Shelly and Richard are avid antiques collectors. They regularly attend garage sa

Question

Shelly and Richard are avid antiques collectors. They regularly attend garage sales and flea markets and purchase lots of old stuff. In 2014, 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. Kim was taking the desk apart when she found an envelope jammed into a dark recess of the desk. She opened the envelope and much to her surprise, found a very rare Picasso painting.

shelly was very excited by the discovery of this historical treasure. She and richard contacted Sotheby’s, the auction house, to get an appraisal for the painting. In December 2015, Sotheby’s authenticated and appraised the painting at $1,350,000. In April of 2016, the painting was auctioned by Sotheby’s and fetched $1,650,000 net of fees and commissions. Kim and Toby received the money in May of 2016.

Your manager asked you to prepare a research memo indicating how shelly and richard should treat the discovery of this painting 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?

Explanation / Answer

1) Yes they do have taxable income.

2) Once they sold the painting and received amount it is taxable.

Amount= 1,650,000-600= 1,649,400

3) This will be treated as Capital gain income.

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