Kim and Toby Jones are avid antiques collectors. They regularly attend garage sales and flea markets and purchase lots of old stuff. In 2014, they purchased a very old desk for $600. The desk was in poor shape and required rehabilitation. It sat in their garage for more than a year. Kim was taking the desk apart when she found an envelope jammed into a dark recess of the desk. She opened the envelope and much to her surprise, found a very rare Picasso painting. Kim was very excited by the discovery of this historical treasure. She and Toby contacted Sotheby's, the auction house, to get an appraisal for the painting. In December 2015, Sotheby's authenticated and appraised the painting at $1,350,000. In April of 2016, the painting was auctioned by Sotheby's and fetched $1,650,000 net of fees and commissions. Kim and Toby received the money in May of 2016. Your manager asked you to prepare a research memo indicating how Kim and Toby should treat the discovery of this painting for tax purposes. 

Specifically, you should indicate the following: a. Do they have taxable income? 

b. If so, when do they have taxable income and what amount? 

c. What is the character of any income?

Answer rating: 100% (QA)

Yes they have taxable income because they have to report the item they have fo... View the full answer