In 2012, German customs investigators seized approximately 1,400
pieces of artwork from Cornelius Gurlitt, an 80-year-old man living
in Munich. The authorities entered Gurlitt's apartment pursuant
to an unrelated allegation of tax evasion and found the trove of
artwork, which it is currently holding in its custody.
During World War II, the Nazis removed many so-called
"degenerate" artworks from German museums and looted
thousands of artworks, including artworks from Jewish collectors,
from the territories they occupied. Hildebrand Gurlitt,
Gurlitt's father, sold "degenerate" and looted works
on behalf of the Nazis and appears to have acquired some of the
looted work for himself. After Gurlitt's father died in 1956,
the collection first passed to Gurlitt's mother and then to
Gurlitt in 1967.
Of the 1,400 pieces discovered in Gurlitt's apartment, the
authorities are attempting to identify the works as either (i)
so-called "degenerate" works or (ii) looted artworks. The
distinction between the two categories is significant because,
under a German law enacted in 1938, the museums might not be
entitled to restitution.
In the event that a particular piece is traced back to a victim of
the Nazis, Gurlitt could assert that his father legally obtained
the piece through purchase or that his ownership is otherwise
protected under German law. Where Gurlitt cannot successfully
defend the legality of ownership, the Germany authorities will
likely retain custody of artworks, at least for the short
term.
Notwithstanding the legal obstacles, victims of the Nazis or their
heirs can nevertheless seek to enforce their rights to artworks
looted by the Nazis. In such cases, there are several possible
outcomes, including outright return of the artworks to the pre-War
owners or their heirs, or the payment of some monetary
compensation.
In the event that a Holocaust victim receives restitution from
Gurlitt or the German authorities, the owners are provided
favorable U.S. income tax treatment on such amount. The general
U.S. income tax rules require taxpayers receiving property, other
than by gift, to report the fair-market value of such property as
gross income. The tax basis in such property would be the amount
paid plus any gain recognized upon receipt. However, Section 803 of
the Economic Growth and Tax Relief Reconciliation of
20011 alters the general rules for Holocaust victims (or
their heirs or estate) in two significant ways. First, an
"eligible individual"2 does not have to
include the "excludible restitution payment"3
as income; and second, the tax basis of any excluded property is
the fair market value of such property as of the date of
restitution.
For example, if Gurlitt (or the German government) transfers a
Picasso painting that has a fair market value of $10 million to a
Holocaust victim (or the victim's heirs or estate) who is
subject to U.S. income tax, the recipient will exclude the value of
the artwork from his "gross income" and will have a $10
million tax basis in the artwork. Similarly, if the recipient pays
a nominal amount for the artwork, his tax basis would still be fair
market value as opposed to "cost basis." Finally, if the
recipient subsequently sells the Picasso for more than $10 million,
only the excess amount would be gross income as the first $10
million of the purchase price is applied against the painting's
tax basis, and thus is received tax-free.
Depending on how the Gurlitt hoard is handled by the German
authorities, claimants could face many legal and practical
obstacles. Herrick's Art Law Group has aided its clients in the
recovery of almost 250 Nazi-looted artworks, and Herrick's Tax
& Personal Planning team can assist successful claimants in a
variety of ways, including advice on tax structuring and estate
planning.
IRS Circular 230 Required Notice – IRS regulations require
that we inform you that to the extent this communication contains
any statement regarding federal taxes, that statement was not
written or intended to be used, and it cannot be used, by any
person (i) for the purpose of avoiding federal tax penalties that
may be imposed on that person, or (ii) to promote, market, or
recommend to another party any transaction or matter addressed
herein.
Footnotes
1 We note that Section 803 has not been codified into the
Internal Revenue Code. When Section 803 was initially enacted, it
was set to expire at the end of 2010; however, subsequent
legislation excepted Section 803 from any expiration date.
2 The term "eligible individual" means a person who was
persecuted on the basis of race, religion, physical or mental
disability, or sexual orientation by Nazi Germany, any other Axis
regime, or any other Nazi-controlled or Nazi-allied country. The
term also includes the person's heirs and estate.
3 An "excludible restitution payment" means any payment
or distribution to an individual (or the individual's heirs or
estate) that (1) is payable by reason of the individual's
status as an eligible individual, including any amount payable by
any foreign country, the United States of America, or any other
foreign or domestic entity, or a fund established by any such
country or entity, any amount payable as a result of a final
resolution of a legal action, and any amount payable under a law
providing for payments or restitution of property; (2) constitutes
the direct or indirect return of, or compensation or reparation
for, assets stolen or hidden from, or otherwise lost to, the
individual before, during, or immediately after World War II by
reason of the individual's status as an eligible individual,
including any proceeds of insurance under policies issued on
eligible individuals by European insurance companies immediately
before and during World War II; or (3) consists of interest which
is payable as part of any payment or distribution described in
paragraph (1) or (2).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.