Art’s Sale Value? Zero. The Tax Bill? $29 Million.
nytimes.com
nytimes.com
But it sure would be useful to have a blog dedicated to exposing the abuses of the IRS and other agencies. Given how big the agency is, and how infrequent these articles are, we can be sure this is just the tip of an iceberg of bureaucratic malfeasance.
EDIT: this is apparently the eyesore that the IRS values at $65 million:
http://upload.wikimedia.org/wikipedia/en/7/74/Robert_Rausche...
And of course, it's always a balance, which ends up with Saverin giving up citizenship because of their fury and at the same time big companies Doubling/Tripling Irish everything and being in the clear with them. (not saying what they did was wrong though)
https://en.wikipedia.org/wiki/Joe_the_Plumber#Tax_controvers...
It was Ohio Job&Family Services and the Highway Patrol which started trying to dig up dirt on him in retaliation for his criticism of Obama, not the IRS.
The more common situation is extremely high valuations, and thus taxes, on real estate which is listed and not selling at half the valuation. I know many people who have gotten burned by that.
Its also a little similar to a system used to resolve splitting a 50/50 owned company: the person who wants to buy out the other partner must first give the price they'll pay, and then the second partner must choose between buying them out at that price, or selling their share.
Of course, there can be an immediate arrangement if they just give away the item to a museum.
The government wants cash, it has no use for paintings!
Why?
Hey kids, I hear your parent died? Great! You owe us 500 million dollars, get to work.
I think estate taxes are defensible, but the way this particular estate was handled doesn't seem defensible. Out of all the things someone could do with their vast fortunes, buying art and then loaning it out to museums and collections doesn't seem like the worst thing in the world.
In particular, the article points out that black market valuations may have even been considered when valuing the art in the estate: That means the government is basically encouraging these works of art to be sold on the black market (likely to private collectors who will keep them in private), where if they were at least sold on the open market - or in this case, held by the original owners - they would be more likely to be put on loan to museums so the public could benefit from them.
Alternately, in a case like this where it's illegal to sell the item being taxed, the government should offer the option of simply handing it over to them in order to erase the tax liability, or giving it to a charity, in order to conclusively demonstrate that no profit is being made from the work of art (black market or otherwise).
So you're supposed to feel sorry for people in that position? That they have to pay so much tax they might have only a few hundred million left to pad out their mattress?
Most people are ground down to nearly nothing by taxes and cripplingly high insurance premiums. They should be so lucky to have this much left over after taxes.
You know what most kids inherit when their parents die? A giant tab for the funeral.
Moreover, when the cash is tied up in an art collection, the valuation is really tricky. Art that earns a $500m tax bill could easily be worth less than that if sold immediately - as is, in fact, the case with the piece under consideration.
As for the fact that most people inherit debts from their parents, I don't see how that's material to the discussion at hand.
Do you have kids? It turns out one big economic incentive, particularly late in life, is to make money not for yourself but for your children. A lot of people hate the concept of an heir running around with money he/she didn't earn, but i mean, it's Not Your Problem so long as the money was fairly earned by the parents. Furthermore, a billion dollar estate is probably something that has already been taxed, possibly several times, possibly in a compound fashion, so I don't think there should be any worries that rich heirs have not paid society for their money.
There's also serious implementation problems with estate taxes, as other posters have described. Levying very large taxes on illiquid and hard-to-value possessions is unfair no matter how you slice it.
I don't hate the concept either, but IMHO complaining that one would only receive $500M of unearned money instead of the $1B anticipated just makes the would-be recipient look like an asshole.
Most people in the world would probably be satisfied to receive a few thousand dollars of unearned money. $1M and they'd be set for life in most parts of the world. Anything above that is just gravy.
Because, God forbid, we treat other humans as humans. They've got some form of pretend wealth so screw them.
Right?
No wealth is created when an estate gets handed over. The tax thus stops being a way to assign a percentage of wealth to public projects and becomes a accounting trick. The idea that this simple wealth transfer should be taxed at such a high rate is slly.
http://www.economist.com/blogs/lexington/2010/10/estate_tax_...
The United States, as conceived, was a departure from the European system comprised mostly of wealthy land owners and destitute peasants.
In a sense, the estate tax is an unfortunate necessity. Without it you would have Paris Hilton inheriting billions absolutely tax free, and likely accumulating even more wealth not by any particular skill, but through interest alone. That much money has a sort of gravitational pull at that point if not mis-managed.
> Hey kids, I hear your parent died? Great! You owe us 500 million dollars, get to work.
Clearing up a dead parents estate an be psychologically challenging. Luckily most people paying the estate tax can afford lawyers to help them muddle through. If you have a well adjusted family and the person doesn't die suddenly you could even plan a lot of this ahead of time.
