Boston University School of Law
The federal income tax law treats artists and art collectors differently. Similar transactions concerning artworks produce disparate income tax results, depending on whether they involve the artist or the collector. On balance, these results seem to favor the collector over the artist. But notwithstanding the dismay of some artists and their advocates, the differences in result flow, in the main, from the differences in the source of the taxpayer's investment in the work.
The collector buys the work with after-tax income. Any gain is properly treated as an investment return and is eligible for capital gain benefits.' The collector, however, does not escape questions of tax characterization entirely. Often his motive in acquiring the work reflects the happy congruence of personal gratification and investment opportunity. If' the former dominates, the transaction loses its profit-seeking character and, with it, the deductibility of losses and certain expenses.
with it, the deductibility of losses and certain expenses. 2 In contrast, the artist acquires his work only partly with tangible investment, such as canvas and paint or clay; he adds his personal efforts which often are the chief source of the work's value. The artist pays no tax on this value he creates with his services until he realizes income in some way, as by the sale of the work. The return to the artist is partly personal services income and partly payment for holding the work after completion, a kind of investment return we shall examine further. 3 In addition, the artist's deduction of certain expenses and losses may depend on his state of mind; like the collector, he may find it necessary to distinguish his profit-seeking activities from his pleasurable ones.
This Article traces these income tax distinctions through a number of common transactions, including sale of property at a gain, sale of property at a loss, expenses incurred to produce or preserve the property, exchanges, and gifts to charity. In each case, the treatment of collectors and artists is contrasted and the appropriateness of any differences is considered. This Article limits the analysis to artworks embodied in the form of unique tangible personal property, primarily painting and sculpture; although some of the discussion bears on authors, book collectors, and others, this Article does not deal with the tax problems of their transactions.
As we will see, most of the differences in treatment derive from the well-established tax differentiation between services income and gains on the sale of property. A few instances, however, go beyond this justification. In Part V, I will propose two changes, one that enhances the tax position of artists and one that limits the benefits currently available to collectors.
Artists, Art Collectors and Income Tax
Boston University Law Review
Available at: https://scholarship.law.bu.edu/faculty_scholarship/2677