[Congressional Record Volume 151, Number 74 (Tuesday, June 7, 2005)]
[Senate]
[Pages S6166-S6168]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. DOMENICI (for himself, Mr. Schumer, Mr. Cochran, Mr. 
        Allard, and Mr. Coleman):
  S. 1186. A bill to amend the Internal Revenue Code of 1986 to provide 
the same capital gains treatment for art and collectibles as for other 
investment property and to provide that a

[[Page S6167]]

deduction equal to fair market value shall be allowed for charitable 
contributions of literary, musical, artistic, or scholarly compositions 
created by the donor; to the Committee on Finance.
  Mr. DOMENICI. Mr. President, I rise today to introduce again 
legislation to eliminate one of the great inconsistencies in the 
Internal Revenue Code.
  The bill I am introducing today with Senator Schumer is designed to 
restore some internal consistency to the tax code as it applies to art 
and artists. No one has ever said that the tax code is fair even though 
it has always been a theoretical objective of the code to treat similar 
taxpayers similarly.
  The bill I am introducing today would address two areas where 
similarly situated taxpayers are not treated the same.
  Internal inconsistency number one deals with the long-term capital 
gains tax treatment of investments in art and collectibles. If a person 
invests in stocks or bonds and sells at a gain, the tax treatment is 
long term capital gains. The top capital gains tax rate is 15 percent. 
However, if the same person invests in art or collectibles the top rate 
is hiked up to 28 percent. Art for art's sake should not incur a higher 
tax rate simply for revenue's sake. That is a big impact on the 
pocketbook of the beholder.
  Art and collectibles are alternatives to financial instruments as an 
investment choice. To create a tax disadvantage with respect to one 
investment compared to another creates an artificial market and may 
lead to poor investment allocations. It also adversely impacts those 
who make their livelihood in the cultural sectors of the economy.
  Santa Fe, NM, is the third largest art market in the country. We have 
a diverse colony of artists, collectors and gallery owners. We have 
fabulous Native American rug weavers, potters and carvers. Creative 
giants like Georgia O'Keeffe, Maria Martinez, E. L. Blumenshein, Allan 
Houser, R.C. Gorman, and Glenna Goodacre have all chosen New Mexico as 
their home and as their artistic subject. John Nieto, Wilson Hurley, 
Clark Hulings, Veryl Goodnight, Bill Acheff, Susan Rothenberg, Bruce 
Nauman, Agnes Martin, Doug Hyde, Margaret Nez, and Dan Ostermiller are 
additional examples of living artists creating art in New Mexico.
  Art, antiques, and collectibles are a $12 to $20 billion annual 
industry nationwide. In New Mexico, it has been estimated that art and 
collectible sales range between $500 million and one billion a year.
  Economists have always been interested in the economics of the arts. 
Adam Smith is a well-known economist. He was also a serious, but 
little-known essayist on painting, dancing, and poetry. Similarly, 
Keynes was both a famous economist and a passionate devotee of 
painting. However, even artistically inclined economists have found it 
difficult to define art within the context of economic theory.
  When asked to define jazz, Louis Armstrong replied: ``If you gotta 
ask, you ain't never going to know.'' A similar conundrum has 
challenged Galbraith and other economists who have grappled with the 
definitional issues associated with bringing art within the economic 
calculus. Original art objects are, as a commodity group, characterized 
by a set of attributes: every unit of output is differentiated from 
every other unit of output; art works can be copied but not reproduced; 
and the cultural capital of the nation has significant elements of 
public good.
  Because art works can be resold, and their prices may rise over time, 
they have the characteristics of financial assets, and as such may be 
sought as a hedge against inflation, as a store of wealth, or as a 
source of speculative capital gain. A study by Keishiro Matsumoto, 
