Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Newman's Sales And Donations Of Self-Created Art, Literature, And Music

This week, David Elkins (Netanya, visiting Cornell Spring 2020) ) reviews a recently posted work by Joel S. Newman (Wake Forest), Sales and Donations of Self-Created Art, Literature, and Music, 12 Pitt. Tax. Rev. 57 (2015):

I have always enjoyed the writings of Professor Joel Newman. He combines insightful analysis with a touch of humor that is distinctive in the tax discourse. In the article reviewed here, Professor Newman discussed the tax treatment of sales and donations of self-created art, literature and music.

The first part of the article concerns sales. In 1948, General Dwight D. Eisenhower sold his memoirs. As he was a general and not a professional writer, the sale of those memoirs received capital gains treatment. In response, Congress enacted what is now §1221(a)(3), which provides that the term capital asset does not include “a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer whose personal efforts created such property.” Thus, the sale of memoirs by a future general would produce ordinary income. In 2005 Congress made an exception to the general rule (pun intended) and granted songwriters capital gains treatment on the sale of copyright to their works.

Professor Newman takes exception to the exception. The value of a self-created asset derives from the effort expended by the creator. Just as compensation for services produces ordinary income, so should the sale of assets produced by the taxpayer’s own effort. He convincingly refutes a number of arguments that have been raised in support of the preferential treatment of songwriters.

The second part of the article concerns the donation of such works. Until 1969, donors were permitted a deduction equal to the fair market value of the donated asset. This meant that when the taxpayer’s marginal tax rate exceeded 50%, the donation of a highly appreciated asset could result is a greater gain than the sale of the same asset. For example, assume that an individual subject to a tax rate of 70% owned an asset with an adjusted basis of 0 and a fair market value of 100. Selling the asset for 100 would leave 30 after tax. Donating the asset would produce a tax benefit worth 70. Consequently, Congress provided that where gain from the sale would produce ordinary income, the charitable deduction would be limited to the adjusted basis of the property. When gain would have been subject to tax at preferential long-term capital gains rates, the donor is entitled to a fair market value deduction if the donee uses the property in a manner related to the basis of its charitable exemption (“related use”).

As noted above, Congress in 2005 allowed songwriters capital gain treatment on the sale of copyright to their works. Nevertheless, it provided that songwriters who donate their works would be permitted a charitable deduction equal to the adjusted basis and not the fair market value (in most cases, the songwriter’s adjusted basis in the copyright is approximately zero). Proposals to permit a deduction equal to fair market value have so far not been enacted.

The most interesting part of the article is Professor Newman’s discussion of the appropriateness of permitting a fair market value deduction of self-created assets. Here he distinguishes between visual arts, such as paintings, sculptures, and original manuscripts, on the one hand and intangible assets such as copyright on the other. With regard to the former there exists a strong public interest in the donation of the ownership interest in the property to certain donees for related use. For example, there is a strong public interest in the donation of a painting to a museum. With regard to intangible assets, there is not the same public interest in the donee acquiring an ownership interest, as a license can serve the same function. Therefore, Professor Newman proposes that visual artists and the creators of manuscripts be allowed a deduction equal to fair market value, while writers be allowed to deduct only their adjusted basis.

The distinction made by Professor Newman is well taken. Indeed, there are instances in which ownership is required and others in which a license is sufficient. However, I am not certain that this distinction successfully grounds the policy proposals that he urges. First, a fair market value deduction effectively constitutes a double deduction of the unrealized appreciation. For example, assume that a painter is subject to tax at the rate of 40.8% (income tax plus Medicare tax). If she sells one of her paintings for $1,000,000, she will pay tax of $408,000. If she donates the painting to a museum she will pay no tax on the gain and – if Professor Newman’s proposal were adopted – would receive a $1,000,000 charitable deduction, which would save her $408,000 in tax. In other words, the government is contributing $816,000 toward the acquisition of this painting by the museum. It is not clear to me what there is about this particular instance that justifies the government’s effectively committing to subsidize 81.6% of the purchase price.

Second, if in the case of intangible property, a license is sufficient to satisfy the public interest, it is not clear why the donation of a license to use intangible property should not receive the same tax benefit as the donation of ownership to tangible property. For example, when a songwriter permits an orchestra to perform her work, consistency would ostensibly seem to require that she receive a charitable donation equal to the fair market value of the license.

