LLC invests in artwork

Technical topics regarding tax preparation.
#1
philly  
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A group of investors forms an LLC in order to purchase and sell valuable artwork.
They engage an art consultant to make purchases and assist in the sale of artwork. In addition, they will incur expenses such as temperature-controlled storage.

The investors want the income to be taxed at capital gains rate since the artwork is an Invesment.

This sounds like " trade of business" to me?
 

#2
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It's going to come down to the "investor" vs "dealer" analysis. That's something you'll have to explore with the client through deep conversation.

Caveat: if the LLC was an investor as opposed to a dealer, I would think most, if not all operating expenses would be Sec 212 expenditures, nondeductible at the federal level through 2026. Isn't that correct?
 

#3
MilesR  
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ManVsTax, I think you are correct that an investor gets no deduction, although there is an unclear area with section 266 that the IRS has not clarified their position on that could "potentially" be used to capitalize the carrying costs into the basis.
 

#4
Nilodop  
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Sale will be at collectibles rate if not trade or business.
 

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MilesR wrote:ManVsTax, I think you are correct that an investor gets no deduction, although there is an unclear area with section 266 that the IRS has not clarified their position on that could "potentially" be used to capitalize the carrying costs into the basis.


I don't believe that supposed loophole exists. i.e. That you can capitalize Sec 212 expenditures that are non-deductible through 2026 2025 via Sec 266.

Treas Reg Sec 1.266-1(a)(1) flush language infers the expenses to be capitalized are deductible under Subtitle A....emphasis mine

In general. In accordance with section 266, items enumerated in paragraph (b)(1) of this section may be capitalized at the election of the taxpayer. Thus, taxes and carrying charges with respect to property of the type described in this section are chargeable to capital account at the election of the taxpayer, notwithstanding that they are otherwise expressly deductible under provisions of Subtitle A of the Code. No deduction is allowable for any items so treated.


Then we have Treas Reg Sec 1.266-1(b)(1)(iv) which is more explicit regarding carrying charges other than interest and taxes and applicable to the instant case as the artwork isn't real property:

...The items thus chargeable to capital account are...

Any other taxes and carrying charges with respect to property, otherwise deductible, which in the opinion of the Commissioner are, under sound accounting principles, chargeable to capital account.
Last edited by ManVsTax on 24-May-2022 8:26am, edited 1 time in total.
 

#6
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I'm confused. Based on general principles it seems obvious to me that 212 expenses would be capitalized if not deducted. Is that an issue or am I misreading the posts?

The hiring of a consultant should have little effect on the dealer/investor issue. My sense is that if the investors say the purchases are investments, you should report that way unless there are some powerful "dealer" facts which were not disclosed in the OP.
Steve
 

#7
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How long are they planning to hold the artwork before they sell it? Seems an investor would not be looking at selling it in the short-term.
 

#8
philly  
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The investors are a group of young IT guys with a significant amount of earned income. They will hold on to the artwork, most likely, for the long term.
 

#9
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gatortaxguy wrote:I'm confused. Based on general principles it seems obvious to me that 212 expenses would be capitalized if not deducted. Is that an issue or am I misreading the posts?


General principles?

You're aware that Sec 212 expenses, aside from interest and taxes, rental real estate Sec 212 expenses, are miscellaneous itemized deductions? Misc itemized deductions are currently not deductible at the federal level. See Sec 67(g).

I already touched on capitalization through Sec 266 given the above.
 

#10
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ManVsTax wrote:It's going to come down to the "investor" vs "dealer" analysis. That's something you'll have to explore with the client through deep conversation.


Agree with this.

Take a look at TC Memo 1992-450. It has a lot of good information in it.
https://www.leagle.com/decision/199248664bytcm4221410
 


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