Another of life’s certainties: Art and Taxes, with legal art expert Diana Wierbicki
DESPITE THE TREPIDATION THAT FACED THE NEW YORK AUCTION HOUSES IN ANTICIPATION OF LAST WEEK’S NEW YORK NOVEMBER AUCTIONS, THE RESULTS WERE REASSURINGLY STABLE. QUALITY WON AND ALTHOUGH A MORE JUDICIOUS AND CAUTIOUS ATTITUDE PERVADED THE SALES ROOMS, AT THE SAME TIME, RECORD PRICES WERE ESTABLISHED IN IMPRESSIONIST, MODERN AND CONTEMPORARY SECTORS.
A NEW WORLD AUCTION RECORD FOR CLAUDE MONET’S GREAT WORK FROM THE GRAINSTACK SERIES WAS ESTABLISHED AT $81 MiLLION AND KANDINSKY’S 1935 OIL REALIZED SLIGHTED OVER $23 MILLION. AT SOTHEBY’S CONTEMPORARY EVENING SALE, GERHARD RICHTER’S A B, STILL TRIUMPHED AT $34 MILLION AND A NEW RECORD PRICE OF $11.7 MILLION WAS ESTABLISHED FOR ARTIST DAVID HOCKNEY’S MONUMENTAL WOLDGATE WOODS, 24, 25, and 26, OCTOBER 2006.
AS THE ART MARKET CONTINUES TO HOLD SWAY AND RECORD PRICES ARE REALIZED AT AUCTION, THE PRACTICE AND FOCUSED SERVICES OF LAWYERS EXPERIENCED IN ART LAW, THE ART AND AUCTION MARKET AND MUSEUMS AND ART FOUNDATIONS HAVE GROWN IN GEOMETRIC PROGRESSION.
AS ALL PARTICIPANTS IN THE ART MARKET FACE ART SPECIFIC ISSUES OF OWNERSHIP, THIS TIMELY ARTICLE BY FORBES’ GUEST EXPERTS DIANA WIERBICKI AND SETH COHEN OF WITHERS BERGMAN FOCUSES ON THE TAX CONSIDERATIONS AND CONSEQUENCES OF THE ACQUISITION AND DEACCESSION AND ESTATE PLANNING OF ART IN THE UNITED STATES.
Timeframe for Resale
A factor generally reviewed by NYS when determining whether a purchaser is a reseller (vs. a collector or investor) is the amount of time it takes for the purchaser to resell the art. This is a challenging factor for sellers of art because art that is fresh to the market generally garners higher prices. For art to appreciate enough to result in a profitable resale, it cannot be sold immediately after purchase. Therefore, the turnover of items for resale in the art market is not analogous to the timing of resale in other markets. This is at odds with the traditional notion that the longer an item is owned, the more it looks like investment property instead of inventory for resale, and suggests that NYS should be analyzing the resale timing in the context of the art market structure. That being said, there is no guarantee that NYS will take art market nuances into account when applying their general rules. In case of an audit or investigation, it is advisable to highlight art industry differences as a way to counterbalance the importance of this factor. Since the determination as to being a reseller looks at all relevant facts and circumstances, it is prudent that a putative reseller with long periods between sales ensure that the other factors be legitimately in the reseller’s favor.
A few of those factors are: (i) whether the purchaser maintains a gallery or specific place of business; (ii) whether the purchaser is an expert in the applicable area of art; (iii) whether the purchaser has employees; and (iv) how the purchaser reports and treats the income derived from sales (i.e., a purchaser cannot have it both ways – by claiming reseller status, while treating the income from sales as investment income subject to capital gains rates). In other words, a reseller operates a business and the more that business acts like a business, the greater the chance that it will survive unscathed by any NYS scrutiny. If investigated by NYS, having complete documentation as to these factors is key as many an investigator or auditor has been swayed by both the information contained in the documentation and the propositions for which they stand.
Selling Art off the Walls of a Home
There may be a valid business reason for displaying art in a personal residence, but by doing so, you invite a struggle with NYS. For example, a reseller’s home may be a great place to display art during orchestrated gatherings with potential buyers to show clients what the art looks like in a home environment. Nonetheless, despite valid reasons for home displays, NYS will highly scrutinize them and, to be frank, NYS is not without justification. NYS has the understandable view that a home display carries with it the purpose of personal use, namely the enjoyment of the art. This is not to say that home display is an automatic disqualifier, but a reseller argument where there is home display will likely be an uphill battle with investigators given their assumption that the reseller exemption is inapplicable. We note that, in some cases, having an area within the home used solely for business purposes has proved successful in defending against taxes and penalties in an audit and subsequent litigation.
Guest post by Diana Wierbicki and Seth Cohen, FORBES , May 10, 2016, in Janet Novak: Taxing Matters
Diana Wierbicki is global head of art law and Seth Cohen is a partner specializing in tax controversies at Withers Bergman.
AND NOW, A WEEKEND OF FAMILY, FRIENDS, FOOTBALL, AND FOR SOME INCORRIGIBLE FEW, FITNESS! HAPPY THANKSGIVING FROM THE LRFA BLOG!