The appropriate tax treatment of charitable donations is a notoriously complicated subject matter, involving issues of constitutional law and public policy and the need to quantify the various interests involved. Professor Newman’s article is an important contribution to the field.

Here’s the rest of this week’s SSRN Tax Roundup:

• Elliot Ash (ETH Zurich) & Omri Y. Marian (UC Irvine), The Making of International Tax Law: Empirical Evidence from Natural Language Processing (2019
• Jean Bernard (Proskauer Ross LLP), David S. Miller (Proskauer Ross LLP), Sejin Park (Proskauer Ross LLP) & Sean Webb (Proskauer Ross LLP), The Final Regulations on Opportunity Zones (2020)
• Samuel Beswick (Harvard), Retroactive Adjudication, 130 Yale L.J. __ (2020) (forthcoming)
• Frank G. Colella (Pace), D.C. Circuit Upholds IRS’s Voluntary Regulation of Tax Preparers – Majority Holds APA’s Statutory Notice and Comment Not Required: AICPA v. IRS, 15 N.Y.U. J. L. & Bus. 229 (2019)
• Timothy Liam Epstein (Duggan Bertsch, LLC), Pittsburgh’s “Jock Tax” is on Thin Ice (2020)
• Mirit Eyal-Cohen (Alabama), Identifying the Causal impacts of Taxation on Innovative Efforts (2018)
• Mirit Eyal-Cohen (Alabama), Path Dependence in Temporary Legislation (2019)
• Thomas Hoppe (Paderborn), Deborah Schanz (Munich), Susann Strum (Munich), Caren Sureth-Sloane (Paderborn) & Johannes Vogel (Mannheim), The Relation between Tax Complexity and Foreign Direct Investments: Evidence Across Countries (2020)
• Gerald Kerska (Independent), Criminal Consequences of the Anti-Injunction Act, Minn. Law Rev. Headnotes (2020)
• Chris Mace (Utah), Elana Patel (Utah) & Nathan Seegert (Utah), Marijuana Taxation and imperfect Competition (2020)
• Yosra Makni-Fourati (Sfax), Rafika Madhi (Sfax) & Ahmad Alqatan (Portsmouth), What Drives Emerging Economies Firms to invest in Tax Havens?, 23 Academy of Acc’ting & Financial Studies J. 1 (2019)
• Octavian Moldovan (Babes-Bolyai) & Gabriella Bucatariu, Effectiveness and Efficiency of Administrative Appeal Procedures: A Case Study on Tax Disputes in Romania, 17 Central Eur. Pub. Admin. Rev 2 (2019)
• Edward A. Morse (Creighton), Important Developments in Federal Income Taxation (2019)
• Leopold Parada, Tax Treaty Entitlements and Fiscally Transparent Entities: Improvements or Unnecessary Complications?, in J. Wheeler (ed.), the Aftermath of BEPS (2020)
• Kunka Petkova, Withholding Tax Rates on Dividends: Symmetries vs. Asymmetries in Double Tax Treaties (2020)
• Chelsea Schrader (Frostburg State) & Chiulien Venezia (Frostburg State), The Relationship between Tax Risk and Acquisition Price Premium, 11 Acc’ting & Taxation 1 (2019)
• Darien Shanske (UC Davis) & David Gamage (Indiana), Will States Step Up in 2020? We Hope So, 94 Tax Notes State 977 (2019)
• Ana Vanancio (ISEG Lisbon), Victor Barros (ISEG Lisbon) & Clara C. Raposo (Technical Univ. of Lisbon), Corporate Taxes and High-Quality Entrepreneurship: Evidence from a Tax Reform (2020)
• Robert J. Walsh (Dallas), An History of US Tax Code Complexity within Computer-Based Return Preparation, 11 Acc’ting & Taxation 47 (2019)
• Braden Williams (Texas) & Brian Williams (Indiana), Real Effects of Financial Reporting on Innovation: Evidence from Tax Law and Accounting Standards (2019)
• Richard Wiratama (Atma Jaya Makassar), Marselinus Asri (Atma Jaya Makassar) & Paulus Tangke, Online Business (E-Commerce) in Indonesia Taxation (2020)