable income. Although this provision was aimed at preventing politicians from capitalizing on their public service, it has primarily limited artistsí charitable contribution deductions to material costs- paint and canvas, for example- and has excluded deduction for the "creative" part of the artistís work.

Disallowing fair market value deductions for artists causes a lot of harm and does little good. Congress can and should enact measures that support the arts and reach the tax policy goal of horizontal equity while curbing potential abuses.

The majority of museumsí funds are used to meet operating expenses; it is estimated that 80% of all works acquired by museums are donated. The fair market value deduction encouraged artists to donate their work to museums and enabled these institutions to develop their collections. Donations of self-created artistic works to museums and libraries have virtually ceased since 1969. Today, works of art are sold to private collectors who take them into their homes or out of the country, limiting public access to American art.

Denial of a fair market value deduction for artists also treats identically situated taxpayers differently, which produces unfair and inefficient outcomes. Art collectors can deduct the full fair market value of a work he or she donates, while an artist donating an identical piece could only deduct material cost. Artists should get the same tax treatment as a result of the charitable contribution of their work available to a collector or other donor giving a purchased work or manuscript.

To make matters worse, estate tax provisions allow estates to take a full fair market deductions on donations of art remaining in an artistís estate. It seems absurd that a museum must wait until an artist dies to receive work that he or she wanted to donate while living, but did not because of unfavorable tax consequences.

This tax provision stifles donations to museums and treats artists differently than other taxpayers. But does it address policy concerns that outweigh these costs? When it eliminated the fair market value deduction for artists, Congress was concerned with abuses possible in the valuation of donated art items. Art objects are very hard to value. As a result, very high values are placed on paintings that cost the person very little. Who is to say how much a painting is really worth?

Potential for abuse certainly exists- valuation problems are tricky and subjective. But Congress didnít fix anything by enacting this tax provision. For all the costs of denying artists a fair market value deduction for self-created works, the provision is not necessary to stem incursions on tax revenues through abuses.

In June 2000, Senator Leahy of Vermont introduced a bill called the "Artist-Museum Partnership Act" to restore a tax deduction to artists who donate their own work. The bill stipulates that the donation shall not exceed "artistic adjusted gross income"-that is, income arising from the artistís art work- so that artists cannot totally offset income from sales by "painting deductions" to donate. The artist must also receive a qualified appraisal of the fair market value of the donated work and the donation must be made to an art museum or other qualified organization that deals with art. The inclusion of these safeguards is more than adequate to thwart abuses.

First, concern about valuation for purposes of deductions may be exaggerated. The IRS has been very successful in stemming art valuation abuses. In 1968, the IRS created the Arts Advisory Panel, which is comprised of dealers and experts from galleries and museums, to audit the accuracy of privately obtained appraisals. Revenue Procedures also require stringent appraisal methods by credentialed appraisers.

Fears that artists will "paint a deduction" at tax time if allowed to take a fair market value deduction are also unwarranted. Deductions can only be made if the donated item is related to the institutionís tax-exempt purpose- that is, art can only be donated to appropriate libraries or museums. And museum directors are highly selective in the works they accept for their institutions; donations are routinely rejected because they do not meet the standards of the museum. Permitting artists a charitable deduction would therefore be a recognition of quality and an inducement for artists to donate their works for the benefit of society.

Additionally, organizations accepting donations could be required to insure a piece for the amount the museum claims they are worth. The museumís interest in keeping costs down would thus serve to check the interest of the artist in exaggerating the price.

Finally, to solve the Nixon problem, legislators could enable artists to receive full fair market deduction value, while explicitly prohibiting these deductions by public servants.

Almost everybody agrees that art is beneficial to society. Congress recognizes that "it is necessary and appropriate for the Federal Government to help create and sustain not only a climate encouraging freedom of thought, imagination, and inquiry but also material conditions facilitating the release of this creative talent."

While the government is most visibly involved in the arts through the National Endowment for the Arts, tax breaks supporting the establishment of libraries and museums and donations to these institutions have historically represented the major public funding vehicle. Since private transactions between artists and museums that give rise to these deductions, the government is not required to become entangled in sticky decision-making regarding what art deserves support. Tax breaks are a particularly useful way of supporting artists without some of the controversy surrounding direct funding by the NEA: if a museum chooses to accept a delightful multi-media piece incorporating fecal matter (or any avant garde piece), the tax code could operate to allow a deduction without requiring tacit government approval.

Allowing this type of deduction will indeed cost the government revenue in lost income tax from artists and in lost sales tax. But our government has made a policy decision to fund the arts. Reinstating the fair market value deduction for artists will stimulate the flow of materials back into our museums, where it is well cared for and accessible to the public. It would be a shame to allow "phantom abuses" to close off this productive method of funding for the arts.