Saturday, 25 October 2014

Surprise: Art can be a business for tax purposes

In the recent US case Crile v Commissioner, the IRS sought to show that the forty-year career of a well-known artist, some of whose works hang in the Metropolitan Museum of Art and the Guggenheim, was not a business, but merely a hobby. 

The case turns on the following point. Relevant US law permits taxpayers to deduct the expenses of their trade or business from the taxable profits of that business. And, if the expenses are greater that the profits, then the taxpayer may generate a net loss. That loss may be of value to the taxpayer if she or he has other profits against which the loss can be set, thereby reducing the overall tax bill payable. 

Suffering is not a pre-requisite to deductibility:
The Comic Almanack, 1847
© The Trustees of the British Museum

But if the taxpayer's activities are not a business but a "hobby", then the deduction position is different. The expenses of a hobby can be deducted against any profit it may make, but only to the extent of those profits. Where the expenses of a hobby are greater than its profits, the taxpayer is not entitled to generate a loss. This is intended to prevent a taxpayer from running a profit-making business and at the same time enjoying a loss-making hobby activity (such as horse breeding or drag racing) - and using the losses generated in their spare time to reduce their business tax bill to nil. 

In the case of Crile the artist made a profit working as an art professor, but a loss working as an artist. When she sought to offset the two, the IRS argued that her losses as an artist were not allowable since her artistic production was a hobby. 

In determining whether an activity is a hobby or a business, the IRS will consider whether the activity is carried on with the objective of making a profit, or whether the real objective is  the taxpayer's own entertainment. In coming to a decision the IRS will apply the "hobby loss rules". These are nine different factors to be considered, such as whether the taxpayer keeps accurate books and records of the activity, how much of the taxpayer's time an activity is expended on the activity, to what extent the activity has elements of personal enjoyment or recreation and so on. 

The outcome of the case, hailed as a "victory" for artists, was that the taxpayer's long and distinguished career - on which she kept detailed records, used a bookkeeper and agent, and spent much of her working time, although she typically lost money - was indeed a business. The court acknowledged that given the unusual nature of the art world, an atypical profit structure - such as a string of losses over many years, or sudden success following a successful show or review - would not necessarily be taken as evidence of a hobby. Nor would a business "be turned into a hobby merely because the owner finds it pleasurable" which is a relief - it would certainly be harsh tax result if it was necessary to dislike your own business in order for your expenses to be deductible. "Suffering," the court confirmed, "has never been made a pre-requisite to deductibility."  

It has been pointed out however that the deductions which the IRS sought to disallow in this case were suspiciously large, and in some instances were of a personal nature which should not in any event have been deductible. The taxpayer's approach to deductions, the court noted, was that "most experiences an artist has may contribute to her art and that most people with whom an artist socialises may become customers or otherwise enhance her career" - on which basis she deducted a great many expenses which did not pertain directly to her career as an artist, such as cable television bills, taxis to the opera, and tips to doormen. 

The IRS therefore made a twofold argument: firstly that the taxpayer's activities were a hobby and as a second (and more reasonable) line of defence that, if the activities were a business, then the expenses in question were not all "ordinary and necessary" for that business and therefore not deductible. While the court's decision as to the first argument will be a relief for US artists, the decision on the second may not be good news for this particular taxpayer. 

Monday, 13 October 2014

At Geek Girl Con: An Exploration of Fan Fiction and the Law

This weekend I had the pleasure of participating in a panel presented by Washington Lawyers for the Arts at Geek Girl Con in Seattle.  For those not in the know, Geek Girl Con is a conference dedicated to connecting women and celebrating the legacy of women contributing to science, technology, comics, art, literature, and game design, among others.  Our panel was dedicated to the legal issues surrounding the creation of fan fiction including the basics of U.S. copyright law and the public domain. We also explored the potential attachment of copyright to specific characters or settings, which requires a certain level of delineation by the original author so as not to grant a monopoly over more generalized ideas, stock characters, plots, or themes.  In addition, we discussed fair use as a defense to accusations of copyright infringement including issues around parody, good faith, and degrees of transformativeness.

