Question

Shenandoah Skies is the name of an oil painting by artist Kara Lee. In each of the following cases, determine the amount and character of the taxpayer’s gain or loss on sale of the painting.
A. The taxpayer is Kara Lee, who sold her painting to the Reller Gallery for $6,000.
B. The taxpayer is the Reller Gallery, who sold the painting purchased from Kara to a regular customer for $10,000.
C. The taxpayer is Lollard Inc., the regular customer that purchased the painting from the Reller Gallery. Lollard displayed the painting in the lobby of its corporate headquarters until it sold Shenandoah Skies to a collector from Dallas. The collector paid $45,000 for the painting.

Answer 1

Answer:

a. Kara Lee is the painter so the painting is simply part of her normal business operations in selling it.

Amount is $6,000 and this is a sale.

b. Taxpayer is Reller Gallery who sold the painting as part of their normal business operations.

Profit on Sale = Amount sold - Amount purchased

= 10,000 - 6,000

= $4,000

Amount is $4,000 and the nature is ordinary business income.

c. Lollard Inc sold this painting even though it is not part of their normal operations.

This is therefore a gain.

Gain = 45,000 - 10,000

= $35,000

Amount is $35,000 and is a Capital Gain.