Reviving The Creative Works Tax Deduction:
Why the CARE Act, Pending In Congress, Should Be Made Law

By JOHN W. DEAN
Friday, Apr. 25, 2003

Working its way through Congress is a tax bill known as the CARE Act. The acronym stands for the Charity, Aid and Recovery Act of 2003, and it has been described as the most significant charitable giving legislation in nearly two decades.

The bill (S. 476) has bipartisan support, and was sponsored by Senators Joe Lieberman (D-CT) and Rick Santorum (R-PA). On April 9, it passed the Senate, and is now under consideration by the House.

One of the bill's provisions has received almost no public attention, yet is very significant indeed. This provision deals with a long existing problem, and is entitled "Enhanced Deduction For Charitable Contributions Of Literary, Musical, Artistic, and Scholarly Compositions." As its title indicates, this provision seeks to revive - in an appropriately modified form - the tax deduction for artistic works that once existed.

The Current Law on Deducting Donations of Creative Works, And Its Effect

Prior to the Tax Reform Act of 1969, visual artists, writers or music composers could deduct the fair market value of works they contributed to charities qualified to receive such works (for example, libraries, museums, and galleries).

However, since 1969, the deduction has been limited to the actual "cost basis" of the work - that is, the amount that the artist spent to create it. Accordingly, the added value of the creative input is entirely ignored. That is the current state of the law - and will remain so unless the CARE Act or similar legislation is passed.

The cost of the paper, canvas, paint, clay, stone or artistic materials is usually nominal, and that means that the so-called creative works deduction, after 1969, basically amounted to no deduction at all. The valuation was low - indeed, insultingly low. As a result, many authors, musicians and artists stopped contributing their creative works, letters, research materials, interviews or uncompleted works-in-progress for charitable purposes.

A study by the Bar of the City of New York found that the most significantly negative impact had occurred with manuscripts and letters. According to this 1975 study, in the years immediately preceding adoption of the 1969 law, the Library of Congress received between fifteen to twenty substantial gifts of manuscripts. In contrast, in the four years after the law's adoption, the Library received one such gift.

Not only have such gifts dried up, but many noted authors, artists and composers have been selling their private papers to the highest bidder. Most recently, of course, Washington Post reporters Bob Woodward and Carl Bernstein sold their papers relating to Watergate and Nixon's final days to the University of Texas for $5 million.

Fortunately, this particular acquisition will mean that the historic papers will remain in the U.S., but that is not always true. Often the highest bidder for a given historic manuscript is a foreign collector.

In addition to its basic unfairness - the refusal to recognize the value of artists' and writers' work - current law also has an inequitable anomaly. The creator, as noted above, can only deduct his or her cost basis. But if a collector acquires such literary or artistic works, then donates it to charity, he or she may take a deduction representing not cost basis, but fair market value.

Needless to say, fair market value is almost always higher than the actual cost basis of the work. Accordingly, many writers, artists and composers who might otherwise have donated or sold their work are letting them gather dust in their attics to be disposed of when they die. (The value of artists' work generally rises when they die, and the total number of works they will produce, and their place is history, can be seen.)

Meanwhile, the public loses access to culturally important materials.

Prior Abuses, Including by Nixon, Resulted In 1969 Removal Of The Deduction

One reason the deduction for such private papers was taken away was its abuse. The abuses by President Lyndon Johnson, Vice President Hubert Humphrey and President Richard Nixon understandably rankled Congress. Indeed, Nixon's abuse, with which I am most familiar, became part of the effort to impeach him.

Nixon took hefty deductions on his income taxes in both 1968 and 1969. It was the last year that got him in trouble. The deductions were based on his gift of his vice presidential papers to the National Archives.

With the law expiring as of July 25, 1969, Nixon was required to make the gift in 1969 in order to take the 1969 deduction, which was for $576,000. He didn't, but claimed on his 1969 tax return that he had. In fact, it was not until April 1970 that

he had an aide execute a deed of gift for the papers. The deed was backdated to 1969. The aide, Edward Morgan, went to jail.

By a vote of 26 to 12, the House Judiciary Committee decided against including an article in the bill of impeachment charging Nixon with tax fraud. And President Ford's pardon eliminated any risk of a criminal tax prosecution. But nothing hurt Nixon more in the public's eyes. The public understood tax fraud, and in particular, the backdating of a document such as Nixon's deed of gift.

In the end, Nixon had to pay the government for his improper deduction, plus a five percent penalty. His actions placed a stigma on such transactions that has lasted to this day. Accordingly, the proposed new deduction in the CARE Act is structured differently from the deduction that Nixon abused.

The Specifics of the Proposed New Tax Deduction

Under the new CARE bill, which has passed the Senate, much of the potential for abuse has been removed. For one thing, Presidential and Vice Presidential papers are no longer even in play. (In reaction to Nixon's activities, the Congress enacted a law making all such papers the property of the government, and ultimately the American people.)

In summary, the new law permits a deduction equal to the fair market value of a literary, musical, artistic or scholarly composition, but with certain limits.

First, the deduction excludes letters, memoranda, or similar property if they have been written or prepared by or for an individual while that person was an officer or employee of any other person (which includes a government agency or instrumentality). In short, the only property that can qualify is that prepared for one's self. A person, by the tax code's definition, includes a corporation. This limitation excludes situations where an employee could profit from work done for someone else, for which he or she already had been fully paid.

Second, an artist can't paint himself or herself a tax deduction, nor can an author write an instant deduction. The property must have been created by the personal efforts of the donor at least eighteen months before the date of the contribution.

Third, the amount of the deduction cannot exceed, and can only be taken against, income resulting from two sources.

One source is the sale or use of property created by the donor that is the same type as the donated property. Thus, if an artist gets income from selling a painting, he can deduct against it the fair market value of another painting he donated.

The other source is income from teaching, lecturing, performing, or similar activities with respect to such property. Thus, an art professor may deduct against his teaching income the fair market value of his own donated paintings.

Fourth, there is no carry over of the deduction from one year to the next. A deduction in any given tax year must be either used, or it is gone.

Fifth, and finally, there are strict rules about the valuation of the property - and rightly so; it's hard to calculate fair market value for property that is not being marketed, but rather donated. There are also strict rules about the types of organizations to which such property may be given.

Why There Is A Strong Need For The New Law

This new law not only makes sense from the perspective of logic - after all, the truth is that artistic works are worth much more than the paper or canvas they are written or painted on - it also will have a beneficial effect on society.

Very few institutions have money with which to acquire personal papers of writers, public scholars and visual artists. And in the contest to acquire such papers, public institutions (run by city, county, state and the federal governments) have been at a particular disadvantage - as the Librarian of Congress and the Archivist of the United States have been the first to explain.

Since 1969, the supply of such material, which once richly endowed both public and private charitable libraries, galleries and museums, has become almost nonexistent. When the private papers of authors and composers like Archibald MacLeish, Ernest Hemingway, Vladimir Nabokov, Robert Lowell, John Updike, Neil Simon, Walter Piston, and Aaron Copland (to mention a few) are lost to private collectors, our cultural heritage is controlled by the highest bidder - who may or may not share it with others.

It is long past time to revive this deduction, for it is a unique way to assure the public availability of literary, musical, artistic or scholarly work to all who are interested, rather than only the few with money to pay. We must all hope that the House follows the Senate with this needed update of the tax law. If the CARE Act does not pass, we will all be the poorer for it.


John Dean, a FindLaw columnist, is a former Counsel to the President of the United States.

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