Our audience posed many thoughtful questions, giving us an opportunity to reflect on the disconnect between the law of copyright and the business realities of suing fans for making fan art as well as a chance to debunk some myths about supposed bright line rules in fair use. The difficulty of course, as I've reflected on recently, is that we are left with rather vague guidelines for artists who are creating work involving appropriated materials. Despite these circumstances some excellent resources, such as Columbia University's Fair Use Checklist, may help those working with appropriated materials spot potential trouble. Other resources, including our slide deck from the presentation, are available on the Washington Lawyers for the Arts website. Although the legal issues may be aggravatingly imprecise, education is the best way to prevent unnecessary self-censorship, allowing artists to explore (or more aptly, appropriate) with awareness.

Friday, 10 October 2014

Met rescues an Egyptian treasure from auction

New York's Metropolitan Museum has acquired the nearly 4,000 year old Egyptian "Treasure of Haregeh" from Bonhams after it was withdrawn from public auction.

Some pieces of the Haregeh treasure

The Treasure consists of 37 pieces from the Middle Kingdom’s 12th Dynasty (1897-1878 BC) found within the burial tomb of a rich woman of that period. It was excavated between 1913 and 1914 by the British School of Archaeology in Egypt, and was exported from Egypt to London following permission from the Egyptian authorities under the terms of the contemporary excavation license. The Treasure was then passed on to the St Louis Society, as consideration for the latter’s financial contribution towards the excavation. It has been said that the St Louis Society, an independent non-profit organisation associated with the Archeological Institute of America, received the items on the condition that they would always be shown in a public collection.

For a century, the treasure was held at the St Louis Art Museum, until the St Louis Society decided to sell the pieces at auction in London, as the annual storage cost had become too high for the organisation The treasure was included in Bonham’s catalogue for its antiquities auction on October 2 for the estimated price of between £80,000 and £120,000 (US$ 130,000-200,000). It featured prominently on the auction house’s website, but was then withdrawn before the lot came under the hammer.

The withdrawal probably occurred since the St Louis Society's decision to sell the treasure was widely criticised by art experts as a loss of a public cultural resource.

The national office of the Archeological Institute of America, the UCL Petrie Museum of Egyptian Archeology and the Egypt Exploration Society insisted that the sale would have contravened the public display condition in the original agreement.

Moreover, those experts stressed that the legal sale of antiquities could provide incentives for global criminal activity. Dr Naunton of the London-based Egypt Exploration society said "While there is a market and while antiquities fetch very high prices, there is incentive for people on the ground in Egypt to continue to find objects and sell them. In this way, legal sales are driving illegal trade". 

Other experts also criticised the sale on the grounds that it would be unethical for publicly-owned collections to be put up for sale to private collectors. Public museums offer the best hope that antiquities are safeguarded against loss or deterioration, and that they remain accessible to scholars and the wider public for study and enjoyment.

Fortunately, the Met intervened by purchasing the majority of the treasure from Bonhams, except for an alabaster travertine headrest which was sold to a private buyer. In a press release, a spokesman for the St. Louis Society's said : "The Metropolitan Museum in New York is the best home for the treasure. We are looking forward to seeing objects and jewelry on exhibition".

Thursday, 2 October 2014

Keep off our worms? No, keep off our walls ...

The United Kingdom, like any modern multiracial and multicultural society, takes great pains to protect minorities from the hostility and prejudice of others.  The same jurisdiction is also accused of being the bastion of unthinking and self-defeating political correctness.  Bearing this in mind, readers are invited to draw their own conclusions regarding the following item on the BBC website:
A new Banksy mural showing a group of pigeons holding anti-immigration banners has been destroyed following a complaint the work was "racist". The mural in Clacton-on-Sea -- where a by-election is due to take place following the local MP's defection to [the politically incorrect] UKIP [whose policy on immigration and border control can be found here] -- appeared this week. It showed four pigeons holding signs including "Go Back to Africa", while a more exotic-looking bird looked on. The local council, which removed it, said it did not know it was by Banksy [Obviously the council was fooled by the style and the content. Maybe they thought it was a newly-discovered fresco by Leonardo]. 
Tendring District Council said it received a complaint that the mural was "offensive" and "racist".  
Nigel Brown, communications manager for the council, said: "The site was inspected by staff who agreed that it could be seen as offensive and it was removed this morning in line with our policy to remove this type of material within 48 hours. We would obviously welcome an appropriate Banksy original on any of our seafronts and would be delighted if he returned in the future." ...
Now why would be want to do a thing like that?

