Long Term Violin Maintenance Expenses

[barnesviolins]

So a customer of mine has a mid 18th century Venetian violin that drowned in the flooding from Hurricane Ike. It was restored. She was given money from the insurance company for the restorations but didn't spend the full amount as the repairman didn't charge for some of the work done. So the IRS comes along and want's capital gains tax for the remaining money. So she wants to justify expenses for upkeep on this instrument for say 10 years, so that what she'll have the money for any future work required to maintain the instrument.........instead of giving the IRS .....some 40 percent.

So there is the story in a nut shell.

The question she posed to me is if there is a way to claim expenses for unforeseen changes in the instrument that will require regular"maintenance"because of the damage and restoration it has currently undergone..

Now I know I'M not psychic, and can't for see the future of this fiddle, but it has had a lot of restoration and has been through the wringer. So there is also some story about the insurance company not processing her new appraisal so it was underinsured at the time. I can see her point on concerns of upkeep and the devaluing the instrument may have undergone that wasn't compensated for by the insurance company.

Any ideas on what can be said to qualify the "reserve" of money for such future expenses?

Appreciate your input.

Thanks

Dorian Barnes

[Ken Pollard]

Above my pay grade, but I'd steer clear of the whole mess. It sounds like the next thing she might be up against is insurance fraud.

[MANFIO]

I agree with Ken. The musician received the money from the insurance company for an specific event in the past, and not to cover possible future events. Just my two cents.

[David Burgess]

I'd expect maintenance costs after a major trauma to be higher. That said, I don't deal with insurance companies much any more. I'm not a tax guy either.

I'd think that major damage, repaired, would result in a depreciation of value. Is it possible to offset that against a payout?

[IBK]

I think that Luis if right on this matter(he is an attorney.) The amount of the insurance claim that was paid, was to cover to cost of restoration of the violin not for the future maintenance which would be the responsibility of the owner, flood damage or not. If the full amount was not expended for the restoration and the surplus amount was not returned to the insurance provider, the IRS views this as income and is taxable as such. I am not a tax expert but it seems logical that the IRS would have that view.

It reminds me of several professional violinists who got into trouble with the IRS. They bought fine violins and claimed them as professional equipment and took a depreciation each year, then when they deducted the appraisal fees for increasing values of those instruments or sold the violins for more than they paid for them , the IRS came after them for capital gains.

[David Burgess]

I think that Luis if right on this matter(he is an attorney.) The amount of the insurance claim that was paid, was to cover to cost of restoration of the violin not for the future maintenance which would be the responsibility of the owner, flood damage or not.

Without seeing the insurance contract, I don't see how it's possible for anyone, even an attorney, to know what was and wasn't covered. Contracts are not all the same.

It's not uncommon for the better policies to cover depreciation. If the insurance covered "loss" to the insured without specific exclusions, it could be interpreted to cover almost anything.

[Bruce Carlson]

Without seeing the insurance contract, I don't see how it's possible for anyone, even an attorney, to know what was and wasn't covered. Contracts are not all the same.

It's not uncommon for the better policies to cover depreciation. If the insurance covered "loss" to the insured without specific exclusions, it could be interpreted to cover almost anything.

IBK and David hit it on the head. The only leg you have to stand on is depreciation. Depreciation implies that the instrument, even though a careful and correct restoration was carried out, can no longer be returned to it's original condition prior to the "accident".

When we do a repair where depreciation is involved we have to advise the insurance company immediately upon completion of the work and the compensation is factored into the final settlement. It is usually indicated as a percentage of the insured value.

Claiming that the remaining monies, which were intended for the repair of the instrument, are instead for depreciation is incorrect. If the insurance company found out they would ask for restitution of the remaining unused funds (and, if necessary, the insurance company would take you to court). The IRS is correct in seeing your extra funds as capital gains.

It would be worth your while to find out if the insurance you have even covers depreciation. Some don't.

This is not legal advice as I am not a lawyer.

