REPORT AND
RECOMMENDATION OF THE
ASSOCIATION
OF ART MUSEUM DIRECTORS
Recommendation
Tax Deduction on Charitable Contributions of Art of Qualified Artistic Property
ASSOCIATION
OF ART MUSEUM DIRECTORS
Recommendation
Tax Deduction on Charitable Contributions of Art of Qualified Artistic Property
The Association of Art Museum Directors (the "AAMD")1 recommends that subsection (e) of Section 170 of the Internal Revenue Code of 1986 (relating to certain contributions of ordinary income and capital gain property be amended by adding a new paragraph (7), which would provide special rules and exceptions for certain contributions of artistic property. In the case of a "qualified artistic charitable contribution," the amount of such contribution would be the fair market value of the donated property at the time of the contribution (including or excluding the copyright, as the case may be). In accordance with the proposed legislation, a "qualified artistic charitable contribution" would be defined as a charitable contribution of any artistic property 2 if, but only if-
(i) such property was created at least eighteen (18) months [three years] prior to the date of such contribution by the personal efforts of the taxpayer (who has previously publicly sold or exhibited similar works) making such contribution;
(ii) the taxpayer has received a written appraisal of the fair market value of such property by a qualified appraiser, and the appraisal is attached to the return;
(iii) the use of such property by the donee is related to the purpose or function constituting the basis for the donee's exemption under Section 501; and
(iv) the taxpayer receives from the donee a written statement representing that the donee's use of the property will be in accordance with the provisions of clause (iii).
The AAMD's recommendation and proposed legislation would provide an income tax charitable deduction equal to the fair market value of any artistic property contributed to a qualifying public institution, provided that the artist's deduction for any year would be limited to such artist's "artistic adjusted gross income" and subject to the applicable percentage limitations for charitable donations.
A copy of the proposed legislation is attached hereto as Exhibit A.
Background
and Rationale for the Proposed Legislation
In 1969, as part of broad tax reform legislation, the income tax deduction on charitable contributions of art, manuscripts and the like by their creators, or by those for whom letters or memoranda are prepared, was drastically reduced. Instead of the fair market value of the donated property, which had previously been the measure of the deduction, the amount allowable as a deduction was restricted to the donor's cost basis in the property (Code Sections 170(e), 1221(l), 1221(3). 3 Since the cost basis of artistic property and manuscripts in the hands of such persons is, in general, merely the cost of the materials (in most cases a nominal amount), the practical effect of the 1969 amendment was to eliminate completely the charitable contributions deduction for the creators and the other persons enumerated above. A person (other than a dealer) who purchases or inherits an artistic work or manuscript is treated differently, however. Thus, a collector making an identical gift to a museum or library would be entitled to deduct the fair market value of the property. 4
The AAMD believes that the public benefits significantly from the availability of works of art, manuscripts and letters of scholarly significance in museums, libraries and other archival institutions. Empirical data suggest that the curtailment of the tax deduction in 1969 has resulted in a substantial reduction in acquisitions of such items by public institutions. Accordingly, the AAMD considers an increase in the charitable deduction applicable to gifts of property by living artists to be in the public interest, as it would provide an incentive for such persons to make their creations and papers available to the public while the donor remains alive.
I. INTRODUCTION AND ANALYSIS OF CURRENT LAW
Prior to the enactment of the Tax Reform Act of 1969 (the " 1969 Act"), a visual artist, writer or composer who made a charitable contribution of his or her own work to a qualifying institution was entitled to a deduction equal to the fair market value of the work contributed. Since enactment of the 1969 Act, a visual artist's, writer's or composer's charitable deduction is limited to his or her actual cost basis in the work. This limitation does not apply to a collector, who can deduct the fair market value of the donated work (subject to certain percentage limitations applicable to all for charitable gifts).
The underlying legal basis for this disparate treatment is the distinction made between "capital gain property" and "ordinary income property" under the Code and the general rule, set forth in Section 170(e) that the amount of a charitable contribution that would otherwise be deductible under Section 170(a) must be reduced by the amount of gain that would not have been long-term gain if the property had been sold by the donor at its fair market value when contributed.
Section 1221(3) of the Code explicitly provides that artistic property is not a capital asset and, thus, not entitled to long-term capital gain treatment. Although Section 1221 of the Code defines a capital asset as "property held by the taxpayer (whether or not connected with his trade or business); Section 1221(3) excludes from the term "capital asset"--
(3) a copyright, a literary, musical or- artistic composition, a letter or memorandum, or similar property, held by --Section 1. 17OA-4(b)(1) of the regulations define the term "ordinary income property" as property any portion of the gain on which would not have been long-term capital gain if the property had been sold by the donor at its fair market value at the time of its contribution.(A) a taxpayer whose personal efforts created such property,
(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or
(C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B).
