ART IS LONG, LIFE IS SHORT1: ESTATE PLANNING FOR THE ARTIST AND THE ART COLLECTOR ABA SECTION OF TAXATION 2012 MAY MEETING May 11, 2012 Sarah M. Johnson, Esq. Joshua J. Kaufman, Esq. Venable LLP I. NON-CHARITABLE TRANSFERS DURING LIFE Art is particularly well-suited for charitable transfers if the circumstances fit, but not all collectors or artists want to leave their art to a charitable organization. In order to understand the different ramifications of transfers of art during life and why it may be preferable to wait for death to make the transfer, it is important to first understand the income tax rules particular to art. A. Income Tax Issues 1. Capital Gains versus Ordinary Income Property. In most cases, a work of art is "capital gain collectible property" as opposed to "ordinary income property". o The work of art is long-term "capital gain collectible property" if: • It is a capital asset under Section 1221; • It has appreciated in value; • It is a collectible under Section 408(m); AND • It has been held by the donor for more than one year. o Sales of capital gain collectible property are taxed at a maximum rate of 28%, whereas sales of ordinary income property (including short-term capital gain) are taxed at a maximum rate of 35%. • Despite reductions over the years in the capital gains rate, the rate on gain from the sale of long-term collectible property has remained constant at 28%.2 • The Taxpayer Relief Act of 1997 added Section 1(h)(5)(B) of the Code to prevent taxpayers from converting the 28% rate to the current 15% capital gains rate by creating a partnership, corporation or trust to hold the collectibles. o A work of art is "ordinary income property" if: • It was created by the donor; • It was received by the donor as a gift from the creator; Proverb originating with Hippocrates. 2 IRC Section 1(h)(S). -1- Venable LLP 575 7th Street NW Washington DC 20004 OD Venable LLP 2012. No copying or distribution is permit