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Art done right is a tax dodge by the wealthy. Rich person buys a painting, by an artist, for $50 million and puts it in their collection. Another person buys

Art done right is a tax dodge by the wealthy. Rich person buys a painting, by an artist, for $50 million and puts it in their collection. Another person buys another painting by the same artist for $75 million. The rich person gets their painting reappraised by an art expert. It is now “estimated” to be worth $75 million. The rich person donates the work to a museum, a non-profit. The donation gives them a $75 million tax write off. The rich person just saved $25 million that would have otherwise been taxed.

dabber 3y ago
> The rich person just saved $25 million that would have otherwise been taxed. In this example, wouldn't it have cost this person $50 million dollars though?
- itsoktocry 3y ago
  People have this idea that there's something magical about "write-offs". In this case the rich person is spending $50 million dollars to save the tax on $75 million? Makes zero sense.
  - rufus_foreman 3y ago
    Cosmo Kramer: It's a write-off for them. Jerry: How is it a write-off? Cosmo Kramer: They just write it off. Jerry: Write it off what? Cosmo Kramer: Jerry, all these big companies, they write off everything. Jerry: You don't even know what a write-off is. Cosmo Kramer: Do you? Jerry: No, I don't. Cosmo Kramer: But they do. And they're the ones writing it off.
itsoktocry 3y ago
>The rich person donates the work to a museum, a non-profit. The donation gives them a $75 million tax write off. The rich person just saved $25 million that would have otherwise been taxed. So you're asserting that rich people and appraisers and insurance companies and museums are all conspiring to commit tax fraud?
- sparsely 3y ago
  Conspiring is maybe strong, but it isn't in any of their interests to stop it happening.
  - itsoktocry 3y ago
    >but it isn't in any of their interests to stop it happening. It isn't in the insurance company's best interest to ensure they have an accurate assessment of the value of the item they're insuring? What is being described above is fraud.
  - thfuran 3y ago
    Tax fraud isn't really accurate either.
- Schiendelman 3y ago
  Not conspiring. It’s a natural outcome of the way this market works though.
- CPLX 3y ago
  Michael: My father’s no different from any other powerful man. Any man who’s responsible for other people. Like a senator or president. Kay: You know how naïve you sound? Senators and presidents don’t have men killed. Michael: Oh. Who’s being naïve, Kay?
alexey-salmin 3y ago
He burned $50 million to save taxes on $75 million?
- BasedInfra 3y ago
  Exactly. Presuming a 50% tax (highest end worldwide) rate and a full write off they spent 50 mil to save 42.5 mil on taxes. Usually it’ll be capital gains income where they would be writing off which is a much lower rate. Example 20% in which case they saved 15 mil in taxes for 50 mil investment. first 20% goes to gift aid in the UK so some countries you wouldnt even get full tax band. Now tax free storage of art usually in ports is interesting but not some 100% write off scheme.
  - MrBuddyCasino 3y ago
    Yeah this makes zero sense. Unless this is not about saving taxes, but money laundering.
    - twic 3y ago
      They spent 50 million in cash, received 42.5 in tax credits, and made a donation of 75 million. So effectively, they made a 75 million donation for 7.5 million outlay. It's a very efficient way of making donations, but it doesn't make you better off in raw cash terms. But being rich is not about having cash, it's about using cash to achieve your ends. Giving 75 million is really buying 75 million worth of philanthropy - 75 million worth of social status, or invites to exclusive parties, or favours from patrons, or support for projects valuable to them. And they bought it for only 7.5 million!
  - firtoz 3y ago
    What'd be the alternative if you had not done the 50m -> 75m trick? Pay x$ more in taxes?
    - BasedInfra 3y ago
      The implication is that they do it purely for tax relief and not as an appreciating asset. If that was the case they would be losing millions each transaction.
CPLX 3y ago
You’re close but that’s not quite it. Here’s a more realistic way it might work. Bob buys paintings A, B, C, and D as a lot for $10MM. “Things happen” in the art market and a few years later lo and behold “everyone” agrees those paintings are worth $200MM of course. Painting A (the most marginal of the four, of course) gets donated to museum X with a value of $50MM. Given standard tax rates on passive income Bob saves at least $10MM on his next tax bill and now has three completely free paintings thanks to your tax dollars.
- boringg 3y ago
  This might be a better example. I also suspect the art world during the pandemic had crazy levels of inflation going on as crypto started looking for assets in the real world and needed to put that money somewhere as well as all other assets in the world going through very strange valuations.
- mhuffman 3y ago
  >Bob buys paintings A, B, C, and D as a lot for $10MM. >later lo and behold “everyone” agrees those paintings are worth $200MM of course. Didn't Bob just get $190MM increase that is going to be capital gains?
  - bane 3y ago
    Capital gains is only realized (and thus taxable) at the time of sale.
    - mhuffman 3y ago
      So the idea is to buy the paintings, yadda yadda yadda, donate at a number that somehow exceeds your original price when taxes are accounted for and keep the other paintings forever?
      - CPLX 3y ago
        No you borrow against them at super low interest rates so you can have and spend the money anyways. Then at your death there’s a thing called stepped up basis so your heirs inherit it at the market value not the original value. So your family net worth can go up by hundreds of millions without any of that being taxed at all. Yes it’s really as fucked up as it sounds. The very rich simply don’t pay taxes like you and me.
rufus_foreman 3y ago
First of all, as others have pointed out, the math here doesn't check out. The rich person is now less rich. Second, the IRS is hip to this. They require a qualified appraisal, they have rules about who the appraiser can be and what information is required. Then, they have a network of experts who would do their own research on an art deduction of this size and give their own estimate of value (without knowing how much the taxpayer was claiming it was worth). And finally, if the charity that received the artwork sells the artwork for less than $75 million before the IRS does its research, they're going can use that information to determine the real value. -- https://www.reuters.com/legal/legalindustry/unlocking-mystery-behind-irs-review-claims-charitable-deductions-art-2023-09-18/ https://www.reuters.com/legal/legalindustry/unlocking-myster... In short, for people planning on avoiding taxes, please consult a licensed tax avoidance specialist for advice in addition to doing research on internet chat boards.
boringg 3y ago
So if I understand your example. I buy a $50M asset on the supposed hope that it goes up in value at which point I then donate it to the museum at an inflated value. 50% gain seems like a fair bit in a short period but I'll use it for your sake. So 75M$ tax write off. Now assuming that I am in an expensive tax jurisdiction and I can write this against short term cap gains - 40% - thats $30M in a tax benefit. TL;DR. Put $50M capital to work to get a $30M tax write off in the future ASSUMING significant gains. During that time you get to own an expensive piece of art. So you get the artwork for a net COST of $20M ($50M purchase - $30M tax benefit). It doesnt make sense purely on economics of the example - unless significantly more capital appreciation in the asset, other reasoning for pursuing it or other tax benefits in the country.
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sagarm 3y ago
An article on this phenomenon: https://www.propublica.org/article/how-private-nonprofits-ultrawealthy-tax-deductions-museums-foundation-art https://www.propublica.org/article/how-private-nonprofits-ul... The donation is made to a non-profit controlled by the donor. The non-profit provides token public access, at best, while the donor still has near exclusive use and control over the "donated" property.