This blogger must confess that, when he saw the offending artwork, he thought it a brilliant way of poking fun at what he suspects as being the artist's view of the social attitudes and voting intentions of the good folk of Clacton-on-Sea and that, if anyone was going to be offended by this message, it should be them.

Presumably a banning order should also be placed on "The Ugly Duckling", which has presumably upset and humiliated generations of swans.

Wednesday, 1 October 2014

The quantification of estate taxes: even more obscure than the valuation of art?

A recent decision of the United States Court of Appeals for the Fifth Circuit has been lauded as a victory for art collectors. More accurately, however, it appears to be a victory for the extremely wealthy seeking to avoid paying taxes.

While a lengthy, rather technical, case, it is hoped that the essential elements have been reproduced below.

James A. Elkins, Jr. and his wife collected 64 works of art during their lives. The collection included pieces by Jackson Pollock, Henry Moore, Pablo Picasso, Rene Magritte, David Hockney, Paul Cezanne to name just a few. At the same time, they were thinking ahead, both creating a Grantor Retained Income Trust (GRIT) that held title to their respective interests in the works, and entering into various agreements which also partitioned and allocated their interests in their art.

The result was that at the time of death of Mr Elkins in 2006 (his wife had died in May 1999), the art was jointly owned in varying percentages by Mr Elkins and his three adult children.

In 2007, his children filed a United States Estate (and Generation Skipping Transfer) Tax Return (estate tax return) in which they reported a Federal estate tax liability of over $100million. It listed, among other assets, fractional interests in various items of real and personal property, including the artworks.

In assessing the federal estate tax due on Elkins' estate, the Internal Revenue Service decided that tax should be paid on the full value of the art, refusing a discount based on Elkins' pro rata share—his fractional-ownership interest— of the art.

In 2010, the Executors of the Estate petitioned the United States Tax Court to review the assessment on the basis that there should have been a fractional-ownership discount applied when determining the taxable values of Elkins' fractional interest in the 64 items of art.

The Tax Court rejected the IRS' zero-discount position, but also rejected the quantums of the various fractional-ownership discounts adduced by the Estate through the reports, exhibits, and testimony of its three expert witnesses. Instead, the Tax Court concluded that a “nominal” fractional-ownership discount of 10% should apply across the board to from pro rata fair market value of Elkins ratable share of each of the works of art.

Still unhappy with the decision, the Estate appealed again and the case was heard by the US Court of Appeals for the Fifth Circuit.

The only question to be resolved was whether the federal estate tax due on the artworks was to be calculated based on Elkins' undiscounted pro rata share of the art (as the IRS contended) or should there be a fractional-ownership discount of either (i) a uniform 10% (as held by the Tax Court) or (ii) the various percentages that the Estate advanced through the testimony and reports of its expert witnesses?

The Court found:
  • Just as it was obvious to the Tax Court that the IRS had no viable basis for rigidly insisting that no fractional-ownership discount was applicable, it should have been equally obvious that, in the absence of any evidentiary basis whatsoever, there was no viable factual or legal support for the the Tax Court’s own nominal 10% discount. 
  • The Estate was entitled to apply a fractional-ownership discount to the tax due on Elkins' ratable share of the each of the 64 works of art. 
  • The answer to the question of the correct quantum was to be found with the proper administration of the willing buyer/willing seller test for fair market value: 'the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.'
  • The Estate's evidence was that the sale of Elkins' undivided interests in the artworks would produce prices substantially below his pro rata share of the works as any hypothetical willing buyer would demand significant fractional-ownership discounts in the face of becoming a co-owner with the Elkins descendants (given their financial strength and sophistication, their legal restraints on alienation and partition, and their determination never to sell their interests in the art).
  • The correct quantums of the fractional ownership discounts applicable to Elkins' pro rata share of the various artworks were those determined by the Estate’s experts. 

