Problem
Be prepared to discuss tax impact and options for Cal Collector of his 2015 tax return. Different possible situations are presented. Each is considered separately.
In 2012 Cal purchased an oil painting form a dealer in antique art, paying $750,000. There were rumors at the time that the dealer had a reputation for selling fakes as originals. The dealer issued a certificate of authenticity.
In 2015 the dealer was arrested and convicted of selling fake art as originals. The dealer was sentenced to seven years in jail and is currently serving his term. He used all his assets to pay his defense lawyers and has no money left.
Cal had the picture re-appraised and it was determined that the canvas was manufactured in 2009. The picture looked like an original oil but was not done by a famous artist. The appraiser valued the picture at $500 because of the frame. The oil itself was basically worthless except for decrative purposes. It was not for collectors.
What options does Cal have for tax purposes? Suing the dealer will not get him any money because the dealer is in jail and has no money left.
• In 2015 Cal estimated that his AGI will be about $1,750,000 if he files joint. If he and his wife file separate his AGI will be $900,000. Cal has no other itemized deductions.
• Cal has stock that has appreciated considerably over the past ten years. If he sold the stock today his long term capital gain would be $800,000. He could use the money to make improvements on his house.
• Cal has a long term capital loss carry-over from 2014 of $150,000.
• Call has been buying and selling art to decorate his house. He could consider himself as an art dealer and consider this a business loss. He had sold a few pieces of art in 2013 and 2014 and made a profit of 12,000 to 15,000 each year. He reported this gain on his tax return.