ART AND TAXES? Some questions for Kerry.

UPDATE: Accountant reader David Walser says something’s wrong here. Click “more” to read his take.

From David Walser:

Thanks for linking to the Boston Globe article giving more details on Senator Kerry’s reported gain on the sale of a painting. Perhaps it’s just the tax accountant in me, but I found the following part of the article especially interesting:

Over time, [Tillou] reimbursed her $1 million, her original one-half stake in the purchase price. When he sold it last year to a private collector for $2.7 million, he shared the $700,000 profit with her.

If the Senator’s wife paid $1 million for half the painting, and if she then gave Kerry a 25% interest in the painting (half of her half), he would have had an initial basis of $500,000 in his share of the painting. But the article says Ms. Heinz-Kerry was reimbursed $1 million — which would have reduced her basis (and his) to zero. (The article says she got the money, but if it was a payment in respect to the painting he would have had a right to half.) So, wouldn’t the gain on the sale equal $1,350,000 (one half of the $2.7 million sales price)? It seems the Kerrys had already recovered their basis in the painting, so 100% of their share of the sales proceeds would be gain.

Perhaps the Senator should consider amending his return. Again.

That makes sense to me, but it’s been a long time since I took “Fundamentals of Income Taxation” from Mike Graetz. Maybe the folks at TaxProf will weigh in.