Was It Legal for This Museum to Sell a Cezanne for $100 Million?

The Edsel and Eleanor Ford House, a historic house museum in Grosse Pointe Shores, Michigan, made the news recently when the Detroit Free Press broke the story that the museum sold part of its historic collection for $100 million. The museum realized this amount from the quiet sale of a Paul Cezanne oil painting to a private buyer. The sale only came to light through the mandatory disclosure on the museum’s 2013 tax return, a document that is open to the public by federal law.

According to the newspaper article, the painting had been in the family since the mid-20th century. According to the museum’s financial statements, the museum was established to carry out the terms of article V of the will of Eleanor Clay Ford (1896 – 1976) for the operation and maintenance of the former residence of Edsel and Eleanor Ford for charitable, educational, civic, cultural and public purposes. In 1977, the will of Eleanor Clay Ford bequeathed the property and house furnishings to the foundation which would become the legal entity now known as the Edsel and Eleanor Ford House. The will is a gift instrument and appears to me to transfer the assets to the foundation with what appears to be a restriction in perpetuity “for charitable, educational, civic, cultural and public purposes.” This is a restricted gift even though the gift itself created the nonprofit, charitable, tax-exempt entity to which it was gifted.

Can the current board of directors sell one of the assets conveyed to the foundation via the will? Can they sell it for the purpose of creating “a special endowment for the preservation, conservation and restoration of the (rest of) the collection.” I think not. The Cezanne was part of the restricted gift transferred under the terms of Eleanor Clay Ford’s Will. Mrs. Ford expected the house to remain as she gifted it.

Accounting literature and financial accounting standards note that when an organization receives a gift of something with a long, useful life, there is an implied restriction for the life of the asset unless the two parties (the donor and recipient) agree that the asset is to be sold and converted to financial support. The very essence of the Ford House Museum is that it “tells the story of the home life of a prominent American family." And the house "reflects their love of family as well as their mutual passion for art and quality design.” Both of these are quotes from the Ford House website. The sale of the Cezanne appears to contradict the words of the organization’s own website. The Michigan Attorney General should investigate the sale.

In addition, there may be issues other than restricted gift issues relating to the sale of a piece of a museum collection for purposes of creating an endowmentor for any other reason.

Generally Accepted Accounting Principles (GAAP) and the American Alliance of Museums (AAM) both have standards which indicate that the proceeds from the sale of a collection item must be restricted to the purchase of other items for the collection. For example, it may be permissible to sell the Cezanne if the piece were not appropriate to the rest of the historic collection in the house, but the sales proceeds should be used to purchase more appropriate collection items. Selling collection items to build endowment is not acceptable under GAAP or AAM guidelines. The fact that the Cezanne had been in the house for years while the Fords lived there clearly indicates that it is an important example of how they lived and is not an inappropriate collection item.

The newspaper article mentioned that the sale highlights the differences between museums and historic homes when it comes to ethical guidelines for selling works from collections. “Leaders of the two professional organizations to which the Ford House belongs said the Cezanne sale does not breach ethical standards for historic homes, where guidelines for selling works are more flexible than art museums.” 

Other than the National Trust for Historic Preservation, I do not know of any organization for historic homes, and the National Trust is not an organization devoted to stewardship or governance of nonprofit organizations. In addition, I believe that the primary reason that the Ford House Foundation received recognition of its tax-exempt status from the Internal Revenue Service is because of the educational mission stemming from its intent to operate for educational purposes similar to any other museum. Therefore, I believe this property is a museum for federal tax purposes.

The Ford House Foundation is on solid financial footing. It has no debt and according to its June 30, 2013 balance sheet, it had over $50 million in income-producing investments before counting the $100 million in proceeds from the Cezanne sale. The foundation’s president (CEO) received compensation during the year ended 6/30/13 of $244,578 plus $21,163 in contributions to her employee benefit plan. An additional $100 million in investments will triple the income for the foundation, some of which is bound to find its way into additional salaries.

The financial statements and tax return of the Ford House have been audited and prepared by a large regional CPA firm. If the auditors read this post, I hope they will comment and let us know where I have gone wrong in my analysis.