The Artful Jurist

There's a new reigning king among works of fine art...at least, from a purely economic standpoint.  Pablo Picasso's 1932 painting, “Nude, Green Leaves and Bust,” has broken the record as the most expensive single piece of art ever sold at auction.  The winning bid was $106.5 million.

The last time the painting was sold, the purchase price was less than $20,000.  Now that's what you call a big time capital gain.

So what will the people who sold the Picasso be paying in income taxes on that gain?  Well, it all depends on what the IRS calls the "tax basis."  That is, what is the dollar figure deducted from the sale price that determines the actual taxable gain?  Does that seem like an easy bit of math?  Well, it would be if all you had to do was subtract $20,000 from $106.5 million.

But, as with most of the American tax system, it's not that simple.  You see, the former owner of the painting died, and, if that former owner bequeathed that, upon the owner's death, the painting passed to an heir, then the heir would inherit the property with a newly adjusted tax basis that would be equal to the fair market value of the property at the time of the deceased's death.

What's "fair market value" for a Picasso?  Well, that's a question better posed to people who know a bit more about appraising art than I.