Longo, John T.

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DePaul Journal of Art, Technology & Intellectual Property Law Volume 1 Issue 1 Spring 1991 Article 5 Charitable Contributions of Artwork and Federal Tax Law John T. Longo Follow this and additional works at: https://via.library.depaul.edu/jatip Recommended Citation John T. Longo, Charitable Contributions of Artwork and Federal Tax Law, 1 DePaul J. Art, Tech. & Intell. Prop. L. 19 (1991) Available at: https://via.library.depaul.edu/jatip/vol1/iss1/5 This Legislative Updates is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Journal of Art, Technology & Intellectual Property Law by an authorized editor of Via Sapientiae. For more information, please contact digitalservices@depaul.edu. 27. Id. at § 103(b), 104 Stat. at 1963 (to be codified at 20U.S.C. 954(d)(2) (1990)).28. Id. at § 103(b), 104 Stat. at 1963 (to be codified at 20U.S.C. 954(d)(1) (1990)).29. Id. at § 109(1), 104 Stat. at 1971 (to be codified at 959(c)(l)(1990)).30. Id. at § 109(9), 104 Stat. at 1971 (tobe codified at959(c)(6)(1990)).31. Id. at § 109(1), 104 Stat. at 1971 (tobe codified at959(c)(1)(1990)).32. G. Biddle, Memorandum on the Reorganization of theDepartmental Agencies of the Federal Government Dealingwiththe Visual Arts, reprinted in, National Arts Legislation: Hear-ings Before The Special Subcomm. On The Arts of The SenateComm. On Labor And Public Welfare On S. 165 And S. 1316,88th Cong., 1st Sess. 143, 144 (1963).33. Rothstein, Arts Organizations In New York Fear PlannedCuts, New York Times, January 14, 1991, § C, at 11, col. 5.34. 121 Cong. Rec. 15,595 (1975) (statement of Senator Pell).Charitable Contributions ofArtwork and Federal Tax LawIntroductionThe art community should see an increase in thenumber of donations from private collections as aresult of a recent change in the federal tax code. Thechange, part of the Omnibus Budget ReconciliationAct of 1990 (1990 OBRA), relates to valuing chari-table donations of tangible personal property.' Itabolishes the requirement that the value of suchdeductions be calculated one way for purposes ofregular income tax and a less favorable way foralternative minimum tax purposes.Prior to the change, for regular tax purposes, thevalue of a deduction for a charitable contribution ofproperty was equal to the property's fair marketvalue at the time of the donation. However, foralternative minimum tax purposes, the value of thededuction was decreased by the amount the prop-erty had appreciated since acquisition. This re-duced the attractiveness of making donations ofappreciated property as a way of decreasing thedonor's federal income tax liability. With the re-cently enacted change to the Internal RevenueCode, effective in tax year 1991, this dual valuationrequirement is canceled in some circumstances.The value of appreciated tangible personal prop-erty is the same for alternative minimum tax pur-poses as it is for regular tax purposes. This can bea tremendous windfall for the taxpayer who wishesto donate valuable appreciated objects to the artcommunity.This update will first discuss the treatment of char-itable contributions of personal property, both forregular tax purposes and alternative minimum taxpurposes, prior to the passing of 1990 OBRA. Addi-tionally, the incentive that 1990 OBRA has createdfor increased charitable contributions of artworkwill be addressed. Finally, the conclusion will setforth the overall affect that this legislation willhave on the art community.Treatment of CharitableContributions of PropertyPrior to ChangeTreatment for Regular Tax PurposesA taxpayer 2 may generally deduct contributions tocharity from his or her adjusted gross income (AGI)to determine the taxable income (TI) on which thetaxpayer pays income tax.3 When the taxpayer con-tributes property, the value of the property, andhence, the amount the taxpayer may deduct, isequal to the fair market value of the property at thetime the taxpayer contributes it. The taxpayer maydeduct this full amount provided the donation ismade to a charity recognized by the I.R.S. and thecharity puts the property to a use related to itsstatus as a charity.4 However, the sum of thetaxpayer's charitable deductions is limited; thetotal may not reduce the taxpayer's AGI by morethan a set percentage in the tax year the deductionis claimed.5For example, assume Donor bought Painting in1980 for $10,000. In 1990, Painting had a fairmarket value of $25,000. Donor then contributedPainting to a tax exempt art museum. The artmuseum put the Painting on display (rather thanselling it). Donor could deduct $25,000 from his orher adjusted gross income when figuring the tax-able income provided it would not reduce taxpayer'sAGI by more than the percentage the Code allows.However, if the Donor contributed Painting to thelocal little league which hung Painting in its snackbar, the donation would be put to an unrelated useand the taxpayer could not deduct the full $25,000.Deductions for charitable