26 THE ARTIST AS A COLLECTOR
The artist often becomes—through trades, gifts, and purchases—a collector of work by other artists. While the collector will often have to know the legal and practical considerations relevant to artists, certain problems are unique to collectors. The following discussion highlights some of the unique areas so that artists who collect will know when legal advice may be helpful.
The Value of Art
Most collectors own art for the sake of enjoyment, but the value of art as a commodity cannot be ignored. The concept of art as an investment has been closely associated with the activities of auction houses such as Christie’s and Sotheby’s. Auctions often show the public art that has increased fantastically in value.
The prices for art are so high that art thefts and forgeries have become a fact of life in the art world. The illicit trade in art is international and extends to antiquities that are illegally excavated and exported from the countries where ancient cultures flourished. To prevent this illegal antiquities trade, the United States has signed a treaty with Mexico, passed a law affecting numerous Latin American countries, and passed the enabling legislation for the UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and Transfer of Cultural Property. Many of the large cities of Europe now have specialized art crime squads—as does New York City. Interpol, with the assistance of the International Council of Museums, has even gone so far as to create wanted posters of the world’s Most Wanted Works of Art.
The response of collectors to this art crime has been varied. Some insure their collections, a definitive but often expensive solution. Others have fakes created that are then substituted for the real works. French collectors can avail themselves of a tower 240 feet high and 180 feet in diameter that is hidden behind the facade of a former bank and can be seen only from the top of the Eiffel Tower. The security includes cameras, special keys, electronic devices, and a tunnel that fills with water and lethal gas.
Art thieves will often offer back the stolen works to the owner and demand a ransom. For example, a collector of rare Russian enamels entrusted them to a New York City storage company before leaving for Europe. When he returned, he found the storage company had, without checking for identification, given the enamels to another person who claimed to be a messenger for the collector. The enamels were valued at $731,000, which the storage company was liable to pay the collector if the enamels couldn’t be recovered. The collector advertised that a ransom would be paid and, by paying $71,000, received back almost the entire collection. He then sued the storage company for the $71,000, having saved the company from paying the $731,000. The storage company, however, argued that perhaps no ransom had been paid since the collector refused to disclose the persons through whom he had recovered the enamels. The collector refused such disclosure because he said he had been threatened with death. The New York Court of Appeals upheld a jury verdict for the collector despite this refusal, although the dissenters on the court argued strongly that the payment of such a ransom should be against public policy (Kraut v. Morgan & Brother Manhattan Storage Company, 38 N.Y.2d 445).
The crime problem is not limited to theft. Today, sophisticated forgers create art that accurately mimic the expensive work of more famous artists. Sometimes art of another period may be attributed to an artist rather than the school that surrounded the artist or the period generally in which the artist worked—far more subtle issues. Authentication requires statements by experts who are often reluctant to give opinions because of the risk of being sued for defamation of the artwork should they be incorrect. The most modern scientific techniques are brought to bear on solving authenticity problems, but forgers can rely upon science as well. The collector must be vigilant if art crime is to be avoided.
Purchasing Art
The collector will wish to consult pages 108–109 to determine what warranties are created upon the purchase of an artwork. The purchaser can certainly rely on the fact that the seller has title or the right to convey title in the artwork. For example, in 1932, a couple living in Belgium purchased a work by Marc Chagall for about $150. Forced to flee the German invasion of 1940, the couple found, when they returned six years later, that the painting had disappeared. In 1962, they noticed a reproduction of the painting in an art book indicating the name of the collector who had innocently purchased the work from a New York City gallery in 1955, paying $4,000 for it. The couple sued the collector for the value of the work in 1962—$22,500—or the return of the work. Not only did the couple win, but the collector also successfully sued the gallery for his loss. The gallery, which had received only $4,000 on sale, became liable for $22,500 which could be recouped, if at all, only by bringing suit against a gallery in Paris (Menzel v. List, 24 N.Y.2d 91).
