Donors may be surprised to learn that gifts of intellectual property, such as a copyright, may be less common but are nevertheless valuable and make wonderful gifts to charity. There are some specific considerations that donors and charities should understand when dealing with gifts of copyrights.

What is a Copyright?

A copyright is an intangible property right that protects an original artistic or literary work. The protection of copyrights is rooted in the United States Constitution and is among the enumerated powers granted to Congress:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

Article I, Section 8, United States Constitution

Intangible property differs from tangible property. Tangible property refers to physical property – something that can be touched or felt such as real estate, vehicles, money, furniture and works of physical art. Intangible property is property that has value but the property cannot be seen or touched. Copyrights are one kind of intangible property. Other kinds of intangible property include patents, trademarks, goodwill and brand recognition.

According to the United States Copyright Office, a copyright "protects original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software and architecture."

Copyrights protect the creator of the work, such as an artist or author, and any third party owner of the copyright. The owner has the exclusive right to reproduce the copyrighted work, to prepare derivative works, to distribute copies or phonorecords of the copyrighted work, to perform the copyrighted work publicly or to display the copyrighted work publicly.

It is important to note that a copyright is a property right that is separate from the copyrighted work. For example, one person might own the copyright to a manuscript and another person may own the manuscript itself.

Transferring Copyrights

When dealing with gifts of copyright, one of the questions of primary importance is to understand who is making the gift to charity. Copyrights can be owned, and gifted, by two kinds of owners. The first is the "Creator as Owner" which means the owner is also the artist who created the copyrighted work. The second kind of donor is a "Third Party Owner" which is someone who acquired the copyright from the creator of the copyrighted work.

In order to transfer a copyright, the owner of the copyright would execute an assignment contract, mortgage or exclusive license agreement. Ideally, the document conveying the copyright would have been recorded with the United States Copyright Office (typically within one month of the transfer). Information about how to assign a copyright and record the assignment is available from the United States Copyright Office.

Any charity that is considering the acceptance of a gift of copyright from a Third Party Owner should, as part of its due diligence, check with the U.S. Copyright Office to confirm that the donor is the copyright owner. Additionally, a charity should understand how to record any assignment of copyright with the U.S. Copyright office to protect the charity's interest after a gift has been made.

Tax Treatment of Copyrights Differ Depending on Several Factors

The tax treatment of a gift of copyright depends on several key factors including who the donor is, when the gift was made, the nature of the gift and the manner in which the deduction of the gift must be calculated.

Factor 1: Who is the Donor?

The tax treatment of a gift of copyright may vary by donor depending on the circumstances.

In the case of a Creator as Owner, the owner of a copyright who gives his entire interest in that copyright to a qualified charity is entitled to claim both income and gift tax deductions for the contribution. Many copyright gifts do not produce a tax deduction because they are not gifts of a donor's entire interest in the copyright. The gift of a license, for example, is not a gift of the copyright owner's entire interest in the copyright and therefore does not allow the owner to claim a tax deduction for the value of the license.

The author of copyrighted material (or the author's widow/widower, child or grandchild who inherited the copyright) generally will not receive a tax deduction if he or she gives the copyright to charity. This is because federal law creates a non-assignable right for the author to terminate the grant of a copyright. 17 U.S.C. 203. This right to terminate cannot be given up nor can the holder of this right agree not to exercise it. For this reason, the gift of a copyright made by the author is not a gift of the donor's entire interest in the copyright and no deduction is allowed.

In the case of a Third Party Owner, if the donor is not the author of copyrighted material and did not inherit the copyright from the author, the tax consequences of the gift of the copyright will depend upon whether he or she owns the copyright only or both the copyright and the copyrighted material. If the donor owns only the copyright, he or she may give the copyright to charity and will receive a gift or estate tax deduction as well as an income tax deduction for the lesser of the donor's basis or the full fair market value of the copyright.

If, however, the donor owns both the copyright and the copyrighted material, he or she must give both in order to receive a gift or estate tax deduction and an income tax deduction. If he or she gives the copyright to charity but retains ownership of the copyrighted material, the donor will receive a gift or estate tax deduction but not an income tax deduction. This is because the gift of the copyright without a concurrent gift of the copyrighted material is a non-deductible partial interest gift.

In May 2004, the Senate passed Senate Bill 1637, the Jumpstart Our Business Strengths (JOBS) Act. Sec. 494 of this Act amends Sec. 170(e) so that gifts of copyrights by persons who are not the creator of the copyright and who did not receive the copyright from its creator by lifetime gift are deductible for an amount equal to 5% of the fair market value of the trademark, with a maximum amount of $1,000,000 (rather than full fair market value). If the recipient charity also receives royalties relating to the gifted copyright, additional deductions on a pro-rated basis could be available to the donor for up to 10 additional years.

Factor 2: When was the Gift Made?

As discussed previously, Federal law related to copyrights grants the creator of the work (and the creator's heirs) a statutory, non-waiveable right to terminate a transfer of grant or patent. Accordingly, a lifetime gift made to charity may effectively be revoked by the creator or the creator's heirs. This section only applies to lifetime gifts.

Because the creator and his/her heirs, by virtue of Federal law, retains termination rights the creator would be unable to receive a charitable deduction for a copyright gift made during their lifetime. As a consequence, it may make sense for the creator of a copyright to grant a right to receive royalty income to a charity during the creator's life and then leave the copyright to the charity as a bequest. This would avoid the potential for an heir to terminate the gift of the copyright and maximize the tax benefits to the creator and his or her estate.