contributions are allowedbecause Congress has determined that it is goodpublic policy to encourage donations to charities bygiving the donations favorable tax status. To pro-mote donations of non-cash property, Congress al-lows such property to be valued at its fair marketvalue at the time of contribution, rather than thevalue at the time the taxpayer acquired it. Thisvaluation method is especially beneficial to the artcommunity because donations frequently are in theSpring 1991 191Longo: Charitable Contributions of Artwork and Federal Tax LawPublished by Via Sapientiae, 2016form of paintings or similar cultural properties thathave appreciated since acquisition.Treatment for AlternativeMinimum Tax PurposesTaxpayers who use itemized deductions to lowertheir TI below amounts set by the Code must makea computation to determine whether they must payan alternative minimum tax (AMT).8 The level thattriggers this additional computation varies basedon the status of the taxpayer. For instance, a singletaxpayer must make the computation if his or hertaxable income is less than $30,000. However, acorporation need not make this computation unlessits taxable income is less than $40,000.7To determine whether they must pay an AMT, thesetaxpayers must calculate a new taxable incomefigure. In calculating this new figure, some of thedeductions allowed for regular tax purposes are notallowed, and the value of others is reduced." Thedeductions which are not fully allowed for AMTpurposes are those taken for items deemed by theCode to be items of tax preference.9 The taxpayermust add the disallowed deduction, or portionthereof, to the original TI to arrive at a new TIfigure known as the AMTI. 10 Nevertheless, deter-mining this new figure for most taxpayers is veryeasy because they have not taken any of the ratherexotic deductions that the Code labels as items oftax preference.Once all the items of tax preference are added,taxpayers are allowed to take a limited number ofdeductions and exemptions from the AMTI." Theamount remaining is multiplied by the alternativeminimum tax rate to arrive at the taxpayer's alter-native minimum tax.'12 If this total exceeds thetaxpayer's federal tax paid on TI, the taxpayer isliable for the difference.' 3From 1986 until the recent change, deductions forcharitable contributions of appreciated propertywere deemed to be items of tax preference. AMTrules did not allow the full fair market value to bededucted when calculating AMTI. For AMT pur-poses, the value of the deduction was equal to thedonor's adjusted basis in the property. As such, thetaxpayer had to add to his or her TI the differencebetween the fair market value and the adjustedbasis of property deducted as charitable contribu-tions.1 4 The adjusted basis of the property wasgenerally the amount the taxpayer paid for it, plusany amount spent to improve it, minus depreciationdeductions already taken.For instance, in the previously mentioned example,Donor's basis in Paintingis $10,000. If Donor wouldhave had to use this amount to assign a value to thecharitable contribution, Donor's deduction wouldhave been reduced by $15,000. Donor would there-fore have to add this $15,000 to the TI to determinethe AMTI figure.Congress created the Alternative Minimum Tax tohelp maintain taxpayer confidence in the tax code.The confidence of taxpayers is linked to their beliefthat the system is basically fair. Congress' recog-nized faith in the system's fairness suffers whenmany taxpayers earning high incomes drasticallyreduce their taxable income through the use ofdeductions unavailable to the average taxpayer.Congress enacted the alternative minimum taxrules to ensure that these higher income taxpayerspay at least a minimum amount of taxes. 1Impact of the LegislationThe 1990 OBRA modified how certain deductionsfor charitable contribution of property are treatedfor AMT purposes.16 Effective in tax year 1991,donations of otherwise qualifying tangible personalproperty are no longer treated as items of tax pref-erence. 17 They therefore are not subject to dualvaluation requirements.' 8 Thus, in the previouslycited example, if Donor made a charitable contribu-tion in 1991, the donor could deduct $25,000 fromthe adjusted gross income to arrive at the TI.Congress did not exempt all donations of appreci-ated property from special treatment under AMTrules. Real and personal property interests, such asland and trusts, are still items of tax preference forAMT purposes.' 