Unusual for the New York Times to criticize the IRS so pointedly. Most private citizens cannot publicly attack the IRS for justified fear of raising their profile and triggering an audit (see: Plumber, Joe The or Snipes, Wesley).
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:
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)
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 IRS computer system was built in the 1970s. It does not have the capabilities you ascribe to it. Consequently, the IRS still uses the following system to determine who to audit: (1) errors in their returns, (2) types of income, and (3)randomly based on type of return.
471 million in estate taxes on a $1 billion collection? That's depressing. Tax collectors being able to declare arbitrary valuations? That's terrifying.
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.
The fix for this is to give people the option to sell the items to the government at some high fraction (eg 75%) of the valuation, instead of paying the taxes.
I think Nascar uses this system to discourage undervaluing entries: owners declare a value for their car, and Nascar has the right to buy the car at that valuation. They would only do this if the car was under by a significant margin, so there's a huge incentive to give a fair estimate for the car.
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.
Pretty much the same as the "one splits, the other chooses which half they want" that my brother and I would use to guarantee fair splits of cookies or cake.
Guatamala tried the reverse of that--they paid Chiquita chiquita's declared tax value for their land... pennies per acre. The US overthrew their democratically elected government over it.
The valuation is given by IRS, so if they value it so high to get taxes (they jumped from 15M to 60+M just like that), they should also be able to buy it at the valued rate.
The last thing the government wants to be involved with is selling real estate, art and other illiquid assets. There is a very real possibility that the government would lose money if it is unable to sell the asset at the original valuation.
Well the reality right now isn't too different. Ignoring the bald-eagle situation, they sell some of the items to pay for the tax bill, and keep the remainder.
The government wants cash, it has no use for paintings!
Even assuming they can find buyers for enough of the collection to pay the taxes, that's an enormous, instantaneous pile of stress on the children of a parent who just died and is probably missed tremendously.
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).
If you're paying $500M in taxes, you just inherited so much money you'd need several trucks to take it to the bank.
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.
No one has $500m of cash lying around in a liquid form. Generating that kind of cash, even for the very rich, usually involves selling lots of assets at rock bottom price.
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.
The article says they sold $600m of the collection. Which means even with the huge tax bill, they have over $100m plus whatever art they havent sold left.
To be fair, if you piloted your $100M yacht into Monaco harbor you'd have to anchor your sad little boat way in the back. Think of the shame this brings!
"Get the rich" is not a good justification for policy.
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 want to defend the handling of this particular estate, but the justification for estate taxes in general is that it is counter to the interests of a democracy to have a hereditary aristocracy. It's not just that we hate the idea of trust fund babies -- they actually hurt America.
> A lot of people hate the concept of an heir running around with money he/she didn't earn
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.
Oh come on. Is expecting them to pay taxes an "enormous ... pile of stress"? Is it not treating them as humans? They inherited an incredibly big estate consisting of illiquid assets. They did not have to work to inherit the assets, now they have to either actually do some work or hire a professional to do their fiscal duties. If that is too much stress, not accepting the inheritance is a stress free option as well, but of course it means they don't get to never have to work for money again.
The money was already taxed. I have no problem taxing transactions that have a value add. When I get paid a wage I have created that wealth a tax on the newly created wealth is fine.
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.
No less an extremist as Thomas Jefferson supported the estate tax, and we still have it for many good reasons. This article talks about it better than I could:
The entire principle behind estate taxes, which are only relevant to those with significant estates, is to prevent the massive accumulation of wealth by a tiny minority.
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.
>Even assuming they can find buyers for enough of the collection to pay the taxes, that's an enormous, instantaneous pile of stress on the children of a parent who just died and is probably missed tremendously.
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.
That's a bold statement to make without any substantiating argument.
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?
Even after paying $471 million in taxes on the art, the heirs stand to net half a billion dollars. So it's hardly "nothing" and hardly a cause of hardship (and that's just the art portion of the wealth). In the US, it is a tiny fraction of estates which are encumbered with any sort of inheritance taxes.
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.
I think you're only making this argument because it doesn't apply to you.
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".
My comments have been motivated by the characterization of the inheritance tax as liable to leave the heirs as waifs. Sonnabend's heirs are middle aged adults, who like their mother were raised in wealth. There is nothing wrong with that, nor even with owning a $30,000,000 stuffed bald eagle (the prohibition on the sale of which I think is absurd).
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.
Since when is the government the rightful owner of anything? Are we ultimately slaves, then?
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.
Actually, it's going to the people. The government is representing the people. However, the children inheritances will still far above average after rich inheritance taxes.
If you are more curious about the contemporary art world market and why $29M is not that expensive[1], I recommend "The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art".
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."
[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..."
It does not matter how rich the parents or how much the family is worth, this is just plain criminal. If the object cannot be sold or donated because of the Eagle- then it has 0 value. I hope that the courts find in favor of this family.
The idea that there is a 50% estate tax in this country is BS. Why not make it 100% and we can just become Marxist...and be done with it.
