Question

Jeff Nelson, a successful dealer of fine art, has an opportunity to acquire an original Dali painting. He thinks this would be a great long-term investment but would also be willing to sell the painting to an art collector for the right price. Before making the purchase, Jeff contacts Danny Jackson, a lawyer, about the possibility of financing the purchase jointly. The parties draft a basic written joint venture agreement for the purchase, holding and possible resale of the painting. Jeff contributes 99% of the capital required and will be allocated 99% of the venture’s income, gain or loss. Danny contributes the remaining 1% and is excited to own even a small share of a painting of a well-renowned artist. The JD Venture closes the deal and acquires the painting and resells it 18 months later to an out-of-town collector who learned about the painting in a trade magazine. Danny is disappointed since his share of the profit is small and he is sad that he no longer owns the painting. On the other hand, Jeff is ecstatic with how everything worked out. What is the proper tax treatment of the sales transaction?

Answer 1

Since the painting is jointly owned and as per drafted agreement the resale value too shall be directed to both parties who own shares. The tax treatment thus have to be born equally as per agreement and resale value will be distributed on basis of witholding share percentage. Even if the shareholder who have least amountof shares will be part of the profits and tax incurred on resale of paintings else could lead to breach of the contract.