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.
Doesn't he have a permanent profit share in the Bain funds? Bain is one of the more successful private equity funds in the world, and as such, I'd think that 'stake' could easily be valued at 10-20x earnings.
Beyond some low value, the IRS expects you to get an independent evaluation of fair market value for tax deduction. I'm sure you would get audited otherwise.
It very well might. A thinly traded asset with limited (but expensive) price history, independent assessors willing to attest to its inherent uniqueness...
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.
In many jurisdictions, it is on the tax authority to prove that a certain transaction was not using an at arms length valuation.
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).
It seems like there is an obvious way to close this loophole: require the taxpayer to realize the $990,000 capital gain. Can anyone explain if/why this is not already required?
Because in the case where the price legitimately rose by that much it would discourage donating the work.
Say you bought the painting for $10k, then the artist becomes world famous and the price really does rise to $1m. Are you going to donate the painting if doing so would trigger a ~$150k capital gains tax bill? Nope. At least if you sold it you have the proceeds to cover the taxes.
If you get tax credits from a donation, which is the situation OP sketched (no pun intended), you should also be hit with the capital gains, and the two would cancel each other out.
This is what would happen if you liquidated the asset and donated the cash instead. There should be no difference.
That's a surprisingly simple fix that makes a lot of sense. There's clearly a public benefit to having more visitors (since the tax break is explicitly to encourage things that are of the public benefit). I like it.
unintended consequence: important works are only sent to the largest museums in the largest cities where traffic flow can support it the tax write off.
So, the most important works end up going where they are seen by the most people? I think that's a reasonable consequence. Much better than hiding them away on some billionaire's private property.
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?"
Somebody should start a website that catalogs all of these museums. Then we the unwashed masses should all visit them. Then we will all find out whether these are actual museums or just tax avoidance schemes.
"... Wealthy collectors, of course, have long saved millions of dollars in federal taxes by donating art and money to museums and foundations. But what distinguishes Mr. Brant’s center and a growing number of private tax-exempt exhibition spaces like it is that their founders can deduct the full market value of any art, cash and stocks they donate, even when the museums are just a quick stroll from their living rooms. ..."
Sounds suspiciously like money laundering. You don't think all that expensive Art, is really worth that amount do you?
In what way are paintings educational? Don't get me wrong I like looking at them, but I can't say I have learned any transferable skills, or that they've made me a better person or anything like that.
Depends on "what" you are being educated. If you are a designer, painting can be very educational as they contain:
- Line
- Color
- Form
- Space
Studying the use of these elements can make you a better designer for sure.
If you are a film maker, you make study an artist's use of color (Monet, Mondrian) to get inspired for your color palette. You are right that studying paintings won't magically make you a better person or make you a better at basketball but in the realm of creation, studying paintings are definitely valuable.
Education isn't just about "transferrable skills", at least not in the sense that you can attach a $ value for it. Society is advanced by two broad categories: science & technology, and arts & culture. To deny the benefit society reaps from a culturally educated population is insane.
- Buy Painting X1, X2, X3, ... for 10K apiece.
- Your friend buys Painting Y1, Y2, Y3, ... for 10K apiece.
- You buy one of your friend's paintings for 1M. He does the same.
- Holy cow! "Market price" for the rest of your paintings is now 100x greater than it was yesterday.
- "Donate" as many of the paintings as you wish to the museum next door. Deduct the full value (now 1M) on your taxes.