INTRODUCTION I. MEXICO'S PAGO ENESPECIE PROGRAM A. The Historical Development of Pago en Especie B. The Legal Foundation and Early Operation of Pago en Especie C. The Contemporary Operation of Pago en Especie 1. The Application Process 2. The Type of Art Accepted 3. A Mandate to Share the Collection D. Justifications for Pago en Especie II. THE UNITED KINGDOM'S CULTURAL GIFTS SCHEME A. The Origins of the Cultural Gifts Scheme B. The Formation and Contemporary Operation of the Cultural Gifts Scheme 1. The Application Process 2. Transferring Title in Return for a Tax Reduction 3. The First Gifts Accepted C. Justifications for the Cultural Gifts Scheme III. TREATMENT OF ART AND ARTISTS UNDER THE UNITED STATES INCOME TAX SYSTEM A. Reducing Income Taxes Through Charitable Donations 1. The Type of Charitable Organization 2. The Nature of the Donated Property 3. Satisfying the Related Use Rule 4. Receiving a Qualified Appraisal from a Qualified Appraiser 5. Observations B. Income Taxes for Artists 1. The Rationale for Identical Tax Treatment 2. Tax Deduction Disadvantages IV. AN APPRAISAL OF PAGO ENESPECIE AND THE CULTURAL GIFTS SCHEME INDICATES THATTHE UNITED STATES SHOULD NOT ADOPT A PAYMENT-IN-KIND INCOME TAX SCHEME A. Payment-in-Kind Programs Forgo Large Sums of Tax Revenue in a Direct and Selective Manner B. Payment-in-Kind Programs Commit Public Funds to the Custodial Care of Accepted Artwork C. Payment-in-Kind Programs Favor State-Run Museums over Private Museums D. Payment-in-Kind Programs Must Decide What and Who A Worth Collecting E. Payment-in-Kind Programs May Set a Dangerous Precedent F. Payment-in-Kind Programs Could Undermine the Principles of Fairness, Objectivity, and Precision in the United States' Tax System CONCLUSION INTRODUCTION!
According to popular accounts, in 1957 David Alfaro Siqueiros marched into Hugo B. Margain's office with a radical and risky proposal. (2) There, the famous muralist bluntly told the new Director of Income Tax that the recent income tax reforms were unduly burdening Mexico's artists because they "did not know about accounting or tax laws" (3) and had no money with which to pay their obligations. (4) "The only thing we have are paintings," Siqueiros insisted. (5) However, rather than seek a complete tax exemption for artists, he told Margain that artists could instead pay taxes with their artwork. (7) Because their art was valuable, Mexico could amass an enviable collection.? Tasked with ensuring the success of the new tax system, (8) perhaps Margain was inclined to be creative, or perhaps he was an art aficionado. Regardless of his motives, Margain replied, "It doesn't seem like a bad idea." (9) Under Margains leadership, the Mexican Ministry of Finance and Public Credit accepted Siqueiros' proposal and launched a program called Pago en Especie (Payment in Kind) in November 1957, when it collected its first income tax payment in art. (10)
Now in effect for almost sixty years, Pago en Especie allows Mexican artists to satisfy their annual income taxes by giving the government a certain number of their paintings, sculptures, drawings, photographs, or other visual works each year. (11) Although no cash payment occurs, the government sees tremendous value in these acquisitions. (12) Endowed each year with more artwork, the government now boasts the world's premier collection of Mexican contemporary art, with close to 7000 works. (13) Artists also view the scheme favorably. (14) Relieved of paperwork, audits, and counting pesos, an artist can devote himself completely to his creativity and take pride in knowing that the work he submits on tax day will become part of a national repository. (15)
While no other country has gone as far as Mexico in adopting a payment-in-kind tax program for art, in 2012 the United Kingdom passed legislation authorizing the Cultural Gifts Scheme (CGS), which allows all taxpayers--not just artists--to donate a preeminent object to a qualifying institution in the United Kingdom. (16) As in Mexico, individual taxpayers and the government both reap significant benefits from this program. For a taxpayer, the tax reduction earned for donating a preeminent object may significantly decrease the income taxes owed. (17) For the United Kingdom, CGS ensures that important cultural and artistic works remain in the country and continue to enrich the nation's cultural landscape. (18)
As Pago en Especie and CGS have gained more attention, there have been rumblings that the United States should consider implementing a similar payment-in-kind income tax program for contemporary artwork and other forms of cultural property. (19) Simplifying tax payments, accommodating artists' needs, accumulating a national collection, and promoting tourism are common justifications for adopting such programs. (20) However, while Pago en Especie and CGS initially appear attractive to artists and art lovers alike, an in-depth examination of each reveals numerous administrative, fiscal, and precedential shortcomings that could undermine--rather than enhance--a larger income tax system.
