Re: tax implications of copyright termination

On Wed, 22 Sep 1999, Peter B. Hirtle <pbh6[_at_]cornell.edu> wrote:
>
> On Wed, 22 Sep 1999, John Noble <jnoble[_at_]dgsys.com> wrote:
> >
> > I'm not a tax lawyer, and property law was a long time ago, but
> > I'm confused by your terminology. In the first example, with the
> > restrictions on access to the work, it seems to me that the potential
> > problem is that the gift is incomplete. I don't see how the deduction
> > is voided by the creation of a "remainder interest." In fact it seems
> > that its the remainder interest, after the expiration of the access
> > restrictions, that is the gift, and you would value the gift and the
> > deduction as the eventual value of the unrestricted gift, which is
> > still a wash for tax purposes.
>
> Oh boy, I'm not a lawyer at all, just a poor archivist, so I knew I
> was going to get fouled up on language here. I also realize that
> such questions need concrete examples and the paid advice of a lawyer.
> But in order to further my education, I will try to be clearer.
>
> As I understand it, in my first example the problem is with Title 26,
> Section 2522(c)(2). This says (with some qualifying language removed):
> "Where a donor transfers an interest in property... to a person, and
> an interest in the same property is retained by the donor..., no
> deduction shall be allowed under this section for the interest which
> is, or has been transferred to the person." I gather from reading
> Moynihan's comments on S. 217 that this has been interpreted to mean
> that if you limit access to your papers, you have retained an interest
> in the property, and therefore you can claim no charitable deduction
> for the gift. If the value of the material you partially transferred
> was high enough, you might even be subject to a gift tax.
>
> In copyright terms, would the right to be able to terminate a copyright
> transfer (as stipulated in copyright law) be considered "an interest
> retained by the donor," and thus negate any possibility of deducting
> the donation on one's taxes (or even worse be faced with having to
> pay a gift tax if the value of the copyright was greater than $10,000)?
>
> > Your question regarding the effect of 203 also seems to confuse a
> > remainder with a potential reversion, raising the possibility that
> > the value of the potential reversion would have to be deducted from
> > the value of the present gift in order to value the gift. Still a
> > wash. I don't see a remainder interest.
>
> You seem to be suggesting that the potential reversion interest
> represented by 203 is _not_ a retained interest as stipulated in
> 2522(c)(2), and thus may have answered my question!

A thumbnail description of Sen.Moynihan's proposed legislation, found in NCC Washington Update, 8/13/99 at http://www.h-net.msu.edu/~ncc/ncc99/ncc9928aug13.html [thank you, Peter Hirtle, for the reference] says that now (absent Sen. Moynihan's bill) "in most cases charitable gifts of historical papers to universities, libraries [...] do not have a gift tax or estate tax consequence."

In my experience that is not true, and may have been misleading. Charitable contributions of archives are definitely taking place, and at least in my tiny corner of the world, they can benefit the donor with a charitable income tax deduction. And there is a good deal of support for the notion that it is good public policy to encourage charitable gifts of important collections of papers, photos, and such, so the information can be shared with more people.

Appraisers have, however, been very shy about the valuations placed on such contributions. It can happen, when an important set of archival materials is considered for _sale_ to an appropriate institution, that an appraiser will set the value at, say, $100M, but when the same materials are considered for _contribution_ to the same institution, the same appraiser will come in with a value of, say, $35M. Insecurity and fear of the IRS seem to run high among appraisers of archival materials.

It's my understanding that getting actual "fair market value" valuations for charitable contributions of archives is now as dicey for the donors as contributions of works of art were in the old days before changes were made to the tax code during the 1960's, with input from private art dealers, lawyers and museum directors.

With contributions of "self-generated" archival compilations, there is another tax problem. As of two years ago, a Tax Court case and a tax memorandum had both come down against newspapers wanting to contribute organized collections of their "morgue" files to scholarly research facilities. The IRS position, which prevailed both times, was that the newspaper archives were ordinary income property. "Ordinary income property" is the dreaded term which is applied to the refrigerator in the hands of the appliance dealer-charitable donor, and the painting, in the hands of the artist who made it and wanted to give it to a museum as a charitable contrbution. Archival materials compiled by an outside consultant, and after a period of years has elapsed since the materials were in day-to-day use, may have a better chance of being treated as capital gain property, providing the donor with a charitable income tax deduction based on the fair market value of the archival materials at the time of the gift.

There are rumblings about the need for further change, through legislation and/or private initiatives, to increase incentives to contribute archival materials. As things stand now, it can be extremely daunting to try. Sen. Moynihan's proposed legislation could be an important step.

Code section2055(e)(4) permits a testamentary gift of artwork to charity, where the estate retains the full copyright interest. Lerner and Bresler, the authors of _Art Law_ (second edition, Practising Law Institute, 1998, at 1247) surmise that "the retention of a copyright interest apparently does not reduce the fair market value of the work of art given to a charity." A charitable transfer of copyright, without the underlying work of art, would _not_ work, they say. On a related point, charitable donors of works of art are advised to state clearly (where it's true) that the contributed property includes the work itself and "[the donor's] copyright interest, if any" in order to prevent problems with the IRS over Code section2055(e)(4). (_Art Law_ at 1246)

Analogizing from gifts of art to gifts of archival materials, perhaps this helps to answer Peter Hirtle's questions.

Cheers,

Anne M Carley
amcarley[_at_]macconnect.com Received on Fri Sep 24 1999 - 23:41:34 GMT