Transcript donations of certain intangibles
DONATIONS OF CERTAIN INTANGIBLES
Jewish Community Foundation
June 24, 2010
Today’s Speakers
Joseph M. Doloboff, Partner Blank Rome LLP
t 424.239.3424
Brad S. Cohen, Partner Venable LLP
t 310.229.9942
SPECIAL TREATMENT FOR DONATIONS OF CERTAIN INTANGIBLE PROPERTY
Intangible Property
PATENTS TRADEMARKS COMPUTER CODE, ETC.
The Bad News
GENERAL RULE INITIAL CHARITABLE CONTRIBUTION OF INTANGIBLES IS LIMITED TO THE LESSER OF THE DONOR’S TAX BASIS OR FAIR MARKET VALUE
Intangibles
WHERE DONATION IS OF A PURCHASED INTANGIBLE, BASIS GENERALLY IS WHAT THE DONOR PAID – WHICH ALSO SHOULD BE FAIR MARKET VALUE
Self-Created Patents
FOR SELF-CREATED PATENTS, TRADEMARKS, SOFTWARE, ETC., FIGURING OUT TAX BASIS CAN BE DIFFICULT. HOW DO YOU ALLOCATE COSTS TO DEVELOPMENT OF THE ASSET?
The Good News
10 YEARS OF ADDITIONAL CHARITABLE DEDUCTIONS FOR THE DONOR!
Period for Deductions
10 YEARS OF DEDUCTIONS FOR THE DONOR BASED ON A PERCENTAGE OF WHAT THE DONEE EARNS FROM THE PROPERTY (E.G., ROYALTIES)
Incentives
SLIDING SCALE OF DEDUCTIBILITY FOR INCOME EARNED BY DONEE RANGING FROM 100% IN THE FIRST YEAR, DECLINING TO 10% IN THE LAST
Incentives
STRONG INCENTIVE FOR HOLDERS OF INCOME PRODUCING INTANGIBLE PROPERTY TO MAKE GIFTS TO CHARITIES – SMALL INITIAL DEDUCTION, BUT A BIG BANG FOR THE BUCK IN LATER YEARS.
Caveats
RECORD KEEPING IS VITAL CHARITY MUST AGREE TO EXPLOIT THE PROPERTY TO ITS FULLEST EXTENT
Important Points
THESE RULES ARE GROUNDBREAKING THERE HAS BEEN NOTHING LIKE THEM IN THE LAW BEFORE!
PROVIDE GREAT OPPORTUNITY TO STRENGTHEN RELATIONSHIPS WITH WORTHY ORGANIZATIONS EXPLOIT THEM WHILE YOU CAN!
What Advisors Should Know
Today we address how the intersection of copyright law, tax and estate planning can affect many advisors Copyright Attorneys Business Managers/Accountants Corporate Attorneys Estate Planners Tax Attorneys Lenders/Investment Bankers If the advisors do not coordinate, very unintended results can occur!
© 2000 Warner Bros.
Copyright Duration
Copyrights created after 1/1/1978 From fixation as writing or otherwise Term is life plus 70 years if: self created OR independent contractor NOT within scope of 9 categories Term is shorter of 95 years from publication/120 years from creation if: work for hire by employee of an entity OR independent contractor within scope of 9 categories Automatic protection
Work for Hire
Employee within scope of employment Certain independent contractors Need a written agreement!
No termination rights
Capital Assets
Capital Assets
Generally, property other than: Inventory or property held for sale in ordinary course of business Trade or business property subject to depreciation Specified self created assets
Self Created Copyrights etc.
Includes copyrights, literary, musical and artistic compositions Excluded from definition of capital asset
BUT
Section 1221(b)(3) exception to exclusion At election of taxpayer, musical compositions or copyrights in musical works treated as capital assets Applies to individuals, LLCs, partnerships and S Corporations Exception does not apply to literary or artistic compositions!
Transfers of Copyrights to Charity During Life
Donations of copyrights can give rise to a charitable contribution deduction under section 170.
Generally, amount of charitable deduction is equal to the fair market value of the donated property Section 170(e) limits deduction to donor in certain cases Intangible Property – reduce charitable contribution by amount of built-in long term capital gain Split interest discussed later…
Transfers of Copyrights to Charity During Life
Acquired copyrights – donation equal to tax basis (generally purchase price) in donated copyrights under section 170(e) Self created copyrights –
DEDUCTION
allowed
NO
Exception for musical copyrights If election made, then musical copyrights not treated as self created copyrights Deduction equal to tax basis
Transfers to Charity During Life
Special rules under section 170(m) for musical copyrights and other intellectual property such as patents, trademarks, etc.
no income recognition to author on donation charitable deductions allowed over 12 year period deduction equals income generated by contributed IP record keeping requirements the gift that keeps on giving!