Bruce

[IBK]

Without seeing the insurance contract, I don't see how it's possible for anyone, even an attorney, to know what was and wasn't covered. Contracts are not all the same.

It's not uncommon for the better policies to cover depreciation. If the insurance covered "loss" to the insured without specific exclusions, it could be interpreted to cover almost anything.

Even if the insurance company claim payout amount was in excess of the restoration done, and let us say that the insurance contract did provide an allowance for maintenance and/or depreciation, and the owner of the violin wanted to apply the amount remaining little by little for maintenance on a long term basis. The whole unused amount if deposited in a bank would be considered as income for that tax year and federal tax on the whole amount would be due for that year.

If the owner is a professional and files a Schedule C, there is a place on that form for "repairs." The owner would then have the option to deduct the amount of maintenance/repair for that tax year and deduct similar amounts in subsequent years. The big problem is when the entire unused amount is "pocketed" so to speak.

Likewise as Bruce stated; I am not a lawyer or a CPA, just a guy who has been dealing with taxation for more years than I care to remember.

With regard to depreciation of antique string instruments, you will find this article of interest

http://www.nysscpa.org/cpajournal/1997/1197/dept/D681197.htm

[Jonathan Rubin]

I definitely recommend consulting with someone who knows the laws where you are and can look at the specifics involved.

I, like all of you, could be totally wrong on this, but this is my understanding:

An insurance award or settlement is not income, and is therefore not taxable.

When one is awarded a settlement on an insurance claim, there is no obligation how one spends the money awarded. For example, if your 10 million dollar violin is lost or destroyed and the insurance pays out, you do not have to go out and buy another 10 million dollar fiddle. You can buy a kazoo and take a vacation if you want.

I wouldn't think about maintenance as much as some devaluation of the instrument unless there is some issue with the restoration itself.

When we take in an instrument for repair as part of an insurance claim, we do not do any repair until the claim is approved, in case the insurance company wants to see the instrument and the damage. Once they pay, they could care less how the money is spent and the person is fully within their legal rights to take the money and not repair or replace the instrument.

[Bruce Carlson]

I definitely recommend consulting with someone who knows the laws where you are and can look at the specifics involved.

I, like all of you, could be totally wrong on this, but this is my understanding:

An insurance award or settlement is not income, and is therefore not taxable.

When one is awarded a settlement on an insurance claim, there is no obligation how one spends the money awarded. For example, if your 10 million dollar violin is lost or destroyed and the insurance pays out, you do not have to go out and buy another 10 million dollar fiddle. You can buy a kazoo and take a vacation if you want.

I wouldn't think about maintenance as much as some devaluation of the instrument unless there is some issue with the restoration itself.

When we take in an instrument for repair as part of an insurance claim, we do not do any repair until the claim is approved, in case the insurance company wants to see the instrument and the damage. Once they pay, they could care less how the money is spent and the person is fully within their legal rights to take the money and not repair or replace the instrument.

The procedure that we use is the same as you mentioned. Once the claim is filed, the Insurance Company expects an estimate from us for the repairs. The actual repair can be paid for either by the insured (owner of the instrument) or directly; where the repairer submits the invoice to the Insurance Company. We must submit a copy of the paid invoice before the Company settles the claim.

It appears that in this case the Company settled the claim with the insured party without requesting proof of payment for the repair. I find this unusual.

On a total loss it is true that you are not obliged to go out and purchase another instrument but many insurance companies have a clause whereby they can replace your instrument with another of equivalent value ..... ALWAYS READ YOUR POLICY CAREFULLY.

You may well be right about taxable income on insurance claim settlements. I shouldn't even talk about it because I've been outside of the states for too long.

Bruce

[Jeffrey Holmes]

It appears that in this case the Company settled the claim with the insured party without requesting proof of payment for the repair. I find this unusual.

Bruce;

Actually, this seems not to be unusual here in the case of instrument damage/loss. Some clients are paid out long before repairs are complete...