The point of estate tax laws is the prevention of the formation of generational aristocracies. I really have absolutely zero sympathy for someone receiving $500 million for nothing.
If they wanted to be an aristocracy they would pull strings so the children are given power and make their own money. I don't see how an estate tax helps here.
The taxation rate seems just wrong to me - 471 million for a 1 billion heritage is almost 50%. Imagine that going on for three generations and suddenly you've payed more than the heritage's value in taxes!
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.
Assuming generation lengths of a conservative 20 years, earning 2% interest after inflation and capital gains tax on the money would result in the real value of the estate staying constant after taxes.
According to the article, the Rauschenberg piece in question is on long-term loan to the Metropolitan Museum of Art. Aren't museums exempt from many kinds of purchase limitations? At least they seem to be able to buy cultural treasures that would be illegal for an individual to acquire.
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).
'James Joseph, a tax lawyer with Arnold & Porter in Washington, noted that the I.R.S. has taxed illegal contraband at its market value, but added: “I don’t know of any instance where the I.R.S. has assumed taxpayers will engage in an illegal activity in order to value their assets at a higher amount."'
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.
The key issue here is that the artwork was created prior to the law illegalizing private possession of bald eagle remains. It was on those grounds that the family received special dispensation from FWS to maintain legal ownership (but not physical possession) of the artwork. (And b/c they do not possess the eagle artwork, they do not violate the law.)
This article got a whole lot less interesting with the sentence: "In this instance, the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act make it a crime to possess, sell, purchase, barter, transport, import or export any bald eagle — alive or dead. 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."
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.
>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.
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.
It's simply not true that it has no expectation of ever being able to be sold. The piece is already on loan to a museum and displayed there - the sale to a museum (perhaps the one displaying it) for its permanent collection is something they should fully expect to be approved. They are trying to skirt the law on a technicality.
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.
The piece is on loan to the museum but they aren't making any money from the loan. They also can't sell it as the previous poster said because it's illegal. Why should they pay tax on something that wont provide monetary benefit unless it is done through illegal means?
You miss that the article says it is a crime to possess or even transport the piece. This is like arguing that if you can't sell it without double parking, it's worth $0 and you don't owe taxes.
Your analogy wasn't very clear. What I'm saying is if they have no way of making money off it what taxes do they owe? If you buy shares in a company that goes bust but you still have the paper should you pay taxes on that if the IRS decides its worth something?
I thought like you until the middle of the article, in the place I quoted. It's not that they have no way of making money off of it - they are only saying that. I would believe it if they got a letter from the wildlife agency saying, oh, no, we are only exempting your possession: we can't extend it to your selling to a museum. But that's clearly not the situation. They obviously have every ability to sell to, e.g. the museum currently displaying it, and it will be approved.
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.
You're missing two key understandings of the Bald and Golden Eagle Protection Act: First, the Act allows museums and similar institutions to own and transport bald eagles. Second, the article states that the bird was acquired prior to the Act taking effect in 1940. That means that current possession is legal, provided that it doesn't change ownership. For a similar situation, look at zoning laws. A property can be "legal nonconforming" because it was, at one time, in compliance with zoning laws but is not any longer. Why? Because both types of laws carry criminal penalties and it is unconstitutional to retroactively make something a crime. The artist can keep the bird, will it to his heirs (generally, passage to one's heirs doesn't trigger "change in ownership" laws), and do the other trappings of ownership but No One Else Can who isn't able to comply with the law, like a museum. Ergo, his heirs can't sell it except to the museum. The museum isn't willing or able to buy it--the piece is already on loan to them for free--so there is no market and, therefore, no value.
Where do you get the idea that museums wouldn't or couldn't purchase the work, assuming this purchase is OK'd by the government first - which given the history here and the work in question the family can easily count on?
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.)
Your arguments have no basis in the law *as it exists in this reality. The law makes it a felony to sell or possess bald eagle remains. The only reason that family still "has" this art piece is because actual possession of the art piece lies with the museum; the family retains "legal" ownership but cannot ever actually exercise possession without violating the law.
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.
The law makes it illegal for them to sell or possess the eagle art piece. You clearly missed the part of the article where it said that a special dispensation from FWS was required for them to continue possessing the eagle art piece so long as it was kept in a museum and was not sold.
I did miss it, because you made that last part up. You would be completely right if the article said "Mrs. Sonnabend was then able to retain ownership as long as the work continued to be exhibited at a public museum and not sold." But I just added the last three words. They're not in the article.
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.
another question. If the IRS values it at so far above its true price, can't they simply donate it and write off the inflated price - which come straight from the IRS - off of the taxes they owe on real-value, non-contraband works they also inherited? (they're not even allowed to "possess" this work under the law.)
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?
"Mr. Lerner said that since the children assert the Rauschenberg has no dollar value for estate purposes, they could not claim a charitable deduction by donating “Canyon” to a museum."
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...