Question

"Shenandoah Skies" is the name of an oil painting by artist Kara Lee. In each of the following cases, determine the amount and character of the taxpayer’s gain or loss on sale of the painting.a. The taxpayer is Kara Lee, who sold her painting to the Reller Gallery for $6,000.b. The taxpayer is the Reller Gallery, who sold the painting purchased from Kara to a regular customer for $10,000.c. The taxpayer is Lollard Inc., the regular customer that purchased the painting from the Reller Gallery. Lollard displayed the painting in the lobby of its corporate headquarters until it sold "Shenandoah Skies" to a collector from Dallas. The collector paid $45,000 for the painting.

Answer 1

Answer: The answers are entwined in the explanation.

Explanation:

The length of time for which each taxpayer held the asset AND the amount or percentage of tax payed by each taxpayer ARE NOT GIVEN but the amount and character of the gains and losses are shown below, as estimated:

(A) Taxpayer Kara Lee

The amount of Kara Lee's gain is $6,000

The character of this gain is SHORT TERM

The amount of Kara Lee's loss is $39,000 ($45,000 - $6,000)

The character of this loss is LONG TERM

(B) Taxpayer Teller Gallery

The amount of Teller Gallery's gain is $4,000 ($10,000 - $6,000)

The character of this gain is SHORT TERM as the gallery sold to a regular customer (meaning that the painting didn't stay long in their possession)

The amount of Reller Gallery's loss is $35,000 ($45,000 - $10,000)

The character of this loss is LONG TERM

(C) Taxpayer Lollard Inc.

The amount of Lollard Inc.'s gain is $35,000

The character of this gain is LONG TERM because the question says that Lollard displayed the painting in the lobby of its corporate headquarters UNTIL it sold for $45,000. This means that the asset "Shenandoah Skies" was held for a long time by/at Lollard Inc.

On the other hand, Lollard Inc. has no loss on sale of the painting until the Dallas Collector (who bought it from them) resells it and at a price higher than $45,000.

Answer 2

Answer:

A. $6000 ordinary income on sale of a creative asset by the creator of the asset.

B. $4000 ordinary income on the sale of inventory.

C. $35000 capital gain on sale of a capital asset. (which is a non depreciable business personality).

Explanation:

The taxpayer sold a painting to Reller Gallery for $6000. So, the tax payer amount and the character of tax payer gain or loss is as follows:

A. $6000 amount realized minus zero basis is equal to $6000 ordinary income on sale of a creative asset by the creator of the asset.

Reller Gallery sold the painting purchased by from Kara to a regular customer, Lollard Inc. for $10000. So, the tax payer amount and the character of tax payer gain or loss is as follows:

B. $10000 amount realized minus $6000 cost basis is equal to $4000 ordinary income on the sale of inventory.

Lollard Inc., the tax payer, was the regular customer that purchased the painting from the Reller Gallery. Lollard showed the painting in the lobby of its corporate headquarters until it sold "Shenandoah Skies" painting to a collector from Dallas. Where the collector paid $45,000 for the painting. So, the tax payer amount and the character of tax payer gain or loss is as follows:

C. $45000 amount realized minus $10000 cost basis is equal to $35000 capital gain on sale of a capital asset. (which is a non depreciable business personality).