Withers Worldwide

On June 7, 2005, the Art and Collectibles Capital Gains Tax Treatment Parity Act ("Tax Parity Act") was introduced in the Senate for the stated purpose of amending the Internal Revenue Code "to provide the same capital gains treatment for art and collectibles as for other investment property and to provide that a deduction equal to fair market value shall be allowed for charitable contributions of literary, musical, artistic, or scholarly compositions created by the donor."  If enacted, this legislation would directly benefit both collectors and artists.

Museums and other charitable institutions would also benefit since the legislation would have the effect of increasing charitable donations of art and other collectibles.

Reduction in Capital Gains Rate

In recent years the US Congress has enacted several pieces of legislation which have reduced the capital gains tax rate.  However, while this legislation reduced the federal tax rate to 15% for long-term capital gains derived from the sale of most capital assets, the rate applicable to sales of collectibles has remained at 28%.  For this purpose, the term "collectible" is defined as: any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage or any other personal property which the Secretary of the Treasury designates.  If the proposed legislation becomes law, it could mean a substantial boom in the market for art and collectibles since the reduction in tax will increase the profit margins of collectors substantially.

Deduction for Gifts of Art by the Artist

The proposal to increase the tax deduction for contributions of art by artists has been on the Congressional agenda, in one form or another, for more than five years.  Current US tax law allows artists to deduct only the cost of materials used in creating the property, effectively the cost of canvas and paint in the case of a painting.  It has long been argued that this rule discourages charitable contributions by artists.  If the Tax Parity Act becomes law, the fair market value of qualified artistic charitable contributions could be deducted in the year of contribution against related income earned by the artist, such as income from the sale or use of similar, self-created property, or income from teaching or performing that is related to the donated work.  For example, an artist could sell one painting and make a charitable donation of  another of the same value, thereby fully offsetting his federal tax liability with respect to the painting that was sold.

To permit the increased charitable deduction, the property contributed must be created by the personal efforts of the donor no less than 18 months prior to the contribution.  As under current law, the donor would be required to obtain a written qualified appraisal of the property, and claim the deduction on his or her income tax return for the year in which the property was contributed.  A contribution will only qualify if the donee is a public charity; the donor-artist could not take advantage of the increased charitable deduction for gifts to a private foundation unless it is an operating foundation.  Further, the use of the property by the donee organization must be consistent with the organization's purpose or function, and the donee must provide the donor with a written statement describing similar use of the property.

Partial gifts of property would also be allowed.  A charitable contribution of any literary, musical, artistic, or scholarly composition, or the copyright therein (or both), may qualify for the fair market value deduction.  Thus, for example, the deduction for a contribution of an artwork without its accompanying copyright would not be denied.  As under current law, gifts of undivided fractional interests in property would also qualify for the charitable deduction.

Effective Dates

If the Tax Parity Act is passed, the 15% capital gains rate would apply to taxable years beginning after December 31, 2004, thereby offering retroactive relief for sales occurring in 2005.  The provisions pertaining to literary, artistic, musical, etc. contributions would apply to those contributions made after the date of enactment.

Timetable

Commentators have expressed the view that the Tax Parity Act is more likely than not to become law but the timing of its adoption is unknown.  After the Act was introduced, it became an amendment to the Tax Relief Act of 2005.  The adoption of the former now depends on the adoption of the latter.  In the event, the Tax Relief Act was not adopted in 2005 but there is interest in adopting it this year.