The full list of the 64 artworks and the discounts can be found in Appendix B to the Tax Court’s decision. The discounts range from over 50% to just under 80%. A substantial difference from the Tax Court's nominal 10% discount. As a result, the Court ordered a refund payment to the Estate of $14,359,508.21, plus statutory interest, for overpaid taxes.

While apparently "nothing is certain except for death and taxes," you could add to that the certainty that those with enough money will seek to avoid both. And that, in itself, is an art form. But that is just a [reckless] opinion....what do you think?

Source: Forbes, 24 September 2014

Friday, 19 September 2014

Art vs Vandalism

Is defacing a Banksy art or vandalism?

Well, from the US point of view, it is certainly a crime worthy of punishment from anywhere between jail time to fines in the thousands of dollars.

It has, therefore, not been a fruitful year (artistically speaking, or otherwise) for David William Noll, who either has a big issue with Banksy's works or, whose artistic creativity, in defacing Banksy's art and then posting it on YouTube, has not been recognised.

In April this year, American "artist" Noll was charged with a vandalising several Banksy murals in separate incidents in LA and Park City, Utah.

In LA, Noll was charged with felony vandalism for painting over two Banksy works. For those charges, he pled no contest and was given three years of felony probation and 60 days of community service.

Girl on Swing – one of the Banksy works in LA that was vandalised

Around the same time, Noll was also charged with a vandalising two Banksy murals in Park City. After Noll failed to appear for a court hearing to face charges of criminal mischief for defacing those pieces, a warrant for his arrest was issued in August. At that time, it was speculated that, if convicted, Noll faced as many as 15 years in jail.

At the beginning of this week, however, Noll pleaded guilty to defacing the two Park City murals, and, as part of a plea deal, will not face jail time if he pays $13,000 in restoration costs before a November sentencing hearing.

So, could it be said that it is not a crime to paint on a wall if it looks nice/is carried out by a famous artist? But, it is a crime to paint over the works of famous artists? If this is the case, how does this fit together with instances where owners of the walls adorned by Banksy works decide to deface them?The challenges with protecting Banksy works continue to mount, even though it doesn't seem like it's an issue to Banksy.

Source: Associated Press, 16 September 2014

Thursday, 18 September 2014

Wrangling over Rothko

Mark Rothko, Untitled (1961)
At least four years of legal wranglings over the sale of this Mark Rothko painting appear to have come to an end with little to show except substantial legal costs for all parties.

At the heart of the dispute, a confidentiality clause, which is now anything but.

By way of background, back in 2007, Marguerite Hoffman (the Plaintiff) sold this Rothko painting for $17.6 million to David Martinez (Second Defendant), via his company Studio Capital, Inc. (Third Defendant), under the terms of a letter agreement.

The agreement was signed by now defunct New York gallery L&M Arts (First Defendant) acting on behalf of Studio Capital. The relevant clause of the agreement provided that: “[a]ll parties agree to make maximum effort to keep all aspects of this transaction confidential indefinitely. In addition, the buyer agrees not to hang or display the work for six months following receipt of the painting.”

Following the 2007 sale, Studio Capital kept the painting in storage, eventually consigning it to Sotheby’s for sale in 2010. Sotheby’s auctioned the painting on 12 May 2010, and sold it for over $31 million.

Not long after, Hoffman sued L&M, Martinez and Studio Capital for damages for breach of the confidentiality clause of the letter agreement, on the basis that when she sold the Rothko painting privately, she had done so at a substantial discount in exchange for the promise of strict confidentiality, forfeiting the additional millions of dollars that the painting would have brought if sold at public auction.

Earlier this year, a Dallas jury decided that Hoffman had proved her breach of contract claim against L&M, Martinez, and Studio Capital, and awarded compensatory damages of $500,000 – far below the $22.4 million claimed by Hoffman – which the court subsequently slightly increased to $1.2 million.

As a result, the defendants filed motions for judgment as a matter of law. This is a US cause of action which argues that the evidence used to support an issue is legally insufficient and no reasonable jury could find for a party on that issue. [US lawyers: please feel free to correct this very basic summary.] 

