DONATIONS OF CERTAIN INTANGIBLES
Jewish Community Foundation
June 24, 2010
Today’s Speakers
Joseph M. Doloboff, Partner
Blank Rome LLP
Doloboff@BlankRome.com
t 424.239.3424
Brad S. Cohen, Partner
Venable LLP
bcohen@Venable.com
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 INCOMEPRODUCING 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:



Term is shorter of 95 years from
publication/120 years from creation if:



self created OR
independent contractor NOT within
scope of 9 categories
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 – NO
DEDUCTION allowed
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:
Years 1 and 2:
Year 3:
Year 4:
Year 5:
Year 6:
Year 7:
Year 8:
Year 9:
Year 10:
100%
90%
80%
70%
60%
50%
40%
30%
20%
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
PRIVATE FOUNDATION
Fair market value deduction on gifts of real estate or closely
held stock
No (in most cases deduction given for donor’s cost basis)
Deduction taken up to 50% of adjusted gross income for cash
gifts
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 (subject to monetary penalties if income not distributed)
No set-up fee
No (may include attorneys’ fees as well as state and federal
filing fees)
Quick and easy to establish
No (multiple filings required to obtain tax-exempt status)
Quick and easy to terminate
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
No (all grants and contributions available for public
inspection on tax return)
Donor free of liability from jeopardizing investments
No (subject to monetary penalties and risk of losing taxexempt status)
Donor free from filing annual federal and state tax returns
No
Donor exempt from annual audit requirement for foundations
with more than $2 million in assets or revenue
No (annual audit required for foundations with more than $2
million in assets or revenue)
Expertise about local nonprofits
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.
DISCUSSION