9 Also, the contribution still mustbe used by the donee in a manner consistent withits tax exempt status, and the total amount bywhich charitable contributions may reduce AGIremains the same.Congress enacted the change because it concludedthat there was a special need to encourage dona-tions of tangible items with unique cultural oreducational value such as works of art and manu-scripts.20 The change was designed to provide anadditional incentive for taxpayers to make suchcontributions. It is clear that Congress wanted toincrease specific kinds of donations, not just dona-tions in general, because the change is limited toitems of tangible personal property.20 Journal of Art & Entertainment Law2DePaul Journal of Art, Technology & Intellectual Property Law, Vol. 1, Iss. 1 [2016], Art. 5https://via.library.depaul.edu/jatip/vol1/iss1/5Congress has also created an incentive for taxpay-ers taking many deductions to make a qualifyingcharitable contribution of property under the newtax code. As noted above, by taking a deduction thatis not considered an item of tax preference, taxpay-ers may keep the full value of their deduction whenfiguring their AMTI. This is good news for all typesof museums, libraries, and archives because thedonation must be in the form of tangible personalproperty in order to keep its full value under AMTrules. This change should also increase the dona-tion of items these institutions need such as coincollections, paintings, manuscripts, sculptures,and artifacts.Additionally, this modification will affect how sometaxpayers plan their tax strategy, because manytaxpayers will continue to prefer deductions thatwill be valued the same way for regular and alter-native minimum tax purposes. Since a donation oftangible personal property is now one of these de-ductions, they will prefer it to other AGI reducingdeductions. For instance, in the example previouslymentioned, Donor would opt to use Painting toreduce the AGI rather than more common tax shel-ters deductions which are still considered items oftax preference for AMT purposes. The 1990 OBRAshould also benefit patrons of art institutions be-cause the donee must still put the contribution to ause related to its tax exempt status in order for thecontribution to be fully deductible. Therefore, do-nors are likely to make contributions contingent onbeing put to a related use and therefore enjoyed bythe donee's patrons.ConclusionTaxpayers with appreciable personal property onceagain have a tax incentive to donate that propertyto charities that can put it to good use. By exempt-ing tangible personal property from the list of taxpreference items, Congress created a means bywhich some taxpayers may use that property toobtain a tax break not subject to any alternativeminimum tax. This change should increase per-sonal property contributions to the art community,therefore benefitting museums around the countryand preventing foreign investors from relocatingvaluable works of art. QJohn T Longo1. Omnibus Budget Reconciliation Act, Pub. L. No. 101-508,§ 11344, 101 Stat. 508 (1990) (codified at I.R.C. § 57(a)(6)(b)(1990)).2. Unless otherwise noted, the term "taxpayer," is used tomean either an individual or a corporation subject to federalincome taxes. Likewise, the term "donor" means either an indi-vidual or a corporation making a donation.3. To figure regular income tax liability, taxpayer multiplieshis or her TI by his or her tax rate.4. I.R.C. § 170(e)(1)(B). The I.R.S. has taken the position thatan unrelated use would include selling the object donated togenerate revenue even if the revenue is then used by the doneefor a purpose consistent with its status as a charity. The regula-tions do recognize that because some of the property donatedmay be sold does not mean the contribution is for an unrelateduse. Treas. Reg. § 1.170A-4(b)(3).5. I.R.C. § 170(b). Presently this percentage is 30%-50% foran individual whose contribution is in the form of property,depending on the type of property and recipient of the contribu-tion. I.R.C. §§ 170(b)(1)(B), (C).6. I.R.C. §§ 55-59.7. I.R.C. §§ 55(d)(1)(A)-(C).8. 1 Stand. Fed. Tax Rep. (CCH) 570 (1991).9.Id.10. Alternative minimum taxable income. Id.11. I.R.C. §§ 55-59. The present exempt amount varies from$20,000 to $40,000 depending on the taxpayer. I.R.C. §§55(d)(1)(A)-(C).12. AMT rate is 24% for a corporation and 21% for a taxpayerother than a corporation. I.R.C. § 55(b)(1)(A).13. I.R.C. § 55(a).14. I.R.C. § 57(a)(6).15. 1 Fed. Tax. 2d (P-H) 1680 (1990).16. Omnibus Budget Reconciliation Act, 101 Stat. 508 (1990).17.Id.18. This is a return to the way all property contributions weretreated prior to 1986. See I.R.C. § 57, reprinted in, 11 Fed. Tax.Serv. (Bender) 11-2782 (1991).19. I.R.C. § 57(e).20. 1 Fed. Tax. 2d (P-H) 1680 (1990).The editorial staff of the DePaul-LCA Journal of Art and Enter-tainment Law is currently accepting submissions for lead arti-cles. Interested individuals should contact Peter Borich, DePaul-LCA Journal of Art and Entertainment Law, DePaul UniversityCollege of Law, 25 East Jackson Boulevard, Chicago, IL, 60604(312) 362-6112. The deadline for consideration of publication inthe Fall 1991 issue is September 1, 1991.Spring 1991 213Longo: Charitable Contributions of Artwork and Federal Tax LawPublished by Via Sapientiae, 2016

Charitable Contributions of Artwork and Federal Tax Law

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Charitable Contributions of Artwork and Federal Tax Law

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