Yeah, it sucks, and it's not ideal, but out of all the places the government can extract money to benefit society, it's one of the most effective and least painful in the big picture.
Hey kids, I hear your parent died? Great! You get to keep half their of their shit that you did absolutely nothing to earn for yourself.
I agree. It should be much higher.
This is money earned by someone through their hard work. They probably created hundreds or thousands of jobs in the process too. They paid taxes on it already, too. Why should the state help itself to almost half of the inheritance? Because it doesn't suck enough to have a close relative die, so you want to make it more painful?
As an American, I am not opposed to inheritance taxes. Discouraging the creation of an hereditary aristocracy is part and parcel of the legacy of our revolution and has long been one of the reasons for enacting inheritance taxes. Given the way in which our tax code favors capital gains, the inheritance tax is in many ways a mechanism which allows people to grow their wealth tax deferred. And in the case of the art, it is a stretch to consider any increase in value a capital gain that contributed to economic growth.
Other cultures enjoy supporting hereditary nobility. But it's not part of our founding principles.
If you were rich, that would be because you cared to generate wealth on that scale. You worked your bollocks off and created vast amounts of wealth at the cost of blood and sweat and your life. I am not rich, but I am earning decent money through my business now and trust me when I say that every penny the government takes on the money that I earned through my hard work creating something from scratch is painful.
I shudder at the thought that when I die, a large percentage of what I earned would be snatched away from those I love "just because the state can".
However, the basis of my opinion regarding the inheritance tax in general is based on a simple political philosophy similar to that of Socrates - when one has enjoyed and benefited from the rule of law for a life time, the only ethical course is to accept those parts of the law which may be to one's detriment.
Sonnabend clearly benefited from the laws of the US for many decades - among those the ability to own private property, enforce contracts, and exchange goods for fungible currency. Indeed, it was US immigration policy which allowed her and her family to immigrate and transfer their wealth from Europe on the eve of the Second World War.
The US tax code allows wealth to be transferred between generations in accordance with American values. The creation of a permanent aristocracy has not traditionally been consistent with those values. As for me, I shudder at the the thought of money constituting my most important legacy to those I love.
Do you think children should win the birth lottery?
Maybe the state should control mate selection as well. We wouldn't want all of the best people pairing up, what is left for the rest?
It's called public education and it's not very controversial.
If my spouse is dead or I am divorced, and I have a house, and I die, are my children homeless and destitute?
I am honestly flabbergasted at the concept that a government should own things by default. A government is not a kingdom, and it should govern, not own.
In general, brand (in this case Christie's and Sotheby's) ranks supreme above all else. Once you are branded, you can pretty much sell anything as expensive art.
Also, an interesting factoid - when we hear of Far East/Middle East buyers bidding tens of millions (or more) for a painting, we naturally tend to think - who buys that without seeing it - but as the book points out - the painting has most likely gone to see the buyer already (e.g. Dubai/Hong Kong pre-auction private tour).
Excerpts from the book:
"Money itself has little meaning in the upper echelons of the art world -- everyone has it. What impresses is ownership of a rare and treasured work such as Jasper Johns' 1958 White Flag. The person who owns it (currently Michael Ovitz in Los Angeles) is above the art crowd, untouchable. What the rich seem to want to acquire is what economists call positional good; things that prove to the rest of the world that they really are rich."
Jasper Johns' White Flag
http://michaelovitz.blogspot.com/2011/04/weve-featured-this-...
http://www.metmuseum.org/toah/works-of-art/1998.329
Estimates on the artist economy:
"40k artists resident in London (about same number in NYC)
For London and NYC each:
75 superstar artists (>$1M/yr income)
300 mature, successful artists (>$100k/yr income)
5,000 part time artists (need to supplement their income)"
http://www.amazon.com/The-Million-Stuffed-Shark-Contemporary...
[1] "If a great apartment costs $30 million, than a Rothko [big deal famous contemporary artist] that hangs in the featured spot in the living room can also be worth $30 million - as much as the value of the apartment. But no one could envision a $72.8 million apartment to use for comparison..."
They'll have to make up for it with their 15% tax rate for the rest of their lives on their derivative income.
Let me know when this practice is making people homeless or preventing them from getting healthcare.
I'm not sure why they inherited it at all - wouldn't it be way more sensible to create a foundation who posses all the art? That way, they wouldn't have to pay any taxes at all.
If a painting was valued 1 million dollars 100 years ago, it would probably be worth a bit more in pure numbers today.
(I'm really just guessing here)
The solution would be for Metropolitan to buy the piece for $29 million, the amount of taxes owed by the current owners. They don't make a profit, but no actual loss either (except the ownership of a piece that they can't legally own and which is already in the museum).
This seems uncontroversial to me - drugs are taxed at market value because it's illegal to own and sell them, surely the same should apply to bald eagles.
