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MORE TAX FUN FOR SENATOR KERRY

April 30, 2004

John Kerry is receiving more free tax advice. The Instapundit points to a story in the Boston Globe providing additional information on the sale of a painting that was reported on Senator Kerry's 2003 tax return. The Senator has already amended the return to correct a preparer error in determining the nature of the gain.

An Instapundit reader says the story suggests that the original return might have another error -- the return may have shown too little gain. Is it true?

THE FACTS

According to the Boston Globe story, Senator Kerry's wife bought a 1/2 interest in the painting around 1994 for $1,000,000. When the painting was sold in 2003 for $2,700,000, Senator Kerry's return reported 1/4 of the $700,000 gain, or $175,000.

Alert Instapundit reader David Walser noted an additional fact: The art dealer who owned the other 1/2 interest in the painting told the Boston Globe reporter that

   Over time, he reimbursed (Mrs. Kerry's)
   $1 million, her  original one-half stake in
   the purchase price. When he sold it last
   year to a private collector for $2.7 million,
   he shared the $700,000 profit with her.

If the other owner had "reimbursed" Mrs. Kerry $1,000,000, her basis in the painting would be zero. If the Kerrys had received 1/2 the gross proceeds, as the Senator's return seems to show, the Senator's 1/4 share of the gain should be $675,000, not $175,000.

SO THE RETURN IS WRONG?

Maybe not. Senator Kerry received his interest in the painting as a gift from his wife. The tax law (IRC Sec. 1042(b)(2)) says that a spouse who receives a gift from the other spouse also receives the donor spouse's basis in the gift. If Senator Kerry received his interest in the painting before Mrs. Kerry received any "reimbursements," his basis in his 1/4 interest would be the $500,000 shown on his return. In that case, however, Mrs. Kerry would have had to show a $500,000 gain on the $1,000,000 "reimbursement" she received from the other co-owner. Because she filed "married filing separately," we don't know how she reported the payments.

HOW SHOULD THE TRANSACTIONS BE REPORTED?

Not many folks we know would reimburse a co-owner their entire purchase price and yet split the gross proceeds on the sale. That said, we don't move in those circles of the art world (or any other circles of the art world, for that matter), so maybe it's not an unusual arrangement.

If the co-owner was reimbursing Mrs. Kerry after she had gifted the 1/2 interest to the Senator, she should have at the very least begun reporting gain once the reimbursements exceeded the $500,000 basis in the 1/4 interest she retained.

If any reimbursements were received before she gave the 1/4 interest to her husband, the Senator's basis should be reduced by 1/2 of the reimbursements, increasing his gain.

Of course, it's possible that the actual transactions differed from what the Boston Globe reported, and perhaps the gain is exactly as shown on the Senator's return.

WHAT DO WE LEARN FROM THIS?

These issues illustrate the drawbacks of married taxpayers filing separate returns. If the returns are prepared by separate preparers, errors can crop up because each preparer has incomplete information.

DOES THE INSTAPUNDIT HAVE A LOT OF NERVE SUMMONING HELP FROM TAX BLOGS?

Well, considering this post, one could draw that conclusion. But when the blogfather speaks, we can only hear and obey.

Prior coverage:

THE MANY FLAVORS OF ASSET SALES

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