Samuel Andoh and James P. Hoban, Jr. assessed the risk-adjusted rates 
of return on art sold at Sotheby's during the 14-year period ending 
September 30, 1989. They concluded that art was a good investment in 
terms of average real rates of return. Several studies found that rates 
of return from the price appreciation on paintings, comic books, 
collectibles and modern prints usually made them very attractive long-
term investments. Also, when William Goetzmann was at the Columbia 
Business School, he constructed an art index and concluded that 
painting price movements and stock market fluctuations are correlated.
  I conclude that with art, as well as stocks, past performance is no 
guarantee of future returns, but the gains should be taxed the same.
  In 1990, the editor of Art and Auction asked the question: ``Is there 
an `efficient' art market?'' A well-known art dealer answered 
``Definitely not. That's one of the things that makes the market so 
interesting.'' For everyone who has been watching world financial 
markets lately, the art market may be a welcome distraction.
  Why do people invest in art and collectibles? Art and collectibles 
are something you can appreciate even if the investment doesn't 
appreciate. Art is less volatile. If buoyant and not so buoyant bond 
prices drive you berserk and spiraling stock prices scare you, art may 
be the appropriate investment for you. Because art and collectibles are 
investments, the long-term capital gains tax treatment should be the 
same as for stocks and bonds. This bill would accomplish that.
  Artists will benefit. Gallery owners will benefit. Collectors will 
benefit. And museums benefit from collectors. About 90 percent of what 
winds up in museums like New York's Metropolitan Museum of Art comes 
from collectors.
  Collecting isn't just for the hoity toity. It seems that everyone 
collects something. Some collections are better investments than 
others. Some collections are just bizarre. The Internet makes 
collecting big business, and flea market fanatics are avid collectors. 
In fact, people collect the darndest things. Books, duck decoys, chia 
pets, snowglobes, thimbles, handcuffs, spectacles, baseball cards, and 
guns are a few such ``collectibles.''
  For most of these collections, capital gains isn't really an issue, 
but you never know. You may find that your collecting passion has 
created a tax predicament to phrase it politely. Art and collectibles 
are tangible assets. When you sell them, capital gains tax is due on 
any appreciation over your purchase price.
  The bill provides capital gains tax parity because it lowers the top 
capital gains rate from 28 percent to 15 percent.
  Internal inconsistency number two deals with the charitable deduction 
for artists donating their work to a museum or other charitable cause. 
When someone is asked to make a charitable contribution to a museum or 
to a fund raising auction, it shouldn't matter whether that person is 
an artist or not. Under current law, however, it makes a big 
difference. As the law stands now, an artist/creator can only take a 
deduction equal to the cost of the art supplies. The bill I am 
introducing will allow a fair market deduction for the artist.
  It's important to note that this bill includes certain safeguards to 
keep the artist from ``painting himself a tax deduction.'' This bill 
applies to literary, musical, artistic, and scholarly compositions if 
the work was created at least 18 months before the donation was made, 
has been appraised, and is related to the purpose or function of the 
charitable organization receiving the donation. As with other 
charitable contributions, it is limited to 50 percent of adjusted gross 
income (AGI). If it is also a capital gain, there is a 30 percent of 
AGI limit. I believe these safeguards bring fairness back into the code 
and protect the Treasury against any potential abuse.
  I hope my colleagues will help me put this internal consistency into 
the Internal Revenue Code.
  I ask unanimous consent that and the text of the bill be printed in 
the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1186