Artists' creations have been accorded ordinary income property treatment since Congress enacted Section 1221(3)(A) in 1950. Prior to that time, self-created works of art were treated as capital assets. If that were presently the case, creators could deduct the fair market value. Artists are not entitled to the preferential capital gains treatment afforded certain other merchants of creative property, including patent holders. IRC Section 1235.5 5
Section 170(e) of the Internal Revenue Code, as amended by the 1969 Act, effectively denies a charitable deduction to the artist, writer or composer who makes a charitable contribution of his or her work by requiring any taxpayer who makes a charitable contribution of appreciated property, the sale of which would give rise to ordinary income (or short-term capital gain), to reduce the amount of the deduction (from fair market value) by the amount of any ordinary income (or short-term capital gain) which the taxpayer would have realized had the property been sold at that time.
As this Report recommends that Congress except artistic property from the general rule of Section 170(e), it should be noted that enacting such an exception would not be unprecedented. Since 1969, Congress has enacted three exceptions to the 170(e) general rule, in order to encourage certain public benefits. The enacted exceptions encourage corporations to make charitable donations of inventory donated for the care of the ill, the needy or infants (Section 170(e)(3); scientific equipment for research or experimentation (Section 170(e)(4); and computer technology or equipment for elementary or secondary school (Section 170(e)(6))
As is demonstrated below, the enactment of the exception proposed in this Report will also benefit the U.S. public by increasing the donation to U.S. museums, for public exhibition, of the artworks of living artists, instead of delaying such donations until the death of the artists, as is the bizarre effect of the current tax law.
II. IMPACT OF CURRENT LAW
Empirical data suggest that the curtailment of the tax deduction in 1969 has had a substantial impact on gifts of artistic property to charitable institutions.
In 1975, in order to determine the effect of the 1969 legislation, a committee of the Association of the Bar of the City of New York contacted numerous museums, libraries and other organizations to obtain quantitative information as to contributions of art works and papers that had been received as gifts from their creators before and after 1969. In addition, the committee reviewed various published studies dealing with this question. Although the data were certainly not comprehensive and in some cases were imprecise, certain conclusions are indicated. The 1969 change appears to have had the most significant effect in the area of manuscripts and letters. In the few years prior to 1969, the Library of Congress received annually about 15 to 20 large gifts of manuscripts from authors; in the four years ended 1974, it received a total of only 1 such gift. 6 A number of prominent authors, artists, composers and others who made regular donations of their papers and works to public institutions before 1969 have subsequently sold such material (in some cases to institutions outside the U.S.) or merely placed it "on deposit," thereby restricting integration into research facilities. 7 Libraries have reported the loss or reduction of gifts of papers from such noted men of letters and composers as Archibald MacLeish, Vladimir Nabokov, Robert Lowell, John Updike, Neil Simon, Walter Piston, Samuel Barber, and Aaron Copland. 8 In testimony before the House Committee on Ways and Means in 1973, Richard E. Oldenburg, the then Director of the Museum of Modem Art, stated:
In the three-year period 1967-1969 immediately preceding the effective date of the Tax Reform Act of 1969, this Museum received from 97 artists, as gifts, 321 works of their own creation -drawings, prints, paintings and works of sculpture. In the three year period 1970-1972 immediately following the passage of the Tax Reform Act, the Museum received from 15 artists gifts of only 28 works, of which the majority were prints -- a decrease of almost 91 percent in the number of gifts. 9It has been widely reported that gifts from artists are a fraction of what they were before the 1969 Act, and that since then significantly fewer gifts have been made by visual artists, writers and composers as against gifts made by collectors. See 37 Case Western Reserve L. Rev. 536, 547 (1987).
III. ARGUMENTS TO RESTORE DEDUCTION
The AAMD views the following as among the most important reasons for this proposed legislative change:
1. Increase Donations by Creators to Charitable Institutions.It is intended that such a change in the law would encourage creators to make donations of their creative works to appropriate charitable institutions and also motivate such charitable institutions to actively seek contributions of works from creators. The public should benefit by having more important creative works available to them in public institutions having a use for such creative works related to the institutions' tax exempt function. The public benefit that would be achieved through the enrichment of charitable institutions by providing an incentive to visual artists, writers and composers to make such gifts cannot be overemphasized. Finally, by encouraging visual artists, writers and composers to donate works to appropriate public charities located in the United States, more of the cultural patrimony of the United States would be kept in the United States and made accessible to the American public instead of going to foreign collectors or museums.