This Comment seeks to explore the issues surrounding payment-in-kind income tax schemes as they relate to art, art owners, and artists. Part I provides a comprehensive history of Pago en Especie and outlines how this annual collection of contemporary art occurs today. It also reviews common justifications for the program to assess how it has garnered such widespread support throughout Mexico. Part II examines the origins of CGS, explains the application process, and surveys the first items collected in exchange for a tax reduction. Finally, it evaluates the dominant explanations for why the United Kingdom adopted the new scheme. Part III then turns to the United States to contrast how the federal income tax system treats art, focusing on deductions for charitable donations and the taxation of artists.
With that background, Part IV identifies and compares the policy weaknesses inherent in Pago en Especie and CGS and contemplates the dangers of adopting a similar payment-in-kind program in the United States. Ultimately, Part IV contends that the United States should not adopt Pago en Especie, CGS, or any other payment-in-kind tax system because to do so would (1) forfeit cash revenue in a direct and selective manner; (2) pledge public funds to the future care of the collected art; (3) give public museums an advantage over private museums; (4) force the Internal Revenue Service (IRS) to make subjective determinations about what kind of art to accept; (5) set a precedent for others to demand payment-in-kind options; and (6) imperil the principles of impartiality, objectivity, and precision that help sustain the income tax system.
Finally, after briefly comparing the advantages of CGS relative to Pago en Especie, this Comment concludes by advising the United States to avoid a payment-in-kind income tax system altogether. Although paying income taxes with art appears to accommodate the needs of artists and highlight the importance of the arts in society, the United States should reject any tax scheme that does not promote the impartial treatment of taxpayers, objective decisions from the IRS, or a precise method of calculating the income taxes owed. By continuing to accept taxes in cash and permitting certain tax deductions for art donations, the United States can avoid many of the policy predicaments that Pago en Especie and CGS confront and preserve the integrity of the income tax system.
MEXICO'S PAGO EN ESPECIE PROGRAM
The Historical Development of Pago en Especie
In December 1953, a series of tax reforms culminated in the Ley del Impuesto Sobre la Renta (Law on Income Tax), which formally levied income taxes on visual artists. (21) Like other self-employed professionals, artists would thereafter have to pay tax on the income earned from the sale of their work. As the Director of Income Tax, Hugo B. Margain was responsible for implementing the new tax system and streamlining the payment process on behalf of Mexico's Ministry of Finance and Public Credit, the Secretaria de Hacienday Credito Publico (SHCP). (22)
By 1957, however, some artists were already struggling to pay their income taxes. (23) The mounting pressure on artists drew the attention of several leaders in the Mexican art community, including two influential museum directors, Ines Amor (24) and Carmen Marin de la Barreda, (25) and two revered Mexican artists, David Alfaro Siqueiros and Gerardo Murillo. (26) For Siqueiros in particular, the worry had become personal. One of his friends had not been able to satisfy his income taxes and faced potential imprisonment. (27) Together, the four conceived of an innovative alternative to alleviate the burden on artists: the government should permit artists to pay their income taxes with their most valuable possessions--their artwork. (28)
Prevailing accounts relate that Siqueiros secured a meeting with Margain at the SHCP offices;2^ there, he forcefully explained how the new income tax unduly burdened artists, who were inexperienced with accounting and the law and had no money. (30) Siqueiros suggested that Margain allow artists to pay their taxes with artwork since that was "the only thing" they had. (31) Moreover, since their artwork was valuable, Siqueiros contended that the works would establish a significant collection for the nation. (32) Intrigued and "sensitive to the situation of artists," (33) Margain eventually presented the proposal to Antonio Carrillo Flores, the Secretary of the SHCP, who approved of the unusual scheme. (34) In November 1957, Margain implemented the Pago en Especie program and collected the SHCP's first payment of income taxes in art. (35)
In general, the Mexican art community received the establishment of Pago en Especie positively. In one of the first articles to announce the program, J. J. Crespo de la Serna heralded Pago en Especie as an...