This
is a story about two paintings and the Internal Revenue Code (the
“Code”). The paintings were done by the same artist, painted during the
same period, and are of comparable value. The owner of the first
painting was able to fully deduct the costs of upkeep, climate control,
security and insurance on his painting, as well as travel and other
expenses pertinent to acquiring the painting on his federal income tax
return, while the other owner incurred the same costs but received none
of the same tax benefits. What is more, if the first painting were sold
at a loss, its owner could deduct the loss for tax purposes, while the
owner of the second painting would receive no benefit from the loss.
The reason for such disparate treatment under the Code? The first owner
was an Investor while the second owner was a Collector.
Financial
advisors often miss obvious opportunities because they are focused only
on immediate liquidity. If the prospect has little in the way of
investable assets but has significant wealth tied up in real estate, a
closely held business or other illiquid assets, the advisor often makes
a note of future potential business and moves on to other, more liquid
prospects. When the financial advisor pursues the prospect after the
liquidity event has occurred, he or she is often surprised to find that
countless other financial advisors have discovered the prospect's
newfound wealth, and now a full-scale beauty pageant is being conducted
for even the smallest piece of business.
