United States: Trove Of Nazi-Looted Artwork Discovered! Restitution And U.S. Federal Income Taxation Issues

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.


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.

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