dabber 3y ago

> The rich person just saved $25 million that would have otherwise been taxed. In this example, wouldn't it have cost this person $50 million dollars though?

itsoktocry 3y ago
People have this idea that there's something magical about "write-offs". In this case the rich person is spending $50 million dollars to save the tax on $75 million? Makes zero sense.
- rufus_foreman 3y ago
  Cosmo Kramer: It's a write-off for them. Jerry: How is it a write-off? Cosmo Kramer: They just write it off. Jerry: Write it off what? Cosmo Kramer: Jerry, all these big companies, they write off everything. Jerry: You don't even know what a write-off is. Cosmo Kramer: Do you? Jerry: No, I don't. Cosmo Kramer: But they do. And they're the ones writing it off.

itsoktocry 3y ago

>The rich person donates the work to a museum, a non-profit. The donation gives them a $75 million tax write off. The rich person just saved $25 million that would have otherwise been taxed. So you're asserting that rich people and appraisers and insurance companies and museums are all conspiring to commit tax fraud?

sparsely 3y ago
Conspiring is maybe strong, but it isn't in any of their interests to stop it happening.
- itsoktocry 3y ago
  >but it isn't in any of their interests to stop it happening. It isn't in the insurance company's best interest to ensure they have an accurate assessment of the value of the item they're insuring? What is being described above is fraud.
- thfuran 3y ago
  Tax fraud isn't really accurate either.
Schiendelman 3y ago
Not conspiring. It’s a natural outcome of the way this market works though.
CPLX 3y ago
Michael: My father’s no different from any other powerful man. Any man who’s responsible for other people. Like a senator or president. Kay: You know how naïve you sound? Senators and presidents don’t have men killed. Michael: Oh. Who’s being naïve, Kay?

alexey-salmin 3y ago

He burned $50 million to save taxes on $75 million?

