And never more so than in Wondertaxland! Prof. Althouse regales us with the fable of a rich woman who leaves a prominent work of art to her heirs. The problem is, the work of art features a long-dead stuffed endangered species, which therefore cannot be sold legally. How to extract estate taxes from this bonanza? (The woman died in 2007, before the estate taxes were temporarily de-fanged.) If the estate can't sell the art, is it worth anything? Absent the endangered species law, art experts say it would be worth $65 million, thus generating almost $30 million in tax bills. Assuming the estate doesn't have that kind of cash handy without selling the artwork, it's a tough spot.
The problem of valuing an asset that can't be sold isn't really as exotic as this story would suggest. It's the typical problem faced by a family business at death, and the reason it's a very good idea to have a big life-insurance policy available to pay the estate tax with if you don't want your heirs to be dragooned into a fire-sale. For decades I watched people spends untold millions of dollars fighting over the valuation of businesses that couldn't or wouldn't be sold for one reason or another; the usual approach in bankruptcy court is to hire experts to fight over what kind of income it's likely to generate over time, and then over the right discount rate to use in taking a present value of that stream of income. (Bankruptcy lawyers can keep that kind of thing up for years, if a sensible judge doesn't exert some discipline over what can never be more than a rough substitute for reality.)
The best approach is to imitate Solomon: try to find a way to force all the combatants to take responsibility for the flip side of their claims. The IRS should be forced, for instance, to confront the prospect of a charitable deduction from ordinary income resulting from the donation of the artwork to a museum. That will put a stop to wild imaginings about the huge value of the piece. Likewise, if the heirs insist that the work has no value, they should be forced to confront the price they would demand in an eminent-domain action. Even if they can't sell it, they may be very attached to the notion of keeping it, whether for personal pleasure or for the status of owning it. If a museum owned it, it might generate income from admissions fees. Regardless of the popular wisdom, sales are not the only means of establishing a value even in the strict economic sense. The old system of dividing a candy-bar fairly comes to mind: one cuts, the other chooses.
Better yet, though, just get rid of the unified gift-and-estate tax, which is an abomination to start with.
There's a little difference in the cases, isn't there? The "fair market value" of an object that you cannot legally sell is zero: the market has no use for it. The fair market value for a business that you just don't want to sell isn't zero; there are people who would buy it if you would sell it. (Such a value may even be higher precisely because you don't want to sell: that means that there'd have to be a higher price offered in order to make it an acceptable bargain).
ReplyDeleteIf you really can't sell the thing because of the law, then it has no market value. It's more like taxing the cocaine you inherited from mom, except that in this case it doesn't even have a street value.
How to extract estate taxes from this bonanza?
ReplyDeleteAnthony Weiner, himself a master of the Unsaleable Art genre, has the answer: You aren’t paying anything [in terms of taxes] in that case because you’ll be dead.…
Plainly it's not the concern of petty heirs squabbling over what's rightfully the State's.
Eric Hines
Theft is theft- Law is written to enable "legal" theft. Bastiat was spot on.
ReplyDeleteFamily businesses are not such an extreme case, but they often have negligible value outside the context of the close-knit family that was running them. Some things are nearly destroyed simply by the process of transfer.
ReplyDeleteAlso, as every bankruptcy lawyer knows to his sorrow, in common with every family facing foreclosure and every exotic art collector facing a cash crunch, there is no single "market value." There is a broad spectrum of potential market values, depending on the urgency of the sale is and the liquidity of the market. Good estate planning can keep heirs from being put over a barrel.
A former associate of mine's father owned the land that is now under many parking lots at Atlanta's main airport. He did not sell the land, but leased it to the various car rental people and others. When he died, his heirs had 90 days to come up with several million dollars in estate taxes for the feds. Each relative took out loans to the maximum amount possible and they are paying them back with the lease income. If they'd sold the land, the capital gains taxes would have left them owing even more money!
ReplyDeleteLittleRed1
Yipe. Good thing President Obama is protecting us from all this, by keeping us from getting jobs or starting businesses!
ReplyDelete"Yipe. Good thing President Obama is protecting us from all this, by keeping us from getting jobs or starting businesses!"
ReplyDeleteAlways with the positive waves Grim, always with the positive waves...
LR -- It was tough on all of you, but necessary to prevent your becoming evil oligarchs, so you should be grateful.
ReplyDeleteFox News is reported yesterday evening
ReplyDeleteThe IRS initially put it at $15 million, then jumped the figure to $65 million when Sundell and Homem refused to pay, according to The New York Times.
The IRS, which declined to comment on the matter, is not only asking for $29 million in taxes, but also an $11.7 million “gross valuation misstatement” penalty, according to Forbes.
Both the bump in "valuation" and the subsequent penalty assessment sound like naked extortion to me. Another example of the blackmail referenced in a later post (eliding the legalist difference between extortion and blackmail).
Eric Hines
To borrow and munge a line from the Seabiscuit movie,
ReplyDeleteWe want a Fair Tax
which would allow for the IRS to implode in both size and scope while insuring everyone contributes sans loopholes, write-offs, or dodges by any other name.
More government by blackmail.
ReplyDeletePerhaps IRS actions should be subject to review by a jury of your peers- you face criminal charges and imprisonment for violating their code, so why not? That might help keep them in check, while still insuring that those who simply are dodging pay up.
ReplyDeleteI agree, with one addendum: the IRS actor should be facing imprisonment if it is found that he acted against you wrongly. After all, that amounts to theft of your family's wealth.
ReplyDelete