2. Restoration of Tax EquityThe Tax Reform Act of 1969 works an unfairness by discriminating against the artists as taxpayers. If an artist donates a self-created work, the artist can only deduct the cost of materials. By virtue of Section 1221 of the Code, inventors, i.e. patent holders, are favored over copyright holders. Although the current proposal does not seek to amend Section 1221, it does seek to redress this inequality of treatment through the creation of an exception to Section 170(e) of the Code. As noted previously Congress has already enacted three exceptions to Section 170(e). In addition, the artist is given less favorable treatment than the collector. Although one can argue that the collector, as opposed to the other groups of donors noted above, purchases artistic property with after tax dollars, the discrimination is not warranted. The principle of "horizontal tax equity," a general goal of the tax code, is to ensure equal treatment to similarly situated taxpayers. There are no public policy reasons that justify different tax treatment for these various groups of donors. If horizontal equity is restored, giving artists the same incentive to donate as is given to corporations and collectors, the flow of art into our nation's museums may well be revived.
3. Asset Efficiency Achieved by Elimination of "Donation Anomaly"The current U.S. tax law has the anomalous effect of discouraging the artist from donating his or her art creations while alive, but encourages donations by the same artist after death. Donations during life are deductible from income taxes only to the extent of material costs; donations after death are deductible from Estate Taxes at fair market value and the artist's estate does not incur income tax on the appreciated value of the post-death donation.
This anomaly has two adverse effects on the nation:
a) it discourages the efficient use of assets; art works, which could be exhibited in public institutions while the artist is alive, when the artist would be available to share with the public, art historians and scholars the background, methods and aesthetic aims of his work, are kept languishing in the studio for many years awaiting his death; and
b) the artist's participation in the display, lighting and placement of his or her work, and in the maintenance and restoration of the work, are denied to the museum, so that a work, donated post-death, may not be seen by the public as the artist intended.
IV. ARGUMENTS AGAINST RESTORING DEDUCTION
In considering its recommendation, the AAMD recognizes the following arguments which have been made against such a legislative change, but has resolved those issues as follows:
1. Valuation Problems. There is a persistent concern that the restoration of a fair market value deduction for contributions of works of art creates the potential for abuse in valuations. However, the Committee believes that the work of the IRS's Art Advisory Panel and the qualified appraisal requirements in the current law have substantially limited this risk. The AAMD also notes that the enactment by the Economic Recovery Tax Act of 1981 of Section 6661 of the Code to provide for nondeductible penalties where a deficiency results from an overvaluation of property provides a remedy for the abuses which have often been cited by opponents of similar legislation.
2. Painting a Deduction. It has been said that the adoption of the AAMD's proposal would enable a visual artist to "paint a tax deduction," or a composer to "compose a tax deduction." A further fear is that an amateur or part-time artist, by making a donation of his or her work, could use a fair market value deduction to offset his taxable income from non-art related activities.
Recognizing that these are actual concerns (although perhaps not warranted), the proposed legislation meets them head-on:
a) by limiting an artist's fair market value deduction to works which have been in existence for not less than eighteen (18) months [three years]; and
b) by limiting the maximum amount of the donation deduction to the artist's art related income in that year, including any income earned by the artist from teaching, lecturing or performing with respect to his or her artistic creations or similar creations of other artists.
V. CONCLUSION AND RECOMMENDATION
The Committee believes that an immediate and significant benefit to eligible charitable institutions, in particular, and the public, in general, would be derived from the increased donations of works of art, literary works and musical compositions to charitable institutions and that this benefit justifies this proposed legislative change. Restoring the charitable deduction for the full fair market value of the works of visual artists, writers and composers which are donated to public institutions under specified procedures set forth in the proposed legislation would provide a significant incentive to the making of such contributions, which will inure to the public good. Such an incentive would provide visual artists, writers, composers and other individuals entitled to copyright protection with the tax advantage available to inventors. The AAMD believes that the public benefit to be derived from such artistic contributions warrants equal treatment.
Respectfully submitted,
The Association of Art Museum Directors, May 24, 1999
BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED,
Section 1. CHARITABLE CONTRIBUTIONS OF CERTAIN ITEMS CREATED BY THE TAXPAYER.
Subsection(E) of Section 170 of the Internal Revenue Code of 1986 (relating to certain contributions of ordinary income and capital gain property) is amended by adding at the end thereof the following new paragraph:
" (7) Special rule for certain contributions of literary, musical or artistic compositions.--
" (A) In general. -- In the case of a qualified artistic charitable contribution --
"(i) the amount of such contribution shall be the fair market value of the property contributed (determined at the time of such contribution), and
"(ii) no reduction in the amount of such contribution shall be made under subparagraph (A) or (B) of paragraph (1).
