Writing Off the Warhol Next Door

http://www.gao.gov/products/GAO-15-16

A small number of taxpayers has accumulated larger IRA balances, likely by investing in assets unavailable to most investors—initially valued very low and offering disproportionately high potential investment returns if successful. Individuals who invest in these assets using certain types of IRAs can escape taxation on investment gains. For example, founders of companies who use IRAs to invest in nonpublicly traded shares of their newly formed companies can realize many millions of dollars in tax-favored gains on their investment if the company is successful. With no total limit on IRA accumulations, the government forgoes millions in tax revenue. The accumulation of these large IRA balances by a small number of investors stands in contrast to Congress's aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement.

It's distinct from "lying" about the value - you're intentionally manipulating the market price. Which, actually, is more or less legal for collectibles (unregulated by the SEC) even if you were explicit about it, which you wouldn't be.

Worst case is after taking you to court you're forced to revise the value down somewhat.

http://qz.com/103091/high-end-art-is-one-of-the-most-manipul...

If Rothko paintings are usually valued at 15x the size of the canvas, multiplied by an arbitrary dollar amount, and the person who structured this has the evidence to back this up, good luck to the tax authority winning that argument.

I've heard stories about collectors buying up 10 Picasso paintings, 3 of them really wanted by collectors, and 7 of them being 'mediocre' (if you could call any Picasso mediocre). As a set, they can be sold for $100M. Even though the acquisition value might only have been $50-$70M.

That said, how do you value a rare painting? Should the painting be worth $1M or $10M, but it's just hard to sell, that doesn't mean it's not worth the actual value. Should you deny a tax deduction just because it's a very illiquid asset? After all, the same reasoning often applies to houses (and other illiquid assets).

This is what would happen if you liquidated the asset and donated the cash instead. There should be no difference.

Second, I'm only trying to point out that often seemingly simple solutions have unintended consequences. In this case the further concentration of art in the largest metropolitan areas. I think one could make a reasonable argument that major metropolitan cities already have a high per capita art quotient - and that there is a public good in ensuring people in Topeka and Wichita can see great art as well.

I guess I'm really just asking the question - "Do we want to create a situation where art does not get donated to small museums in order to spite a couple of billionaires?"