Brandeis, the Rose and the Pension Protection Act

Followers of the AW Blog are aware of the situation at Brandeis University, the closing of the Rose Art Museum and the potential of selling the collection. I had previously mentioned that this was going to be an important story, and one that appraisers should watch. It not only impacts appraisers, by donors, institutions and the general public. The story has certainly gathered a lot of traction, but it is well worth following.

The Wall Street Journal just published a very interesting look at the situation, complete with donor reactions, the potential for related use issues (with the museum closing and not displaying donated property may result in the loss of of full tax deductions), a potential review by the Massachusetts Attorney General and the pension protection act. Certainly a plethora of information appraisers who typically deal with and write complex tax donation appraisals.

This article is a must read for all appraisers, especially for those who are doing charitable donation assignment. Two different tax situations are listed below.

The article starts with the basics, which we have covered and I wont go over again, but then segue ways into potential pitfalls of closing the museum and upset donors, who may have restricted their gifts when donated, and tax deduction complications for past donors. The situation is now much more than just a closing or deaccessioning question. This WSJ brings all of the issues into play.

The WSJ article states "It makes me feel disposable, like a plastic fork," said Marlene Persky of Worcester, Mass., a donor of cash and several artworks to the Rose and current chair of the museum's collections committee. She will not be making any more gifts to Brandeis. Another donor, Jerry Fineberg, former chairman of the Rose's board and the retired chairman of a Boston-based apartment-building management company, stated that he "donated $2.5 million for a building addition to the museum that was supposed to be done and now will never be done. As far as I can tell, I'm not getting my money back." Additionally, because donors weren't consulted in advance of the decision to close the museum and sell the collection, "people are going to be p- off and, if there are any restrictions on gifts, they will be far less likely to release the university from the restrictions."

The article continues There is a last potential headache, not so much for Brandeis as for the individuals who have donated objects to the Rose's collection. These donors have taken a tax deduction based on the appraised value of these works, but are these deductions still valid? Let's say that in 2007 a woman donated an Andy Warhol painting to the Rose that she had paid $1 million for several years earlier. For tax purposes, she obtained an appraisal of the artwork, which was valued at $10 million, and on her tax returns she deducts that full fair market value. Come 2009, Brandeis University decides to close the Rose Art Museum and sell the entire collection.

Under the Related Use Rule of the 2006 Pension Protection Act, the recipient organization -- the Rose -- is required to make substantial use of the donated property (such as hanging the art on a wall) within a three-year period or else the deduction is disallowed. Now, in the case of a museum that is closing, the requirements of the related use rule still could be met if museum officials notify the Internal Revenue Service that either the institution had intended to use the donated artwork but that the situation has become impossible or that the school simply wants to sell it. (It is not at all clear if Michael Rush or Brandeis officials plan to do anything of the sort.) It is quite possible, according to Ralph Lerner, a New York tax attorney and co-author of "Art Law" (Practicing Law Institute), "that the IRS might disallow the $10 million deduction and only permit a deduction of $1 million," the amount the donor of the Warhol had paid originally.

Scenario Two: Brandeis sells the Warhol in an art market that is currently in a state of recession and only for $5 million. The IRS may go back to challenge the donor's appraisal, allowing her a deduction of only $5 million. She would then need to argue in Tax Court that there had been a significant change in the market between the time of the gift and that of Brandeis's sale. "It's difficult to say what the IRS will decide," Mr. Lerner said.

To read the full WSJ article, click HERE. For more information on related use and charitable donations, click HERE for a August 2008 AW Blog posting on the topic.