Factor 3: What is the Nature of the Gift?

In order for a gift of copyright to produce a tax deduction the gift must represent the entire interest that the donor has in that copyright. The gift of a temporary or non-exclusive license, for example, is not a gift of the copyright owner's entire interest in the copyright and therefore does not allow the owner to claim a tax deduction for the value of the license.

After the charity receives the copyright, it may license the copyright and produce "Qualified Donee Income (QDI)." The donor may receive additional qualified charitable deductions for QDI in excess of his or her basis produced for up to 10 years after the gift year. The deduction starts at 100% of the QDI received each year and declines to 10% of the QDI in tax year 11. The percentage of income deductible varies with each passing year. The charity is required to track the QDI attributable to the copyright gift and report that amount to the donor and the IRS to substantiate the donor's deduction. This is reported on Form 8899, Notice of Income From Donated Intellectual Property.

Factor 4: How is the Deduction Calculated?

As with any substantial, non-cash gift, an important factor in determining the amount of the allowable deduction for a gift of copyright is to calculate the fair market value of the copyright. The fair market value of a copyright is determined by a qualified appraiser and is generally based upon the income stream that the copyright is expected to generate. The income stream a copyright will generate often relates to whether there is market demand for the copyrighted material, any restrictions on the use of or ability to transfer or license the copyright, and the length of time before the copyright expires.

It is also important to know the donor's cost basis of the gift. A Creator as Owner is likely to have a lower cost basis than a Third Party Owner who has acquired the copyright through a purchase and sale from the creator.

Both fair market value and cost basis are important information to have when calculating the amount of the allowable deduction. The donor of a copyright may deduct the lesser of: (1) his or her cost basis in the copyright; or (2) the fair market value of the copyright.

Examples of Gifts of Copyright

Consider the following case studies regarding gifts of copyright and the tax consequences for these gifts.

1. Creator as Donor of Copyright

Country crooner Nelly Wilson is a singer/songwriter and the creator of numerous copyrighted songs. He wants to give his copyright and copyrighted material to charity. Nelly learns, however, that he will not get a charitable deduction for the value of the copyright and copyrighted material if he gives them to charity. The reason for this is that Nelly's gift is not a gift of his entire interest in his songs. Under federal law, Nelly retains the right to revoke the transfer at any time. Even if Nelly wanted to give up this right to revoke, he is unable to do so. There is no way for him to give up the entire interest in the copyright and copyrighted material to charity during his life. As a result, Nelly decides to leave the copyright and copyrighted material to charity in his will. When he dies, his estate will get a deduction for the value of the copyright and copyrighted material that go to charity.

2. Third Party Donor of Copyright

Gary Berry is the owner of a famous art studio. Over the years, Gary has helped many budding artists by giving them studio space and by allowing them to display their works. When Gary saw a promising artist, he would even buy some of their artwork above the going rate as a means to help encourage and finance the artists' careers. That is how, in 1998, he acquired not only three sculptures but their copyrights of the now famous artist, Simone Carlee.

Gary wants to give the sculptures to his favorite charity, an art museum, but wants to retain ownership of the copyrighted material so that he can benefit from the use of the sculpture's images for other artists and promotional purposes. Gary asked his accountant about making the gift. The accountant, however, tells him that if he gives less than his entire interest to the museum that he will not get a deduction for the value of the copyright. As a result, Gary decides to give both the copyright and the sculpture to charity so that he can get a deduction for the gift.

3. Creator's Heir as Donor of Copyright

Ernest Hummingbird is a famous creator of very popular literary work such as books, short stories and poems. Shortly before his death, Ernest gave the last manuscript he wrote, and assigned the copyright for the manuscript, to his son, Jack. At the time of the gift, Ernest's cost basis in the manuscript was only $100 (the cost of the paper, ink and binding for the manuscript). Ernest left a sizeable estate to Jack, his sole heir. Not wanting for money but motivated by the idea of creating a lasting charitable legacy, Jack is considering giving his entire interest in the manuscript's copyright to his father's favorite charity, a summer writing camp for high school students. Given the public interest in Ernest's last work, literary agents have offered Jack $15 million for the manuscript.

When Jack spoke to an attorney, he was disappointed to learn the tax benefits of giving the copyright to the camp. Jack's basis in the copyright is the same as his father's, $100. If Jack donates his entire interest in the copyright, including the manuscript, to charity, he will only be able to deduct the lesser of his basis ($100.00) or the fair market value of the copyright ($15 million). As a result, Jack would only be allowed to deduct $100. Despite the lack of tax benefits, Jack decides to donate the copyright and the manuscript to the summer camp. The camp sold the manuscript for $15 million and used the proceeds to endow the Ernest Hummingbird Scholarship for Aspiring Writers. Jack was so pleased that his father's last written work was able to fund a program that would benefit the arts for years to come.

4. Creator as Donor of Copyright and Royalty Rights

Frances Fuller holds a copyright to a screenplay she wrote more than a decade ago. She donated the copyright and the royalty rights (the right to receive income from the copyrighted material) to a charity five years ago. Every year since its creation, the copyright has produced income in the amount of $5,000. In the year of the gift and the first year thereafter, Frances was able to deduct the full $5,000. By year five, Frances was only able to deduct 70% of the gift (or $3,500).