I've always found these practices a bit odd myself.

Dorian;

As far as the tax implications, if it were me, I'd be on the phone to a CPA and/or attorney rather than trying to find a way of sneaking around the IRS claim, valid or spurious as it might be...

[Bruce Carlson]

Bruce;

Actually, this seems not to be unusual here in the case of instrument damage/loss. Some clients are paid out long before repairs are complete...

I've always found these practices a bit odd myself.

Dorian;

As far as the tax implications, if it were me, I'd be on the phone to a CPA and/or attorney rather than trying to find a way of sneaking around the IRS claim, valid or spurious as it might be...

Jeffrey,

Couldn't agree more ...

Bruce

[NewNewbie]

A member of Maestronet here is a Lawyer, Zak Moen.

Here is his link.

Zak Moen Law

While you are at it checkout his blog on making!

Blog

I can only think that if a person bought a 'maintenance package' spread over a few years, then this might be a way around things.

Sorta like buying an extended warranty.

[Ratcliffiddles]

Interesting case but not enough info.

What would be interesting to know is if the settlement was based on an accurate estimate provided by a professional. If this is the case, and if the final amount charged to restore the instrument was substantially lower (as it seems to be suggested that it was?) than the amount the insurance company settled at, I suspect that the insurance would have something to say about this.

If the repairer didn’t charge for some of the work done, why not? The owner wasn’t paying for it anyway.

Again, if she wasn’t compensated for any possible depreciation, I don’t understand that either. Somebody restoring a Venetian instrument should possess, or have access to the knowledge required to evaluate depreciation on such an instrument after an accident, and should advise accordingly. Depreciation can be a far higher figure than actual repair costs.

In the UK, the vast majority of instruments above a certain calibre are insured by one of two companies. As Bruce and others mentioned, it is customary on this side of the pond, to submit an invoice to the Insurance, either after payment by the insured, or directly by the repairer if agreeable. I think introducing future possible costs in the equation could be “misinterpreted”.

Either the estimated cost was over-inflated, or it should have clearly stated that future maintenance costs would be included in the claim over and above the restoration (never come across it myself).

A good way round this would have been what Zak suggests, ie an extended guarantee from the repairer, in which case any excess money probably should still have been paid to him (or her) and eventual maintenance attributable to the restoration/accident would be carried out free of charge within the guarantee period.

No idea about tax implications.

Peter

[La Folia]

Don't forget, there is also the possibility of a tax deduction for the unreimbursed loss. Again, you need a professional opinion, not our amateur attempts., i.e., sudden depreciation.

[barnesviolins]

I appreciate all of your feedback. This definately went more legal than I am going to be involved with.

Some misinformation I gave...... It was the hurricane Allison, not Ike. So that puts it back 9 years. The restoration was done then, and the maker stood behind the work and redid some things to try to get back the sound the customer remembered it having. The money she got from the insurance was a settlement for the issue that they didn't up the coverage amount on it when she sent them the higher appraisal I think.......... That is why the IRS see's it as a capital gain.

Bottom line is I don't have all the facts, and don't even think I want them. I am not getting involved with keeping from Caesar what is Caesars. She is using a CPA and and Attorney. My part in this was that she asked me if there was anyway to justify continued maintenance on this as it has yet to be what she remembered it to be and is still sinking money into it to get it there.

With that said, I reported to her that I don't know how to say there is any more maintenance for this instrument than any old instrument would require. Then again, if I was in a car accident and injured my neck, there may be things that come up later, head aches, nerve damage, that were not seen in the beginning and an insurance company would continue covering costs of injuries related to the original accident. And that the best person to give that type of documentation would be the original "Doctor". So..........

The instrument was delivered this morning and she is happier with it. I am happy not to get myself into any legal issue around it. For me, it did pose an interesting question around "continued care" so to speak and was wondering who else may have had a similar experience.

Thanks for all the thoughtful input.

Dorian