This is a piece of artwork it's apparently "just as illegal" merely to own. (i.e. illegal under the same clause of federal law.)
Suddenly it sounds like they found some obscure law to value it at $0, and that they would not get in trouble for actually selling it. Rather than appraisers in on the heist, perhaps they should have written to the Fish and Wildlife Service to ask if they can sell the thing to pay the taxes on it. The reason they didn't do that is they didn't want to hear the answer, yes. They want their cake and to eat it, too. (Keep the work but not pay taxes).
I'm not sure I agree with the existence of this kind of tax, but the case isn't as clear as the title and first half of the article make it sound.
Even then, the government revisited the issue in 1998. Rauschenberg himself had to send a notarized statement attesting that the eagle had been killed and stuffed by one of Teddy Roosevelt’s Rough Riders long before the 1940 law went into effect. Mrs. Sonnabend was then able to retain ownership as long as the work continued to be exhibited at a public museum. The piece is on a long-term loan to the Metropolitan Museum of Art in New York, which Mr. Lerner said insures it, but the policy details are confidential.
this is respected art with a high market value. They should not have put $0 as its value.
take-home lesson: don't do that.
It's valued at $0 because they cannot sell it. It does not have "a high market value" because it is not, and has no expectation of ever being, able to be sold.
The Fish & Wildlife Service didn't say they could sell it - it said they could continue to possess it.
A letter from the Fish & Wildlife Service stating they can't sell it to a museum - even though it's already on display in one - is what would show this; but if they asked, they would not get that letter - they would be told they could, for the same reason that they could keep it. (Because this is a famous, exceptional, well-known piece that is attested as being produced before the law that made it illegal.) The conditions would be the same - it would have to go in a museum.
You have to realize that under the law you're quoting it's illegal to POSSESS as well. This is what changed my opinion of the case.
So the family is saying "it's illegal to own or sell", so we'll just do the former since we already got approval but we'll say we can't do the latter, and won't even try to get approval.
Personally, I think they should put the price that a museum would pay (and not a recluse billionaire) and which they would expect the Fish & Wildlife Service to approve. Or they can ask for that approval, which the article doesn't show them doing. If they asked and the Fish & Wildlife Service said, weirdly, "you can keep it - as long as it is on display in a museum - but you can't sell it to that museum" then the article, and you, would have a case.
they're trying to use a technicality - that it's "technically" illegal. don't do that. if they were serious they wouldn't even possess it, since that's "illegal" too. read the article carefully to see what I mean.
Your comment doesn't make sense in light of the fact that the family was forced to put the work on display, which doesn't sound like they "can do the other trappings of ownership but No One Else Can".
The article says: "Indeed, the only reason Mrs. Sonnabend was able to hold onto 'Canyon', Mr. Lerner said, was due to an informal nod from the United States Fish and Wildlife Service in 1981. {P} Even then, the government revisited the issue in 1998. Rauschenberg himself had to send a notarized statement attesting that the eagle had been killed...before the 1940 law went into effect. Mrs. Sonnabend was then able to retain ownership as long as the work continued to be exhibited at a public museum. The piece is on a long-term loan to the Metropolitan Museum of Art in New York, which Mr. Lerner said insures it, but the policy details are confidential."
This does not sound to me like it matches what you are saying at all. Quite to the contrary, it sounds like this work is quite special and important and for this reason was given these exemptions - this makes it quite likely for a sale to a museum to be approved, and the family has every reason to believe this.
So we must return to why you would say that a museum wouldn't or couldn't buy it (after saying earlier in your comment that museums were allowed to own such works, though the article does not make this blanket statement.)
The family does not have a reason to believe that a sale to a museum would be approved since that would be a clear exception to the explicit text of the law. The prior "exception" does not change this because it does not actually conflict with the terms of the law.
You need to either (1) learn the law or (2) stop pretending like you know what you are talking about. Armchair lawyers like you ruin the discussion of legal articles on HN.
I will just say that if it were me in this situation, I would never in a million years go on an art appraiser's word that I 'can't' sell it, without even asking the appropriate agency.
So, a special dispensation from FWS was required for them to continue possessing it. Which is illegal. So, ask for a special dispensation from the FWS to sell it to the museum. Which is illegal.
They have every reason to believe they will get it. Read between the lines.
Likewise if in an inheritance I got a stone that the IRS decided was an anti-tiger stone worth $100m, couldn't I just donate it to a non-profit tiger research institute, write it off of things I got with real non-baloney market value, and the IRS simply loses out due to their inflated price on the baloney good?
Doesn't the IRS acting like a joke with overvaluations cut both ways? (assuming there's real value somewhere that's worth keeping if you write off the taxes on it.)
i.e. if the irs's valuation on something happened to be inflated by vast multiples - as people in this thread are saying happens from time to time - then can't you donate that and write it off of things that they aren't inflating?