Question

Whitney and Ed North are avid antiques collectors. They regularly attend garage sales and flea markets and purchase lots of old stuff. In 2019, they purchased a very old desk for $600. The desk was in poor shape and required rehabilitation. It sat in their garage for more than a year. Whitney was taking the desk apart when she found an old document jammed into a dark recess of the desk. She opened the document and much to her surprise she had found a Picasso painting. Whitney was very excited by the discovery of this treasure. She and Ed contacted Sotheby’s, the auction house, to get an appraisal for the painting. In December 2020, Sotheby’s authenticated and appraised the painting at $1,350,000. In April of 2021, the painting was auctioned by Sotheby’s and fetched $1,650,000 net of fees and commissions. Whitney and Ed received the money in May of 2021.

Your manager asked you to prepare a research memo indicating how Whitney and Ed should treat the discovery of this document for tax purposes. Specifically, you should indicate the following:

Do they have taxable income?

If so, when do they have taxable income and what amount?

What is the character of any income?

Answer 1

Do they have taxable income?

Yes, they have taxable income

As Whitney held antique for more than one year, it comes to capital asset

So they were taxable under Capital and losses which taxable @28%

If so, when do they have taxable income and what amount?

When they received the consideration for capital asset sold

i.e sale amount recognized

Taxable Income = Net Sale price - Expenses

= $1,650,000 - $1,350,000

=$300,000

Tax Amount = $300,000 *28%

=$84,000

What is the character of any income?

In this question character of income is Capital Gain

held more than one year