Originally published on Forbes.com. Oct 28th, 2014
Art has been in the tax news of late and I was bemoaning the fact that accountants generally don’t know that much about art. Of course, there are exceptions and among them, perhaps foremost among them, is Gary Castle, a principal with Anchin, Block & Anchin. Gary is a member of Anchin’s Art Specialty Group. Among the clients he serves are high net worth individuals, private foundations, artist-funded foundations, and family offices. He is a Chartered Accountant and has the corresponding British accent, which probably gives him an edge in the art world. Depending on your point of view being a Chartered Accountant is equivalent to, slightly better than, or almost as good as being a CPA.
A little known bit of CPA trivia is that when New York became the first state to license CPAs in 1896 it only issued licenses to American citizens. Cynics thought that was to prevent chartered accountants from the UK, where the profession first took root, from stealing our lunch. I’m certain it was patriotism, but we’ve gotten over those things – mostly.
Recent Decisions
The tax decision that caused the biggest stir in the art world in recent memory was that of Susan Crile. Ms. Crile is a professor at Hunter College and a renowned artist – world-class really – with works hanging in the Guggenheim Museum, the Metropolitan Museum of Art, and even the Worcester Art Museum. Beautiful as her artwork was, her tax return was kind of ugly with consistent Schedule C losses offsetting about half her salary year in and year out. The IRS attacked her with Section 183, commonly called the “hobby loss rule”. The IRS lost badly in Tax Court on that issue. Ms. Crile is not out of the woods yet, since there will be another decision on whether some of her expenses like tipping her doorman were really “ordinary and necessary” business expenses. Gary Castle agreed with my perspective that exciting as this case might be, it is really of limited applicability.
The money shot tax decision for the art world this year was the Fifth Circuit decision in the case of the Estate of James Elkins. You might say that the Fifth Circuit spanked the Tax Court in Elkins as the Tax Court had spanked the IRS in Crile. Only the stakes were a lot higher – over $14 million in estate tax. The issue was the valuation of fractional interests in artwork. The estate had claimed a 44.75% discount for lack of marketability and control. The IRS went for a zero discount. The Tax Court allowed a 10% discount. I covered the Tax Court decision. I passed on the Fifth Circuit decision because Ashlea Ebeling beat me to it and I didn’t have anything to add.
I asked Gary what his thoughts on Elkins were. He defended the concept of minority discounts for fractional art interests indicating that it is no different than a minority interest in a closely held business. My concern is questioning why somebody who owns 100% of something would divide it into pieces that sum up to less than the value of the whole. Of course, the obvious answer is that if a family wants to hold onto art that has been collected, perhaps over a lifetime, the death of the collector presents them with a severe liquidity problem. Regardless Gary does not think the success of the Elkins Estate should embolden planners to assume they will be able to sustain discounts approaching 50%. Neither the IRS nor the Tax Court did a very good job analytically in Elkins. If they had, somewhere between 10% and 45% might have been the answer.
Other Tax Issues
Although estate taxes play a major role in art planning, there are numerous other tax issues. If you want to diversify your collection or get the yen to move from say Impressionism to Abstract, you might have significant taxable gains. Although I’ve always believed that 1031 might have application in the art world, Gary confirmed that it is a viable technique. He recommends that you involve an institutional exchange facilitator which might also be doing real estate and equipment since they will have the facility with the proper tax execution. I couldn’t pry a name out of him.
Then there are state tax issues. The New York Times recently ran an article about a sales and use tax dodge that some collectors were using. Works that they bought were shipped on loan to a museum in a state that would not charge sales or use tax. After a few months, the work could be moved to the collectors home and he beats the use tax because the original use was the museum loan. Gary’s firm put out an alert, that nifty as this idea might be it does not work if you bring the artwork into New York, New Jersey, or Connecticut.
Art As An Investment
I asked Gary if he thought art makes sense as an investment, independent of what pleasure owning say a Picasso might yield. He indicated that for someone with a net worth north of five or maybe ten million, it might make sense to have as much as 5% to 15% in collectibles including art, but also possibly collectible wines, automobiles, or historical documents. He believes that such investments can be counter-cyclical.
He noted some of the major problems with this category of investment such as lack of liquidity, a totally unregulated marketplace, and costs of ownership. An important element to the investment is maintaining its condition. And if you want to move it, you can’t just hire the local moving man or as I once did a couple of college kids and a U-Haul. There needs to be a condition report each time the work is packed and unpacked. For whatever it is worth, he told me that oil on canvas is much more resilient than watercolors on paper.
Then there is knowing when to sell. If you have focused your collection on a particular artist, your decision to sell several works could conceivably move the market adversely.
How Do You End Up With A CPA Art Expert?
Anchin, Block & Anchin with 350 people claims to be the largest single office accounting and advisory firm in the country. They take up seven floors at 1375 Broadway in Manhattan putting them almost dead center between 42nd Street and Herald Square if you want to give them regards.
Gary says that concentrating all the firm’s intellectual capital in one place allows practitioners to effectively support one another. Anchin was founded in 1923 and Gary has been there over 30 years, which reminded me just a bit of my own experience at Joseph B Cohan and Associates which was founded in 1917. Herb Cohan took advantage of his intellectual capital concentrated in what was then the Peoples Savings Bank Building on the Worcester Common by roaming up and down the hall asking everybody the same question till he got an answer he liked.
I told Gary that I was surprised that I hadn’t heard of his firm. He attributed that to my spending a career in the wilds of Central Massachusetts. I tested that theory by asking Bob Charron, the last managing partner of JBC, and now Tax Operations partner at Friedman LLP. He confirmed that Anchin is well known and well regarded.
A tax adviser ends up learning about the intricacies of his client’s concerns because you cannot do tax planning in a vacuum. The Anchin client base provides enough art collectors and people in ancillary businesses to make the effort worthwhile. Ultra-high net worth clients tend to value privacy, so I don’t know who Gary might be consulting for, but I was able to find a “for instance” which was pretty impressive.
Robert Wilson was a hedge fund founder and philanthropist who gave away most of his fortune which peaked at $800 million. His most peculiar donation was $30 million to the Archdiocese of New York for its Catholic schools. What made the donation peculiar was that he was an openly gay atheist, who thought the Catholic schools were good at educating kids. More to the point of this piece is this quote from Wilson’s obituary:
Gary S. Castle, a philanthropic-giving specialist at the accounting firm Anchin Block & Anchin who worked with Mr. Wilson for many years, said Mr. Wilson had suffered a stroke in June.
I just checked the retail value of my limited edition print collection which includes a print of a B-25 taking off from a carrier that has signatures of veterans of the Doolittle raid. Even with that, I barely break a thousand, so I won’t be needing Gary anytime soon.
Correction
In an earlier version of this piece I indicated that Gary Castle was both a Chartered Accountant and Certified Public Accountant. I also did not make it adequately clear that his opinion about the appropriateness of substantial investment of art was directed to persons with net worth well in excess of $10 million.