- Published Articles
- In the Press
- Press Releases
Sign Up for Alerts
Sign up to receive receive industry-specific emails from our legal team.
Sign Up for Alerts
We provide tailored, industry-specific legal updates to our clients and other friends of the firm.
Areas of Interest
October 23rd, 2014
Professor’s Art Career Was Business - Not “Hobby” - for Tax Purposes
Earlier this month, the United States Tax Court held that the work of a visual artist - who was a full-time art professor - constituted a business, not a hobby, for purposes of the tax law. Result: the artist, who had incurred losses from art sales, was allowed to deduct the expenses of her art business on her income tax returns. It's a reassuring decision for artists who earn steady incomes from teaching or other occupations while pursuing their careers as artists. Here's a summary of the case.
The case involves a visual artist who is also a tenured professor of studio art. For more than 40 years, she has sold her works through at least five New York galleries, and her work hangs in the permanent collections of at least 25 museums, including the Metropolitan Museum of Art and the Guggenheim Museum. Her works reside in corporate collections, and she has received numerous residencies from art organizations. According to the court, the artist sold a total of 356 works from 1971-2013, generating approximately $668,000 in net income (averaging just under $16,000 per year), after subtracting gallery commissions from the gross sales proceeds.
The IRS claimed the artist/petitioner underpaid her taxes by approximately $81,000. Like many artists, she had claimed deductions for expenses such as supplies, travel, meals and research. The IRS argued that the artist's work was "an activity not engaged in for profit" (i.e., a hobby), and therefore she was not entitled to claim deductions in excess of the income she derived from that activity. Alternatively, the IRS argued that, if petitioner was engaged in a business during these years, many of her claimed deductions were not "ordinary and necessary expenses" incurred in carrying on that business.
At the close of trial, the Tax Court bifurcated the case so that those two issues would be decided separately.
On the "hobby" issue, the Tax Court ruled that the petitioner was engaged in a "trade or business" with the objective of making a profit from her activity as an artist. (The court left the substantiation of her expenses, the character of those expenses as "ordinary and necessary" and her liability for penalties for another day.) While the court found that, ordinarily, the fact that a taxpayer incurs a series of losses beyond the startup years may imply the absence of a profit objective, "because it often takes years to achieve economic success in the creative arts, [the Tax Court] has found that a 'history of losses is less persuasive in the art field than it might be in other fields.'" The court ruled that, even though petitioner had reported losses for 18 of the last 20 years, she had nonetheless demonstrated an actual and honest objective of making a profit from her artwork.
This case is seen by many as a win for creative artists, who rely on the ability to claim tax deductions for expenses incurred in their work as artists. As long as the artist is able to show that she has an actual and honest objective of making a profit, the expenses incurred in making art may, depending on all the facts and circumstances, be treated as business expenses for purposes of the tax law. We note, however, that business deductions in any context are subject to scrutiny by the IRS, and may be disallowed where they are not "ordinary or necessary" or where the expenses are essentially personal in nature.
If you have any questions about this Tax Court ruling, or about other art law issues, please contact Amelia Brankov at (212) 826 5574 or firstname.lastname@example.org, or any other member of the Frankfurt Kurnit Art Law Group.
Other Art Law Alerts
Real Estate Developer Ordered to Pay $6.75 Million for Destroying Aerosol Artists’ Works
A New York federal court recently ordered a real estate developer to pay $6.75 million for whitewashing aerosol artists' works located at the famed 5Pointz site in Long Island City. Read more.
February 22 2018
Art Collaborators Settle Suit over Ownership of Works
Recently, a settlement was reached in a lawsuit over the intellectual property rights in a body of thousands of works of visual art created by a husband and wife duo. Read more.
February 7 2018
Recent NYS Sales Tax Law Change Affects Art Sales Between Related Entities
On August 14, 2017, the New York State Department of Taxation & Finance issued a Technical Memorandum, TSB-M-17(4)S, which will be of interest to many New York-area art dealers and collectors. Read more.
August 23 2017