Auctions have become a major force in the art market. Auctions are a process of offer and acceptance through public bidding. If the auctioneer sells art with a reserve price, no offers by purchasers will be accepted that are less than the reserve price. This protects the person who has consigned art to the auctioneer from receiving too low a price. The auctioneer can, therefore, withdraw the art from the bidding at any time if the price is not satisfactory. On the other hand, if the auction is without a reserve price, the auctioneer must accept the highest bid made. The art cannot be withdrawn once the bidding has begun. The purchaser, regardless of whether the auction is with or without reserve, may withdraw a bid at any time prior to the fall of the hammer or other customary completion of the sale.
The collector may be inclined to rely upon the representations made in an auctioneer’s catalog. But the Uniform Commercial Code warranties may not be fully effective to protect the collector, particularly since most catalogs contain warranty disclaimers. Also, certain of the representations made in the catalog can be construed merely as puffing—touting a salable item in a way that the purchaser should know not to accept at face value.
In 1962 a doctor paid $3,347.50 to Parke-Bernet for a painting stated in the catalog to be the work of Raoul Dufy. In fact, the work was a forgery. However, the catalog stated that Parke-Bernet disclaimed all warranties and sold any property “as is.” The New York Supreme Court held for the doctor, who sought to recover what he had paid. The Appellate Term reversed and held for Parke-Bernet on the rationale that authenticity was a factor in the sale price and the purchaser had the burden to satisfy himself with regard to authenticity (Weisz v. Parke-Bernet Galleries, Inc., 67 Misc.2d 1077, reversed 77 Misc.2d 80).
The New York attorney general recommended legislation to rectify this ruling. In 1968, a law passed regulating the “Creation and Negotiation of Express Warranties in the Sale of Works of Fine Art.” This law covers any sale by an art merchant, which includes an auctioneer, to a purchaser who is not an art merchant, if a written instrument such as a catalog or prospectus makes representations as to authorship. Such statements as to authorship, even if not stated to be warranties, shall be considered express warranties and a basis upon which the purchaser made a purchase. For example: (1) a work stated to be by a named artist must be by such artist; (2) a work attributed to a named artist means a work of the period but not necessarily by the artist; and (3) a work of the school of the artist means work of a pupil or close follower of the artist, but not by the artist.
An art merchant can disclaim warranties created by this law, but only if the disclaimer satisfies certain conditions. The disclaimer must be conspicuous and written separately from any statements as to authorship. It must not be general, such as a negation at the beginning of a catalog that all warranties are disclaimed, but must be specific as to the particular work. If a work is counterfeit, defined as fine art made or altered to appear to be by a certain artist when it is not, the fact of the counterfeiting must be conspicuously disclosed. Also, if a work is unqualifiedly stated to be by a given artist, such a statement cannot be disclaimed.
The effect of this New York law is to create valuable protections beyond those contained in the Uniform Commercial Code for purchasers from art merchants. Another New York law enacted in 1969 makes the falsification of a certificate of authenticity punishable as a misdemeanor.
The New York laws are important safeguards for collectors who may be prone to rely too much on statements contained in catalogs or certificates of authenticity. But the absence of such laws in other states, where only the Uniform Commercial Code would govern transactions, is a warning to collectors to exercise caution in the purchase of art. Also, while auctions are subject to some legal regulation, irregular practices such as collusive bidding are reported from time to time. The auction house rules have often become complex as well, so expert advice may be a necessity for the collector buying in the auction market.
Importing Art
The collector who purchases art abroad should be aware that many countries have enacted laws to protect artistic and archeological objects. Italy’s law, for example, regulates such objects, but does not apply either to works of living artists or to works created within the last fifty years. Collectors must obtain an export license from the Office of Exportation for items that come within the law. The export license will not be issued if exportation would cause great injury to the national patrimony. The collector must declare the market price of each item, and the Ministry of Education has the power to purchase at that price within two months of the application for an export license. The result is that the collector either may not be allowed to export art from Italy or may find that the Ministry of Education intends to purchase the art for the stated market price. The collector must be aware that these laws, however erratically enforced, exist in most of the nations that possess an abundance of art.
