05 December 2019 - Podcast
US Congress may finally pass the proposed legislation this year
Under current US law, artists, authors, and composers who donate their works to charitable institutions during their lifetime are entitled to an income tax charitable deduction limited to the cost of producing their works. In the case of a painting, for example, the artist’s deduction is generally limited to the cost of paint and canvas. Collectors, on the other hand, are allowed to deduct the full fair market value of artworks they give to charity. For the fifth consecutive session of the U.S. Congress, a bill has been introduced to erase this inequity. The Senate has approved the bill each time it has been introduced but the House of Representatives has never sanctioned the measure. The proposed legislation, referred to as the Artist-Museum Partnership Act (“AMPA”), would allow taxpayers who create literary, musical, artistic, or scholarly compositions or similar property, a fair market value income tax deduction for the contributions of such properties, the copyrights thereon, or both, to qualified charities.
Prior to 1969, both artists and collectors were allowed an income tax charitable deduction up to the fair market value of a work. This was changed when Congress passed the Tax Reform Act of 1969 creating disparate treatment of artists and collectors. This inequity in the Internal Revenue Code has discouraged artists from making lifetime charitable contributions since. Advocates of the new legislation claim that after the enactment of the 1969 Tax Reform Act there was a dramatic decrease in the number of art and literary works given to charity. For example, it is reported that the Museum of Modern Art received 321 gifts from artists in the three years prior to the passage of the 1969 legislation and in the three years following its repeal the Museum received 28 works of art from artists, a decrease of more than 90%.
With the passage of the 1969 Tax Reform Act, Congress intended to correct the perceived abuse that taxpayers were exaggerating the value of self-created works and therefore exaggerating their income tax deductions. Since then the government has significantly cut down on abuse of fair market value determinations through tax legislation such as the “qualified appraisal” legislation, which became law in 1984. Under AMPA, taxpayers who donate their own works would be subject to similar rules that now govern charitable gifts by collectors. This includes providing relevant information as to the value of the gift, providing appraisals by qualified appraisers, and, in some cases, subjecting the appraisals to review by the Internal Revenue Service’s Art Advisory Panel. It can be argued therefore that the reasoning behind the enactment of the 1969 tax provisions is no longer valid.
Charitable Deductions Under AMPA
If AMPA is enacted, an artist or author will be able to obtain an income tax deduction equal to the full fair market value for his or her work, provided the work was created more than 18 months prior to the contribution. By contrast, collectors must hold their artwork for more than 12 months prior to the contribution in order to obtain the full fair value deduction. Both collectors and artists must give the artwork to a public type charity that will use the work as part of its charitable mission: a gift of an artwork must be made to a museum or institution that will exhibit the work rather than to a charitable organization that will hold the work for investment or sale. Artists will have the additional burden of obtaining a statement from the donee organization to the effect that the work will be owned, maintained, and displayed by the donee organization. Artists and authors, like collectors, will have to obtain an independent qualified appraisal if they are trying to obtain a deduction of more than US$5,000, and the value claimed as a deduction will be subject to a review by the Internal Revenue Service’s Art Advisory Panel if the deduction claimed exceeds US$20,000 for a work or a group of similar works. The qualified appraisal for artist contributions must provide evidence (if any is available) that the works in question are, or have been owned, maintained, or displayed by public charities. The qualified appraisal must also contain information regarding whether the works have been sold or exchanged by persons other than the taxpayer, the donee charity, or any person related to the taxpayer or the donee charity.
Deduction Limited to “Artistic Adjusted Gross Income”
Under AMPA, the amount of the deduction an artist can claim in the year of the gift is limited to 100% of his or her “artistic adjusted gross income” for the year. Artistic adjusted gross income is defined as income from the sale or use of property created by the personal efforts of the taxpayer which is of the same type as the donated property and income from teaching, lecturing, performing, or similar activity with respect to the donated property. For example, if an artist sells one of his works at a gain of US$1,000, he can donate another artwork worth US$1,000 to a museum and fully offset his gain of US$1,000. He could also offset up to US$1,000 of his salary from an art-related teaching position. However, unlike collectors, an artist cannot carry forward his unused art-related charitable deduction. If, in the prior example, the artist donates artwork worth US$1,100, he loses the extra US$100 of deduction since he only has US$1,000 of artistic income during the year.
Collectors can only deduct their contributions up to 30% of their “adjusted gross income.” Adjusted gross income is not limited to art related income but can include income and gains realized by the collector in a given year from any source. Collectors are allowed to deduct the excess contributions over the 30% limit for up to five years following the year of the gift if they have sufficient adjusted gross income in those five years.
Copyright Treated as Separate Property
Importantly, AMPA would treat the artist’s work and the copyright in that work as separate properties for purposes of the charitable deduction rules. Under current law, most charitable gifts of so-called partial interests in property are not deductible for income, gift, or estate tax purposes. Such is the case when an artist transfers his work without the copyright or transfers the copyright independently of the work as these are considered partial interests in the artwork. If AMPA becomes law, the artist would be allowed a deduction for income tax purposes, as well as for estate and gift tax purposes, for the separate transfers of the copyright and the work itself.
Works Received by Gift or Inheritance
AMPA will not affect transfers of works by gift or inheritance. Collectors and artists have been, and will continue to be, treated identically when they leave art or other property to charity by will. Taxpayers are allowed to leave their art and other property to qualified charities free of estate tax. Similarly, taxpayers who make gifts to charity during their lifetime are not charged with a gift tax regardless of their status as an artist or a collector.
Will It Pass?
It seems likely that AMPA in some form will be passed this year. The bill has been referred to the Senate Committee on Finance and to the House of Representatives’ Committee on Ways and Means. As of October 2008, 108 co-sponsors had signed on to the bill in the House, breaking the record number set in 2004. There were also a record number of co-sponsors in the Senate, with 30 co-sponsors signing on to the bill and, during his campaign, President Obama stated he would sign this bill into law if elected.