Policy Update

Museum Group Raises Concerns About Proposal on Non-Cash Gifts

5/16/2005

In a letter to the chair and ranking minority member of the Senate Finance Committee, Edward H. Able Jr., president and CEO of the American Association of Museums, writes that a proposal to eliminate the full market value deduction of non- cash gifts would have a negative effect on donations of objects to museums.
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April 8, 2005

The Honorable Charles E. Grassley
Chairman
Committee on Finance
United States Senate
SD-219 Dirksen Senate Office Building
Washington, DC 20510-6200

The Honorable Max Baucus
Ranking Minority Member
Committee on Finance
United States Senate
SD-219 Dirksen Senate Office Building
Washington, DC 20510-6200

Dear Mr. Chairman and Senator Baucus:

I am writing to make clear the continuing interest and willingness of the museum community to work closely with both of you and the rest of the Committee as you develop additional means of strengthening the charitable sector, and to express our thanks for the willingness of your staffs to meet with us last summer on these issues. We hope to continue those fruitful discussions.

We are, I think, as concerned as you and the rest of the Committee about evidence of abuses of charities and their exempt status by individuals seeking private benefit, which contravenes the legal as well as ethical duty of loyalty to the charity.

Along with the rest of the charitable community, we want to continue to work with you in a serious and specific way to determine the scope of these problems, which potentially endanger the credibility of the whole sector, and to address them promptly and thoroughly.

In that context, I want to raise specific concerns we have about some of the testimony presented at the Committee's April 5th oversight hearing and about the related parts of the Joint Committee on Taxation's (JCT) Report of January 27, 2005.

That report and the testimony of Dr. Jane Gravelle of the Congressional Research Service implied that there would be few, if any, negative overall effects of eliminating the full market value deduction of non-cash gifts. In fact, our actual experience, in recent times, of such a change makes clear that it did -- and would once again -- have a most significant negative effect on giving of objects to museums.

In brief, a form of such a cost-basis-only deduction was enacted in 1986 in a more restrictive form. Its failure was documented and it was repealed in 1993. If re-enacted, particularly in the form proposed in the JCT Option 1 (lesser of basis or fair market value), which would affect even more people and more deductions than was enacted in 1986, it would have even more negative consequences.

To understand why this was -- and would again be -- the case, it is helpful to have some brief background about how collecting functions in the museum community.

Approximately 80% of the objects in American museums have been acquired through gifts. This is unusual on the world scene, because our tax code is unusual in its long-standing encouragement of private philanthropy.
Museums, particularly art and history museums, usually collect unique objects.

Often these objects appear on the market only rarely and are quickly sold. This is also the case with rare books and manuscripts collected by libraries, etc. Indeed, the central mission of many collecting cultural institutions is precisely to collect, do research on, and display, with educational context, unique objects with unique cultural value, for the purpose of public education.

The JCT report notes that "A primary goal of the charitable deduction . . . should be to encourage gifts that are most useful to a charitable organization" (p. 296.) While museums and other charities can always use cash gifts, for a collecting institution, the most valuable gift in the collections area is not money but rather a unique object.

Very few museums or other cultural institutions have significant standing acquisitions budgets.

Thus while museums and other cultural institutions, as interested parties, must continue to remain at arms length in the valuation process, both to comply with national codes of ethics and for substantive reasons, we have a strong incentive to assure and maintain a justified confidence in the donation process of tangible objects for our collections.

Without that confidence, donors could not be sure that the value of their donation would be sustained, creating uncertainties that would depress giving. In addition, without clarity and transparency here, the public and Congress would lose confidence in the donation of cultural property, which would likely result once again in the drying up of that giving that we saw in the 1986- 93 period of restrictions.

Let me turn now to some particulars about what we discovered when the experiment of cost-basis-only giving of in-kind gifts was tried unsuccessfully from 1986-93:

The Tax Reform Act of 1986 included a provision that made the deduction for the appreciated value of in-kind gifts a preference item under the Alternative Minimum Tax. The effect on giving to charities was immediate. A national survey demonstrated a 60% drop in giving to museums generally from 1985 to 1987. A second national survey, of art museums only, showed a drop of 63% from 1986-88. For museums, the movement of private wealth to the public good was slowed to a trickle.

Creation of a one-year window of opportunity in 1991 to take, once again, a full market value deduction only for gifts of art, manuscripts, and some other tangible personal property, revived giving of such objects dramatically; the window was then extended to June 30, 1992.

Both Presidents George H. W. Bush and Bill Clinton supported repeal of the restriction.

As part of the repeal process, cultural institutions, along with the charitable community generally, worked closely with Congress and IRS to create the quid pro quo and substantiation rules in current law relating to charitable gifts. The basis-only restriction was finally repealed in 1993.

I think it is important for you, your staffs, and the Committee to know this background and history, but in closing, I want to emphasize again that we are eager to continue working with the Committee both on larger questions of nonprofit oversight and particularly on the issue of valuation of gifts of non-cash gifts, which is so vital to the museum community's continuing ability to collect objects to support the life-long learning of our fellow citizens. We would like to find solutions here, as with the larger issues, that will benefit not just museums but the larger charitable community.

Sincerely,

Edward H. Able, Jr.
President and CEO

Cc: Dean Zerbe, Tax Counsel
Jon Selib, Tax Counsel