Essentially, the court was asked whether:
(i) a reasonable jury could have found that L&M was acting as agent for Studio Capital and Martinez when it entered into the letter agreement, and that, accordingly, Studio Capital and Martinez were bound by the letter agreement;
(ii) a reasonable jury could have found that L&M breached the letter agreement;
(iii) a jury could reasonably have found that L&M’s breach of the confidentiality clause caused Hoffman damages; and
(iv) the damages Hoffman had elected to recover were legally barred under Texas law.
In respect of the first point, Studio Capital and Martinez claimed that there was no evidence that they ever communicated to L&M or to Hoffman any intent to confer any authority on L&M to enter into the letter agreement on their behalf, and that the undisputed evidence was that this did not occur. (Rather, Studio Capital and Martinez argued, L&M did not act as their agent, but, consistent with art industry practice, as an intermediary, purchasing the Rothko painting from Hoffman and then reselling it to them.)

On the second point, L&M argued that no reasonable jury could have found that the goal of the confidentiality clause was not met. And, on the third, L&M maintained that a reasonable jury could not have found that Hoffman suffered any damages as a result of their breach of the confidentiality clause because she had failed to adduce sufficient evidence of causation.

The final point was [from my point of view!] a complicated issue of the type of damages allowed for the breach of a contract under Texas law.

Earlier this month, the US District Court for the Northern District of Texas (Dallas Division) handed down its ruling on the motions.

Unfortunately for Hoffman, the court agreed with Studio Capital and Martinez. It found that there wasn't legally sufficient evidence for a reasonable jury to have found that Studio Capital or Martinez conferred any actual or apparent authority on L&M to enter into the letter agreement on their behalf. The court, therefore, went on to dismiss the action against them with prejudice.

The court did find that a reasonable jury could have found that L&M breached the confidentiality clause, and, further, that L&M’s breach of the confidentiality clause caused Hoffman's damages in the form of the lost benefit of her bargain. However, as a further blow to Hoffman, even though the jury had offered Hoffman two measures of damages and the judge had ultimately decided the appropriate sum of damages to be awarded, the court held that she was not entitled to recover under the measure of damages that she had elected.

The result of this ruling is that the Hoffman's claim against Studio Capital and Martinez is effectively over and she is barred from filing another case against them on the same claim. Moreover, Hoffman must file a new motion against L&M to alter or amend the judgment in order for the court to award her damages under an alternative measure of damages.

Four year of litigation and no additional millions to show for it....distressing.

Wednesday, 17 September 2014

More support for free access to UK museums and galleries

The government has announced that it will extend the VAT refund scheme which helps to support museums and galleries in providing free access to the public.

Many of the UK’s major museums and galleries allow free entry to their permanent collections. But this creates a VAT problem.

The National Gallery of Scotland

 Museums and galleries must pay for new exhibits and for the services they need to look after their collections (such as climate control or the upkeep of the buildings in which the collection is housed) and they will usually need to pay VAT on those services. Normally, a business can reclaim VAT which it incurs, so long as that VAT is related to the business’s own onwards supply to its customers.

But providing free access to the public is not regarded as a business activity for VAT purposes. Under normal VAT rules, this would mean that any VAT paid on services which relate to the exhibits on permanent display could not be recovered. So in effect the costs of many goods and services purchased by museums and galleries would be higher by 20% (the standard VAT rate) than they would be if the museum or gallery charged for entrance.

However, since the UK government wants to promote free access, a special VAT rule was introduced in 2001 whereby certain specified museums and galleries (including London’s British Museum, the National Museums and Galleries of Northern Ireland and the National Galleries of Scotland) are allowed to reclaim such VAT. According to the government’s website, this scheme provides around £60 million of support for free access annually.

The recently announced extension to the scheme will mean that the V&A Museum of Design, Dundee and the University of Leicester’s arts centre, Embrace Arts, will be able to take advantage of the VAT refund rules. 