Transfers to Charity During Life
Section 170(m) – percentage charitable deduction allowed during 12 year period: 100% Years 1 and 2: Year 3: Year 4: Year 5: 90% 80% 70% Year 6: Year 7: Year 8: Year 9: Year 10: 20% 60% 50% 40% 30% Years 11 and 12: 10%
Transfers of Copyrights to Charity at Death
Testamentary donations of copyrights – charitable deduction under section 2055 for estate tax purposes Deduction equal to fair market value of contributed assets Special rules for art related copyrights under section 2055(3)(4) discussed later Differs from donation during life tax rules discussed above
Donations of Art
Subject to the rules of section 170(e) Under current copyright regime, art work and copyright interest in the art work are separate assets.
Artist can therefore donate (i) the art work itself, (2) a copyright interest in the art work, or (3) both Section 170(e) effectively limits the deduction to the author’s tax basis in the copyrights
If artist donates both, charitable deduction is limited to artist’s tax basis in the art, which is likely to be low where the art is self created
If artists donates the art but not the copyright, or vice versa, the donation constitutes a split-interest donation, and NO DEDUCTION is allowed, not even tax basis.
Donations of Art
A different set of rules apply at death; section 2055(e)(4) applies rather than Section 170(e) Charity must be public charity or private operating foundation; donated property must be related to exempt purpose of charity Artist estate can claim a fair market value deduction for the contributed art work Not limited to tax basis, unlike the income tax rules Split-interest rules do not apply, so estate can retain the copyright interest while donating the art work to a charity
Donations of Art
Donation of tangible property to a charity where the use of the property is related to the charity’s purpose: IRS takes a liberal view of what is “related” Charity must hold the donated property for at least 3 years; otherwise donor recognized income If held for more than 1 year, then charitable contribution equal to fair market value If held for less than 1 year, the deduction is reduced by amount of gain that would not be long-term capital gain
Donations of Art
If collector only owns the art work, and donates the entire art work, then the split-interest rules would not apply If the collector owns both the art work and the copyright, then split-interest rules would apply (i.e.
NO DEDUCTION
) unless the collector donates both to the charity Can donate a fractional interest in ALL rights that the collector has and claim a fair market value deduction Example: 6 month/year donation in all rights, is OK Donee must take substantial physical possession No “Wink & A Nod” Fractional interests in only some rights are not OK
Donations of Art
As with artists, testamentary gifts are governed by Section 2055 and not Section 170(e) - Split interest rules would not apply
Donor Advised Fund: At a Glance
A giving vehicle that provides donors with immediate tax benefits but allows them to make grant recommendations on their own timetable Donor gives assets to a public charity, such as Jewish Community Foundation , that will manage the fund Donor evaluates and recommends grantees with assistance of public charity Public charity distributes grants from the fund to eligible nonprofits
DONOR ADVISED FUND
Fair market value deduction on gifts of real estate or closely held stock Deduction taken up to 50% of adjusted gross income for cash gifts
PRIVATE FOUNDATION
No (in most cases deduction given for donor’s cost basis) No (limited to 30%) Deduction taken up to 30% of adjusted gross income for gifts of publicly traded stock No (limited to 20%) Exempt from investment excise tax No (generally subject to a 2% tax on net investment income) Exempt from annual minimum distribution requirements No set-up fee Quick and easy to establish Quick and easy to terminate No (subject to monetary penalties if income not distributed) No (may include attorneys’ fees as well as state and federal filing fees) No (multiple filings required to obtain tax-exempt status) No (multiple filings and notifications required by government; in some cases requires state attorney general approval) Contributions and grants anonymous from the public when desired Donor free of liability from jeopardizing investments Donor free from filing annual federal and state tax returns Donor exempt from annual audit requirement for foundations with more than $2 million in assets or revenue Expertise about local nonprofits No (all grants and contributions available for public inspection on tax return) No (subject to monetary penalties and risk of losing tax exempt status) No No (annual audit required for foundations with more than $2 million in assets or revenue) No
Circular 230 Disclosure
Any tax advice contained in this presentation is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market, or recommend to anyone a transaction or matter addressed herein.