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Art and Collectibles Capital 
     Gains Tax Treatment Parity Act''.

     SEC. 2. CAPITAL GAINS TREATMENT FOR ART AND COLLECTIBLES.

       (a) In General.--Section 1(h) of the Internal Revenue Code 
     of 1986 (relating to maximum capital gains rate) is amended 
     by striking paragraphs (4) and (5) and inserting the 
     following new paragraphs:

[[Page S6168]]

       ``(4) 28-percent rate gain.--For purposes of this 
     subsection, the term `28-percent rate gain' means the excess 
     (if any) of--
       ``(A) section 1202 gain, over
       ``(B) the sum of--
       ``(i) the net short-term capital loss, and
       ``(ii) the amount of long-term capital loss carried under 
     section 1212(b)(1)(B) to the taxable year.
       ``(5) Reserved.--.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2004.

     SEC. 3. CHARITABLE CONTRIBUTIONS OF CERTAIN ITEMS CREATED BY 
                   THE TAXPAYER.

       (a) In General.--Subsection (e) of section 170 of the 
     Internal Revenue Code of 1986 (relating to certain 
     contributions of ordinary income and capital gain property) 
     is amended by adding at the end the following new paragraph:
       ``(7) Special rule for certain contributions of literary, 
     musical, artistic, or scholarly compositions.--
       ``(A) In general.--In the case of a qualified artistic 
     charitable contribution--
       ``(i) the amount of such contribution taken into account 
     under this section shall be the fair market value of the 
     property contributed (determined at the time of such 
     contribution), and
       ``(ii) no reduction in the amount of such contribution 
     shall be made under paragraph (1).
       ``(B) Qualified artistic charitable contribution.--For 
     purposes of this paragraph, the term `qualified artistic 
     charitable contribution' means a charitable contribution of 
     any literary, musical, artistic, or scholarly composition, or 
     similar property, or the copyright thereon (or both), but 
     only if--
       ``(i) such property was created by the personal efforts of 
     the taxpayer making such contribution no less than 18 months 
     prior to such contribution,
       ``(ii) the taxpayer--

       ``(I) has received a qualified appraisal of the fair market 
     value of such property in accordance with the regulations 
     under this section, and
       ``(II) attaches to the taxpayer's income tax return for the 
     taxable year in which such contribution was made a copy of 
     such appraisal,

       ``(iii) the donee is an organization described in 
     subsection (b)(1)(A),
       ``(iv) the use of such property by the donee is related to 
     the purpose or function constituting the basis for the 
     donee's exemption under section 501 (or, in the case of a 
     governmental unit, to any purpose or function described under 
     section 501(c)),
       ``(v) the taxpayer receives from the donee a written 
     statement representing that the donee's use of the property 
     will be in accordance with the provisions of clause (iv), and
       ``(vi) the written appraisal referred to in clause (ii) 
     includes evidence of the extent (if any) to which property 
     created by the personal efforts of the taxpayer and of the 
     same type as the donated property is or has been--

       ``(I) owned, maintained, and displayed by organizations 
     described in subsection (b)(1)(A), and
       ``(II) sold to or exchanged by persons other than the 
     taxpayer, donee, or any related person (as defined in section 
     465(b)(3)(C)).

       ``(C) Maximum dollar limitation; no carryover of increased 
     deduction.--The increase in the deduction under this section 
     by reason of this paragraph for any taxable year--
       ``(i) shall not exceed the artistic adjusted gross income 
     of the taxpayer for such taxable year, and
       ``(ii) shall not be taken into account in determining the 
     amount which may be carried from such taxable year under 
     subsection (d).
       ``(D) Artistic adjusted gross income.--For purposes of this 
     paragraph, the term `artistic adjusted gross income' means 
     that portion of the adjusted gross income of the taxpayer for 
     the taxable year attributable to--
       ``(i) income from the sale or use of property created by 
     the personal efforts of the taxpayer which is of the same 
     type as the donated property, and
       ``(ii) income from teaching, lecturing, performing, or 
     similar activity with respect to property described in clause 
     (i).
       ``(E) Paragraph not to apply to certain contributions.--
     Subparagraph (A) shall not apply to any charitable 
     contribution of any letter, memorandum, or similar property 
     which was written, prepared, or produced by or for an 
     individual while the individual is an officer or employee of 
     any person (including any government agency or 
     instrumentality) unless such letter, memorandum, or similar 
     property is entirely personal.
       ``(F) Copyright treated as separate property for partial 
     interest rule.--In the case of a qualified artistic 
     charitable contribution, the tangible literary, musical, 
     artistic, or scholarly composition, or similar property and 
     the copyright on such work shall be treated as separate 
     properties for purposes of this paragraph and subsection 
     (f)(3).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions made after the date of the 
     enactment of this Act in taxable years ending after such 
     date.
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