Monday, 8 September 2014

Who owns art? Copyright, inheritance and Vivian Maier

Vivian Maier, self portrait New York c1950s
via Wikipedia
She has been compared to Cartier-Bresson. She captured the life on the streets of Chicago and New York for over 40 years and she died penniless and without a will. It is the lack of a will rather than her artistic legacy which has recently been hitting the headlines and threatens to prevent the dissemination of her art to the world that she spent so long photographing.

Vivian Maier appears to have two male heirs, both French and both first cousins once removed. One of these heirs, Sylvain Jaussaud, has transferred their rights to John Maloof, who was one of the first to discover Maier’s work and has since bought the majority of her negatives as well as helping to create a film which celebrates her work and its discovery. 

The second heir was identified by a photographer/lawyer, David Deal, who believed that Maier’s legacy was being misappropriated and sought to track down any additional relatives who might have a claim. He convinced a second French cousin, Francis Baille, to seek legal heirship in the US courts with Deal as his legal representative.

As all Art and Artifice readers are no doubt aware, there is a fundamental distinction between a work and the copyright in a work. One does not necessarily go with the other. That said, in the UK, at least, if you inherit a work of art, the copyright is deemed to go with it unless there is a contrary intention expressed elsewhere in the will. It is this distinction that is causing the problem, Maloof is the lawful owner of many of the physical photographs and negatives but is not necessarily the owner of the copyright.

Whether or not Maloof is the owner depends on (1) the agreement which he struck with Jaussaud which sounds from the reports like it was a full assignment of rights, and (2) whether Baille has a claim to full or partial ownership of the rights in the photographs as well.

There is now a court case in Chicago to determine who owns the rights.

Unfortunately, whilst the case is working its way through the courts, it will be very difficult to see Maier’s photographs. The Cook County Public Administrator department reportedly sent letters to put all interested parties, including galleries exhibiting Maier’s work, on notice of the rights issue. Any dealing in the photographs is likely to be a challenge until this is resolved.

In the meantime, I have some queries for my US colleagues:

1 A particular quote from the New York Times article which has been circulating around the internet states that: “Under federal copyright law, owning a photograph’s negative or a print is distinct from owning the copyright itself. The copyright owner controls whether images can be reproduced and sold.” That is quite surprising. I can see that copyright could stop a reproduction (and by extension a sale following a reproduction) but how copyright can stop the sale of the photograph or negative itself. There is a clear distinction between the object and the copyright. But if only the object is sold and the copy (i.e. print) was made by Maier (the artist) what is to stop the resale?

2 My understanding is that until the photographs are registered, it is not possible to get statutory damages or legal fees for infringement of the photographs. Is that correct? If so, what will happen if the copyright in the photographs which have been registered by Maloof is found to be owned (or partially owned) by Baille?

Any light you can shed on this and the case in general would be much appreciated.

You can read much more about the background to this story in The New York Times (which takes a more Maloof friendly approach) and in The Independent (which is a bit more suspicious of Maloof's motives).

Sunday, 31 August 2014

Copyright and technology: can you graphically illustrate the relationship? A competition

This blogger's friend and colleague Eleonora Rosati (right, as usual ...) is in action on 1 October 2014, where she is hosting a one-day Copyright and Technology conference in the London offices of ReedSmith LLP.  Registration details can be accessed on this post, which had the misfortune to be promulgated on a public holiday when all respectable IP enthusiasts were enjoying a day away from their screens, indulging in the pleasures that only a day off work can bring.  But what, you may be wondering, does this have to do with the concepts of art and artifice ...?

The explanation is not hard to find.  Eleonora has a complimentary ticket (worth £239) which she will be pleased to bestow upon the winner of a contest which is open solely to full-time students/trainees/apprentices, regardless of their age. This competition requires aspiring entrants to create an artistic work, eg a photograph or (if you find it easier) a work of architecture, that illustrates in the best and/or most humorous and/or saddest etc aspect of the relationship between copyright and technology.

Once you are happy with your "own intellectual creation", says Eleonora, you should email it to, but do so by Monday 8 September 11 pm GMT.

The best entries will be published on the IPKat weblog, so competitors are naturally asked to provide an irrevocable gratuitous and non-exclusive licence when submitting their work.