BasedInfra 3y ago
Exactly. Presuming a 50% tax (highest end worldwide) rate and a full write off they spent 50 mil to save 42.5 mil on taxes. Usually it’ll be capital gains income where they would be writing off which is a much lower rate. Example 20% in which case they saved 15 mil in taxes for 50 mil investment. first 20% goes to gift aid in the UK so some countries you wouldnt even get full tax band. Now tax free storage of art usually in ports is interesting but not some 100% write off scheme.
- MrBuddyCasino 3y ago
  Yeah this makes zero sense. Unless this is not about saving taxes, but money laundering.
  - twic 3y ago
    They spent 50 million in cash, received 42.5 in tax credits, and made a donation of 75 million. So effectively, they made a 75 million donation for 7.5 million outlay. It's a very efficient way of making donations, but it doesn't make you better off in raw cash terms. But being rich is not about having cash, it's about using cash to achieve your ends. Giving 75 million is really buying 75 million worth of philanthropy - 75 million worth of social status, or invites to exclusive parties, or favours from patrons, or support for projects valuable to them. And they bought it for only 7.5 million!
- firtoz 3y ago
  What'd be the alternative if you had not done the 50m -> 75m trick? Pay x$ more in taxes?
  - BasedInfra 3y ago
    The implication is that they do it purely for tax relief and not as an appreciating asset. If that was the case they would be losing millions each transaction.

CPLX 3y ago

You’re close but that’s not quite it. Here’s a more realistic way it might work. Bob buys paintings A, B, C, and D as a lot for $10MM. “Things happen” in the art market and a few years later lo and behold “everyone” agrees those paintings are worth $200MM of course. Painting A (the most marginal of the four, of course) gets donated to museum X with a value of $50MM. Given standard tax rates on passive income Bob saves at least $10MM on his next tax bill and now has three completely free paintings thanks to your tax dollars.

boringg 3y ago
This might be a better example. I also suspect the art world during the pandemic had crazy levels of inflation going on as crypto started looking for assets in the real world and needed to put that money somewhere as well as all other assets in the world going through very strange valuations.
mhuffman 3y ago
>Bob buys paintings A, B, C, and D as a lot for $10MM. >later lo and behold “everyone” agrees those paintings are worth $200MM of course. Didn't Bob just get $190MM increase that is going to be capital gains?
- bane 3y ago
  Capital gains is only realized (and thus taxable) at the time of sale.
  - mhuffman 3y ago
    So the idea is to buy the paintings, yadda yadda yadda, donate at a number that somehow exceeds your original price when taxes are accounted for and keep the other paintings forever?
    - CPLX 3y ago
      No you borrow against them at super low interest rates so you can have and spend the money anyways. Then at your death there’s a thing called stepped up basis so your heirs inherit it at the market value not the original value. So your family net worth can go up by hundreds of millions without any of that being taxed at all. Yes it’s really as fucked up as it sounds. The very rich simply don’t pay taxes like you and me.

rufus_foreman 3y ago

First of all, as others have pointed out, the math here doesn't check out. The rich person is now less rich. Second, the IRS is hip to this. They require a qualified appraisal, they have rules about who the appraiser can be and what information is required. Then, they have a network of experts who would do their own research on an art deduction of this size and give their own estimate of value (without knowing how much the taxpayer was claiming it was worth). And finally, if the charity that received the artwork sells the artwork for less than $75 million before the IRS does its research, they're going can use that information to determine the real value. -- https://www.reuters.com/legal/legalindustry/unlocking-mystery-behind-irs-review-claims-charitable-deductions-art-2023-09-18/ https://www.reuters.com/legal/legalindustry/unlocking-myster... In short, for people planning on avoiding taxes, please consult a licensed tax avoidance specialist for advice in addition to doing research on internet chat boards.

boringg 3y ago

So if I understand your example. I buy a $50M asset on the supposed hope that it goes up in value at which point I then donate it to the museum at an inflated value. 50% gain seems like a fair bit in a short period but I'll use it for your sake. So 75M$ tax write off. Now assuming that I am in an expensive tax jurisdiction and I can write this against short term cap gains - 40% - thats $30M in a tax benefit. TL;DR. Put $50M capital to work to get a $30M tax write off in the future ASSUMING significant gains. During that time you get to own an expensive piece of art. So you get the artwork for a net COST of $20M ($50M purchase - $30M tax benefit). It doesnt make sense purely on economics of the example - unless significantly more capital appreciation in the asset, other reasoning for pursuing it or other tax benefits in the country.

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sagarm 3y ago

An article on this phenomenon: https://www.propublica.org/article/how-private-nonprofits-ultrawealthy-tax-deductions-museums-foundation-art https://www.propublica.org/article/how-private-nonprofits-ul... The donation is made to a non-profit controlled by the donor. The non-profit provides token public access, at best, while the donor still has near exclusive use and control over the "donated" property.