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At a time when museums are generally priced out of auctions for top works of art, that donation method, known as fractional giving, has been responsible for a substantial portion of the 80% of pieces that come through private donors. "It's a win-win situation," says Stephen Clark, deputy general counsel for the Museum of Modern Art in New York City, where roughly 650 works of art have been acquired via fractional giving, with about 650 more on the way--including Henri Matisse's Plum Blossoms. "It encourages art collectors to give because they get a tax benefit, but it also encourages donors to be prudent stewards of important art."
Already the new tax law is disrupting the traffic between donors and museums. That's in part because it requires a museum to take possession of a piece of donated art within 10 years, not merely for a specific number of days each year, as under the present arrangement. And now donors' write-offs are limited to a painting's market value at the time the original gift was given, not its appreciated value. That may end up being a significant disincentive for giving. While the law's intent is to prevent donors from reaping tax breaks on art that isn't often seen by the public, museum directors say this rarely occurs. "I'd like to see the government produce some evidence," says James Cuno, director of the Art Institute of Chicago, which has about 200 fractional gifts in process. "The artworks usually end up in the museums, where for centuries they will be enjoyed by the public."
Museum officials, who are lobbying to have the tax provision withdrawn, say they're already getting the cold shoulder from potential donors. "There have been donors in negotiations who pull back immediately," says James K. Ballinger, director of the Phoenix Art Museum, which obtained two Georgia O'Keeffe paintings through fractional giving. Lerner says he's advising clients to hold off on donations and has pulled the plug on a $20 million painting. "I don't go through a long explanation. I just tell the client, 'You can't do this any longer,'" he says. "They say, 'Fine.'"
Art is not only about investment, however, and at the center of each staggeringly expensive acquisition is a collector who is usually rapturous about a painting. "It's not like buying and selling shoes," says Los Angeles--based art adviser Patricia Ciaffa Peyser, who handles a number of high-profile collectors. "There's a sense of wonder and immortality about art that's precious to everyone. It transcends business." But as the art bubble continues to expand as a barometer of the overall health of the economy, even the most passionate collectors and the people who advise them are trying to figure out how long it can last and when it's going to burst.