Jewish Community FoundationJune 24, 2010

DONATIONS OF CERTAIN INTANGIBLESDONATIONS OF CERTAIN INTANGIBLES

Today’s Speakers

Brad S. Cohen, PartnerVenable LLPbcohen@Venable.comt 310.229.9942

Joseph M. Doloboff, PartnerBlank Rome LLPDoloboff@BlankRome.comt 424.239.3424

SPECIAL TREATMENT

FOR DONATIONS OF CERTAIN

INTANGIBLE PROPERTY

Intangible Property

PATENTS

TRADEMARKS

COMPUTER CODE, ETC.

The Bad News

GENERAL RULEINITIAL 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 – 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: 100%

Year 3: 90%

Year 4: 80%

Year 5: 70%

Year 6: 60%

Year 7: 50%

Year 8: 40%

Year 9: 30%

Year 10: 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 tax-exempt 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 Any tax advice contained in this presentation is neither intended norpresentation is neither intended nor

written to be used, and cannot be used,written to be used, and cannot be used,to avoid penalties under the Internalto avoid penalties under the Internal

Revenue Code or to promote, market,Revenue Code or to promote, market,or recommend to anyone a transactionor recommend to anyone a transaction

or matter addressed herein.or matter addressed herein.

DISCUSSION