Friday, January 28, 2022

Private Art Museums of the Future?

Prior to the pandemic, I had the great pleasure to present a paper on the Tax Reform Act of 1969 ("the 1969 Act") at the Pittsburgh Tax Review Symposium celebrating its 50th Anniversary.  I chose the topic of private operating foundations and specifically explored the J. Paul Getty Trust, the largest private operating foundation in the United States.  Generally, private operating foundations receive scant attention, except perhaps for scandals that arise regarding them.  However, last spring, Forbes featured an article noting that private operating foundation art museums may be the museums of the future in light of the pandemic.  The author made a point from my article that traditionally large scale “private art museums” are largely inaccessible in terms of socioeconomic class, age, and life circumstance and suggested that change is necessary.  He encouraged those considering setting up one to think about posting the collections online.

For those who are unfamiliar with this form, here is a brief overview.  The Internal Revenue Code divides what are commonly referred to as “charities” into two categories:  public charities and private foundations.  Within the category of private foundations, a further distinction is made.  Private foundations are either non-operating (grant-making) foundations or operating foundations.  Although private operating foundations may make grants to other charitable organizations, they are required to directly fulfill their charitable purpose by running their own programs and services.  Some common ones include museums, libraries, research facilities, and historic homes.  Thus, in sum, a private operating foundation is a type of private foundation which uses the majority of its income to run its own charitable programs or services, rather than just making grants.  While private operating foundations may also make grants to other charitable organizations, they must engage primarily in direct charitable activities by running their own programs.

In order to qualify as a private operating foundation, a private foundation must spend at least 85% of its adjusted net income or its minimum investment return, whichever is less, directly for the active conduct of its exempt activities (the income test).  Additionally, the foundation must meet one of three tests: (1) the assets test, (2) the endowment test, or (3) the support test.  A further description of each test may be found on the IRS website.  There are several tax advantages associated with private operating foundations, including a 60% of AGI cap on cash contributions, compared to a 30% of AGI cap that applies to private foundations.

Khrista McCarden

Tulane Law School

Hoffman Fuller Associate Professor of Tax Law

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