5 ms·

Here's a neat trick: - Buy Painting X1, X2, X3, ... for 10K apiece. - Your friend buys Painting Y1, Y2, Y3, ... for 10K apiece. - You buy one of your friend'

Here's a neat trick: - 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.

iolothebard 12y ago
You should see the Romney Family's IRAs. 30k/year somehow has magically grown to 87 million. Nice eh?
- fiatmoney 12y ago
  Yeah, it's amazing what you can do when you're able to arbitrarily declare the "market value" of the stock you're putting in your IRA.
  - winstonsmith 12y ago
    In case anyone doesn't know what you're talking about: http://www.gao.gov/products/GAO-15-16 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.
  - charlesdm 12y ago
    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.
    - spinlock 12y ago
      I think those are exactly the deals he had access to in his IRA.
amalag 12y ago
Wow didn't realize it was so simple.
- smackfu 12y ago
  It's just simple lying on taxes. The inflated value wouldn't hold up to an audit.
  - amalag 12y ago
    I can't see it as lying. It is a thinly traded asset with limited price history.
  - fiatmoney 12y ago
    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. http://qz.com/103091/high-end-art-is-one-of-the-most-manipulated-markets-in-the-world/ http://qz.com/103091/high-end-art-is-one-of-the-most-manipul...
    - shillster 12y ago
      This type of fraud has bitcoin written all over it.
      - toomuchtodo 12y ago
        And it would be any different than Bansky works...how?
  - charlesdm 12y ago
    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).
deleted 12y ago
[deleted]
pkaye 12y ago
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.
- amalag 12y ago
  Even independent evaluators go by price history.
pdabbadabba 12y ago
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?
- breischl 12y ago
  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.
  - reitzensteinm 12y ago
    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.
    - breischl 12y ago
      Good point. Now that you point it out, depending on your income tax bracket the credits would probably be worth more than the capital gains tax.
jim_greco 12y ago
The IRS has never thought of that one.

iolothebard 12y ago

You should see the Romney Family's IRAs. 30k/year somehow has magically grown to 87 million. Nice eh?

fiatmoney 12y ago
Yeah, it's amazing what you can do when you're able to arbitrarily declare the "market value" of the stock you're putting in your IRA.
- winstonsmith 12y ago
  In case anyone doesn't know what you're talking about: http://www.gao.gov/products/GAO-15-16 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.
- charlesdm 12y ago
  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.
  - spinlock 12y ago
    I think those are exactly the deals he had access to in his IRA.

amalag 12y ago

Wow didn't realize it was so simple.

smackfu 12y ago
It's just simple lying on taxes. The inflated value wouldn't hold up to an audit.
- amalag 12y ago
  I can't see it as lying. It is a thinly traded asset with limited price history.
- fiatmoney 12y ago
  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. http://qz.com/103091/high-end-art-is-one-of-the-most-manipulated-markets-in-the-world/ http://qz.com/103091/high-end-art-is-one-of-the-most-manipul...
  - shillster 12y ago
    This type of fraud has bitcoin written all over it.
    - toomuchtodo 12y ago
      And it would be any different than Bansky works...how?
- charlesdm 12y ago
  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).

deleted 12y ago

[deleted]

pkaye 12y ago

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.

amalag 12y ago
Even independent evaluators go by price history.

pdabbadabba 12y ago

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?

breischl 12y ago
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.
- reitzensteinm 12y ago
  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.
  - breischl 12y ago
    Good point. Now that you point it out, depending on your income tax bracket the credits would probably be worth more than the capital gains tax.

jim_greco 12y ago

The IRS has never thought of that one.