Wish You Were Here: Sotheby’s Institute of Art (CA) Conference, January 2015

April 1, 2015

by Jessica Newman

On January 30 and 31, the Sotheby’s Institute of Art gathered attorneys and art professionals together in Los Angeles, California for their Art Law Conference entitled “The Practice of Law in the International Art World.” The two-day expansive agenda featured twelve modules and nearly forty speakers, including artist Shepard Fairey giving an inspired keynote speech. The Conference addressed a number of issues at the confluence of art and law, including authenticity, looting, collecting, restitution, investment, public art, the future of art, and the art market. Following is a brief write up of the most memorable topics:

1. Liability v. Leadership: Advising Arts Organizations

Melody Kanschat, Executive Director of the Getty Leadership Institute at Claremont Graduate University, chaired a panel entitled “Liability v. Leadership: Advising Arts Organizations,” which featured Stephen Clark (J. Paul Getty Trust), Fred Goldstein (Los Angeles County Museum of Art), David Galligan (Walker Art Center), and Eva Schieveld (Van Gogh Museum). As multidimensional institutions, museums face a myriad of issues that extend far beyond the world of art. The panel emphasized that general counsel should be a part of all senior management conversations and budget discussions. One common concern was the avoidance of conflicts of interest (both real and apparent), particularly when dealing with a board of trustees.

One question posed to the panel was whether a museum can invest in a company which is run by a member of the museum’s board. As with many legal questions, the answer is, “Yes, but…” Although some museums have a strict zero tolerance policy when it comes to such investments, it is possible to structure transactions in a manner that avoids direct conflicts of interest. In part, the soundness of such a transaction turns on who is making the decision. It is important to ensure that the transaction is done at arm’s length and that no one who will directly benefit is personally involved in the decision whether or not to invest. In addition, transparency and continued management play important roles in preventing conflicts from arising.

2. Restitution Panel

Jonathan Petropoulos moderated the Restitution Panel, which explored the continuing evolution of restitution claims. Although issues of restitution have been around for some time, they remain a major concern for purchasers, heirs, and museums alike. Lucian Simmons of Sotheby’s observed that investigation into potential restitution issues remains a steady part of his work even today. Accordingly, as Simon J.Frankel (Covington) reiterated, research into proper provenance is as important as ever, and several conference speakers strongly advocated title insurance. As for the future of the field, Lawrence M. Kaye (Herrick), identified Russia as the next potential hotspot for restitution claims if access to Russian archives and collections becomes a possibility.

3. Secured Transactions

The second day of the conference began with a panel on Secured Transactions, moderated by Franklin Boyd and featuring John Arena (Bank of America), Stephen D. Brodie (Feinstein), and Karen McManus (Jacqueline Silberman & Assocs. Inc.). Art as an alternative asset has become increasingly popular for wealthy investors looking to diversify their portfolios. Art can also be used as a financial tool without having to sell the works by using the art as collateral. However, this option is only open to a select number of collectors.

The target collector is one with at least $10 million in well-established works (i.e., Old Masters, Modern, etc.) which can be quickly and easily sold were such a sale to become necessary for the lender. These works are appraised and, from a collector’s perspective, title insurance is recommended. Additionally, art must be the “second way out” of the deal. In other words, the borrower must have demonstrated equity in other assets. For those who can meet these criteria, using art to finance loans can be an attractive option. The fact that the United States is the only country where owners can maintain control of their collateralized works makes this option particularly appealing.

4. Art Collecting in the Current Legal Market

“Art Collecting in the Current Legal Market,” panel which was chaired by Mary Rozell (Sotheby’s) and featured Carol Bradford (California Community Foundation), Josh Roth (United Talent Agency, formerly Glaser Weil), and Katie Tolson (Gurr Johns). Although the increasingly global and technology-driven world of art collecting makes it easier than ever to access art, it also poses a number of challenges for the contemporary collector. For instance, documents can now be forged with the push of a button. However, one area in which technology has significantly enhanced the collecting experience is in inventory management. Ensuring proper documentation of one’s inventory is vital and a number of new software options have emerged that can assist a collector in doing just that. These software programs range in price, but at a minimum it should offer the collector a means of inputting photographs, descriptions of the works and details such as collection history, exhibition history, location, and inventory number. Ms. Tolson described her firm’s custom-designed Art Collection Management Software, which offers collectors a sophisticated means of managing their collections.

Roth discussed the increasing use of Section 1031 like-kind exchanges as a tool that can be utilized to expand one’s collection. Section 1031 of the Internal Revenue Code, entitled “Nonrecognition of gain or loss from exchanges solely in like kind,” provides a means for investors to defer taxes on capital gain from the sale of a work of art. In effect, 1031 Exchanges provide a collector with an interest-free loan from the government that can be used to subsidize future acquisitions so long as certain conditions are met. First, this section does not apply to personal property, as it applies only to property used for business or investment purposes. The exact parameters for this requirement are somewhat vague, however a work purchased solely for personal display in one’s home is not likely to qualify. Defining a like-kind property in this context can be equally difficult as there is no definitive guideline as to what type of art would be of like-kind to another. For instance, it is conceivable that the IRS may determine that a sculpture is not of like-kind to a painting.

Lastly, there are strict timing and designation requirements which are intended to distinguish a 1031 Exchange from a taxable transaction in which the purchaser merely uses the proceeds from a previous sale to purchase a new property. There are several ways to structure such an exchange, though the forward, or deferred exchange is most common. Broadly speaking a forward exchange works as follows: upon the sale of a work, the collector can use a 1031 exchange to defer the gain by investing the proceeds in a like-kind replacement property (i.e. another work of art) of equal or greater value. The replacement work must be identified within 45 days of the initial sale, and the collector has 135 days to close the sale upon identification. The appeal of such exchanges is evident, and Roth expects that they will only continue to grow in popularity.

Over the course of the two days, several takeaways emerged. First, many of the traditional issues within the field of art law – looting, restitution, importing/exporting, authenticity – remain at the heart of any art law practice. Secondly, the search for new uses and new means of valuing art has produced a number of creative options for investment and exchange of art. These options, however, are complex and require thorough due diligence by all parties. Lastly, the digital age has brought with it a host of new challenges for collectors, museums, artists, and attorneys alike. At the same time, technological advances also are opening up the art world in exciting ways.

Selected Sources:

• Like-Kind Exchanges Under IRC Section 1031, FS-2008-18 (Feb. 2008), http://www.irs.gov/pub/irs-news/fs-08-18.pdf.

About the Author: Jessica Newman is a third year dual-degree student pursuing a Juris Doctor and a Masters in Art History at Duke University. She can be reached at Jessica.newman@lawnet.duke.edu.