"(B) Qualified artistic charitable contribution. -- For purposes of this paragraph, the term "qualified artistic charitable contribution" means a charitable contribution of any literary, music, artistic, or scholarly composition, or similar property, or the copyright thereon (or both), but only if --
"(i) such property was created by the personal efforts of the taxpayer making such contribution no less than eighteen (18) months prior to such contribution,
"(ii) the taxpayer--
"(I) has received a qualified appraisal of the fair market value of such property in accordance with Section 170(a)(1)
"(II) attaches to the taxpayer's income tax return for the taxable year in which such contribution was made a copy of such appraisal, and
"(III) the appraisal takes into account but is not limited to the factors described in clause (vi),
"(iii) the donee is an organization described in subparagraph (A) of subsection (b)(1),
"(iv) the use of such property by the donee is related to the purpose of function constituting the basis for the donee's exemption under section 501 (or, in the case of a governmental unit, to any purpose of function described under subsection (c)),
"(v) the taxpayer receives from the donee a written statement representing that the donee's use of the property will be in accordance with the provisions of clause (iv), and
"(vi) the written appraisal referred to in clause (ii) includes evidence of the extent to which property created by the personal efforts of the taxpayer is or has been --
"(I) owned, maintained, and displayed by organizations described in subparagraph (A) of subsection (b)(1), and
"(II) sold to or exchanged by persons other than the taxpayer, donee, or any related person (within the meaning of section 465(b)(3)(C)).
"(C) Maximum dollar limitation. -- The aggregate amount of qualified artistic charitable contributions allowable to any taxpayer as a deduction under subsection (a) for any taxable year shall not exceed the artistic adjusted gross income of the taxpayer for such taxable year.
"(D) Artistic adjusted gross income. -- For purposes of this paragraph, the term 'artistic adjusted gross income' means that portion of the adjusted gross income of the taxpayer for the taxable year attributable to --
"(i) income with respect to the type of property described in subparagraph (B) that is created by the taxpayer,, and
"(ii) income from teaching, lecturing, performing, or similar activity with respect to such property or to similar property created by individuals other than the taxpayer.
"(E) Paragraph not to apply to certain contributions by public officials. -- Subparagraph (A) shall not apply in the case of any charitable contribution of any letter, memorandum, or similar property which was written, prepared, or produced by or for an individual while such individual was an officer or employee of the United States or of any State (or political subdivision thereof) if the writing, preparation, or production of such individuals duties as such an officer or employee.
"(F) In the case of a qualified artistic charitable contribution, the tangible literary, music, artistic or scholarly composition, or similar property and the copyright on such work shall be treated as separate properties for purposes of this paragraph (7) and subsection (f)(3).
1 The Association of Art Museum Directors (AAMD), founded in 1916, assists its members in establishing and maintaining high standards for themselves and the museums they represent, thereby increasing the contribuiton of art museums to society. AAMD believes that art museums must be reflective of and responsive to the communities they serve, with education being central to engaging diverse publics in the experience of works of art. Fundamental to the education process is the importance AAMD and its members place on the value of art and artists in society.
AAMD gratefully acknowledges the following attorneys for their generous contributions in drafting this report and its proposed legislation: Sally Ballantine, Christine Baltz, William Borchard, Susan Brown, Judith Lynn Church, Gilbert Edelson, Jeremy Epstein, Genevieve Fraiman, Lee White Galvis, Peter P. McN. Gates, Philomene A. Gates, Ashton Hawkins, Barbara Hoffman, Herbert Hirsch, Slade Metcalf, Millard Midonick, Rena Moulopoulos, Herbert Nass, Pamela Mann, Theodore Kaplan, William Pearlstein, John Sare, Selvyn Seidel, Ronald Spencer, Erik Stapper, Michael Ward Stout, Daniel Weiner, Carl L. Zanger.
2 As used in this Report, (unless the context otherwise requires), the words "artistic property" or "art work," include any literary, music, artistic or scholarly composition, any letter or memorandum, or similar property; and the term "artist" refers to the creator of any artistic property.
3 All references to "Code' are to the Internal Revenue Code of 1986, as amended.
4 The charitable deduction allowable in any year is, however, limited to a percentage of the donor's adjusted gross income, which varies according to the type of recipient and the nature of the donated property.
5 See Cantor, Tax Policy: Copyrights and Patents, 31 VELL. L. REV. 931 (1986). The author explores the utility-expression dichotomy used to justify differing treatment of copyright holders and patent holders in the area of capital gains and finds the discrimination unjustified as a matter of public policy and constitutional law.
6 Congress Record, April 16, 1975.
7 Id. see also Norman E. Tanis, Report on the Tax Reform Act of 1969 as it Affects Libraries (unpublished). Id.
8 Id.
9 Public Hearings on General Tax Reform before the House Ways and Means Committee, 93rd Congress, 1st Session, note 48 at 6143 (letter of Richard E. Oldenburgh, Director, Museum of Modem Art).