If the art can legally be exported from the nation where purchased, the collector must next consider whether U.S. custom duties will be payable on the work to be imported. Generally, however, no duties are payable on original works of art, such as paintings, drawings, fine prints (which must be printed by hand from hand-etched, hand drawn, or hand-engraved plates, stones, or blocks), sculptures (the original and up to ten replicas), mosaics, and works of the fine arts not fitting into the other categories (such as collages). To be eligible for duty-free entry, sculptures must be produced by a professional sculptor, which is defined as someone who has graduated from a recognized school of art or has given public displays of sculpture in exhibitions limited to the fine arts. Because crafts are dutiable, disputes often arise as to whether an object should be classified as art or as craft. The artist who has created work while living temporarily abroad is subject to the same rules as a collector with respect to whether such work can be brought back to the United States without paying duties.
Tax Status of the Collector
A collector may fall into three categories for tax treatment: a dealer, an investor, or a hobbyist. Each category has distinctly different tax consequences.
One who very frequently buys and sells artworks will be taxed as a dealer and will receive ordinary income from art sales, rather than the more favorable capital gains. A dealer will be able to deduct all the ordinary and necessary expenses of doing business (Hollis v. United States, 121 F.Supp. 191).
On the other hand, the collector may be an investor in artworks, similar to a person who invests in stocks and bonds. An investor will have capital gains and losses. Ordinary and necessary expenses will be deductible if incurred for the management and preservation of the works, such as insurance and storage costs. However, the investor must own the artworks primarily for profit. In one case, collectors, who kept their collection in their homes and derived personal use and pleasure from the collection, were found not to own the collection primarily for profit (Wrightsman v. United States, 428 F.2d 1316). But the alternative of storing art will hardly satisfy most collectors.
The third category, the hobbyist, includes the collector who buys and keeps artworks mainly for pleasure. Gains on sale will be taxed as capital gains, not ordinary income. But if a capital loss is incurred upon the sale of an artwork, there must be a profit motive for the loss to be deductible. A limited exception to this allows the hobbyist to deduct capital losses up to the amount of capital gains, when the losses and gains result from the same activity (the sale of artworks) during the tax year. Similarly, the expenses of keeping up the collection can be deducted up to the amount of income generated by the collection.
Charitable Contributions
The collector also has an advantage over the artist in the area of charitable contributions, because the collector can deduct either all or part of the fair market value of contributed works of art (fair market value is defined on page 200). However, the tax laws have complex limitations designed to prevent tax abuses of charitable deductions. Taxpayers may only receive a charitable deduction for donations up to a percentage of their contribution base (which is their adjusted gross income with some modifications). The deduction limit is 50 percent of the contribution base for most charities, including a church, hospital, school, museum, publicly supported religious, charitable, or similar organization, or certain limited private foundations. The collector must verify whether the organization is exempt and, if so, whether it is a 50 percent organization. The purpose of these limitations is to prevent reducing taxable income to zero through the use of charitable contributions.
If cash is being donated, the full amount is a deduction. However, if the artworks being donated have increased in value, complicated rules regarding the contribution of appreciated property come into play. Basically, these rules reduce the amount that can be taken as a charitable deduction when appreciated work is contributed. Also, the amount of the deduction will be reduced if the artwork that has appreciated in value will not be used for a purpose related to the exempt purpose or function of the organization that receives the donation. A lawyer or an accountant should be consulted to aid in determining the best strategy for charitable contributions involving artworks that have appreciated in value are involved. For any artwork valued at more than $5,000, an appraisal must be obtained and attached to the tax form. It must be made within sixty days of the donation and cannot be done by the person giving the donation, the person who sold the artwork originally, or the institution receiving the work. IRS Publications 526, Income Tax Deductions for Contributions, and 561, Determining the Value of Donated Property, will aid collectors who seek to take advantage of the deduction for contributions.