WASHINGTON – Senate Finance Committee chair Orrin Hatch, R-Utah, is concerned some private nonprofit museums may be exploiting their tax-exempt status and not providing enough public benefits.
In a letter to Internal Revenue Service Commissioner John Koskinen, Hatch said short public hours, admission costs and donors' roles bring into question whether these museums merit tax-exempt status and are sufficiently serving the public interest.
"These factors alone are not cause for revoking tax-exempt status or imposing tax on self-dealing, but they do raise questions about the nature of the relationship between the donor and museum that perhaps merit further security," Hatch said. "Despite the good work that is being done by many private museums, I remain concerned that this area of our tax code is ripe for exploitation."
The letter follows a nearly seven-month review of 11 private foundations during which Hatch questioned whether they were meeting public interests and whether museum operations merited the tax-exemption provided to their collector-founders. Hatch sent a letter the museums to find out how the museums in question make their art available to the public, and what benefits are received by their founders and donors.
The inquiry posed nine questions to the private foundations, including the total number of visitors, how artwork was obtained, the hours the museums were open to the public, and the grants awarded by the museums over the past five years.
Responses varied widely, Hatch said, from one museum that expected more than 500,000 visitors in 2015 to four that averaged 5,700 or less over the past five years. Several reported that donors who provided more than 5% of their art collections also currently oversee museum operations, and that some museums have "highly irregular" schedules.
Hatch expressed particular concern with museums that require reservations made weeks or months in advance and those that are open to the public for a short number of hours per week, as well as those that close for weeks or months at a time to the public. This, he said, limits the number of visitors each museum can take in.
He also expressed concern over museums that sit on land owned by founding donors or that have buildings adjacent to donors' private residences. He also was wary that many museums obtained all or most of their collections form a single founding donor or family. In many cases, the founding donors have an active management role, either by serving on boards of directors or as presidents.
Hatch, who launched his review in November, said it was based in part on media reports alleging that some tax-exempt museums "provide limited benefits to the public while enabling donors to reap substantial tax advantages."
The letter, along with a summary of his findings, was published by Hatch on Thursday. He did not specify which museums were questioned.
"I ask that you respond and detail the IRS's views on private museums and the agency's efforts to ensure that private museums have sufficient guidance to conduct their operations," Hatch wrote to the IRS commissioner.
Hatch said that private museums must perform work that benefit the public, but said there is little clarity beyond that to ensure they continually meet tax-exempt requirements.
He said tax-exempt private museums opened by individual collectors "creates a unique opportunity for such persons to simultaneously enjoy two generous tax advantages." Under Section 501 of the federal tax code, certain charitable organizations are exempt are exempt from federal tax on operations related to their tax-exempt purpose. Under Section 170, donors may receive deductions for contributions made to such nonprofit organizations.
More than $5.7 billion in tax-exempt bonds have been issued since the beginning of 2010 to finance museums and libraries, according to data provided by Thomson Reuters. Thus far this year, 24 issues totaling $301.1 million have been used to finance museums and libraries. The National Law Enforcement Officers Memorial Fund said in January it secured $103.1 million in tax-exempt revenue bonds to build a law enforcement museum in Washington D.C. The bonds, issued through the District of Columbia's revenue bond program, will finance the museum, which is expected to contain a collection of photographs from numerous events in law enforcement history. It is expected to open in 2018.
The International Spy Museum said last June that it would seek $25 million in tax-exempt bonds to finance the construction of its new $162 million home in L'Enfant Plaza in Washington, according to the Washington Business Journal.
