Rose v. Commissioner

Jackie Fine Arts (Jackie) facilitated investment in artwork reproductions. Its business model entailed (1) securing the rights to reproduce famous artwork (referred to as reproduction masters) and then (2) selling those rights and the anticipated income to investors. One of the major selling points of Jackie’s product was its tax-advantageous status: on the basis of their ownership, purchasers could seek deductions and investment credits on their federal income taxes. In 1979 and 1980, James Rose (plaintiff) purchased three Picasso packages from Jackie. These packages included the reproduction masters to Picasso images, which were to be used to produce prints, posters, puzzles, calendars, and the like. Each Picasso package also included two appraisals of the reproduction master that valued it at between $600,000 and $800,000. The appraisals attached to each package were identical, save for the name of the buyer and the identification of the reproduction master, and their valuations were based on Picasso’s fame and the sales of original prints—not reproductions—made by other artists. The appraisals did not consider the fair market value of the reproduced images, nor did they contemplate the impact of simultaneous print sales. James failed to seek an independent valuation of the packages before purchasing them. On their tax returns for 1979 and 1980, James and his wife, Judy (plaintiff), claimed depreciation deductions and investment tax credits deriving from their ownership of the packages. In 1983, the Internal Revenue Service (IRS) (defendant) issued a notice of deficiency disallowing all the claimed deductions and credits, which the Roses challenged. The tax court considered whether the Picasso packages met the business or income bases required to claim the deductions and credits.