Make an offer

A few weeks ago I repeated a suggestion relating to bureaucratic valuation of property:

One solution to this problem is to convert any property valuation into an offer for purchase. So when you receive your rates notice the council should be making an offer to purchase your property that the valuation they have estimated.

That was in relation to land tax. The Wall Street Journal relates another example where my proposal could work well.


First some detail about a significant piece of modern art. “Rauschenberg was among the leading American artists of the post-World War II era, and “Canyon” is a “combine,” a kind of large-scale, three-dimensional collage that includes photographs, pieces of wood, a mirror, a pillow and a stuffed bald eagle.”

Okay – so how much would something like that be worth? The answer ever since the marginal revolution is however much somebody would be prepared to pay for it. Prior to that the answer would have been a function of some or all of the costs of production. But what happens when it is illegal to buy that art work?

“But “Canyon” was another story. The presence of the stuffed eagle meant it couldn’t be sold without violating the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act. Since the artwork couldn’t be sold, logic dictated that it be listed as having zero value, which is what the Sonnabend family’s three appraisers, one of them Christie’s auction house, did.”

Legally the art work is worth nothing – although I’m sure someone would make an generous offer for purchase if it was legal and I suspect others would expend real resources to steal it. So what happened next?

But don’t look for “logic” in any government dictionary. In the summer of 2011, the IRS sent the family an unsigned report appraising “Canyon” at $15 million. When they rejected the valuation, the government upped the ante: The appraisal was increased to $65 million, which yielded a $29.2 million tax bill. And the IRS levied a special “undervaluation penalty” of 40%, applied in cases where a party has made what the IRS deems a “gross understatement” of a property’s value. That added $11.2 million to the tab. Plus interest.

Only in the fantasy bazaar of the U.S. government’s imagination can an item that is worthless carry a multimillion-dollar price tag.

Ms. Sundell and Mr. Homem had another option: donate “Canyon” to a museum. But since they were declaring that it had no value, they would have to forfeit the charitable deductions that normally accrue to individuals in such cases. In the end, this is what they chose to do. “Canyon,” which had been on extended loan to the Metropolitan Museum of Art, now joins five other Rauschenberg combines at MoMA. In exchange, the government has dropped its $40 million-plus claim against Sonnabend’s estate.

If the US government really thought it to be worth $65 million it should have made an offer for purchase.

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41 Responses to Make an offer

  1. Rudiau

    F*ck you, pay me.

    The IRS, Robert Rauschenberg, and a Bald Eagle: Pay Me…

  2. If the US government really thought it to be worth $65 million it should have made an offer for purchase.

    This is exactly right. Whenever someone sees some antique or collectible or anything and opines “Wow that would worth a lot” it is worth bearing in mind what “worth” means.
    Twenty bucks, in Australia, is worth twenty bucks. I can go anywhere, any time, and anyone, provided they can afford it, will pay me twenty bucks for my twenty bucks. That’s what “worth” means. Everything else is wishful thinking.

  3. brc

    OHH : not so. If I offer to pay you 20 bucks for the 20bucks in two months time, that’s actually not even worth 20 bucks. That’s between you and me deciding an implied interest rate.

    I whole heartedly agree that any valuation made by a government must include an option for the government to purchase at that price.

  4. Keith

    I’m scratching my head. How can the sale of an artwork be in breach of the various bird protection acts, but the creation of said artwork isn’t/wasn’t ?
    Did Rauschenberg get prosecuted over this, and if creation of the artwork couldn’t be prosecuted, then surely he must have sold it at some point. Is the sale only illegal when rich non-artists sell artwork?
    Puzzling.

  5. Sinclair Davidson

    The bird was killed and stuffed before the legislation came into effect.

  6. Amortiser

    It couldn’t happen here you might say. Well this happened to the company I worked for.

    In 1988, they purchased a number of Brisbane CBD properties for redevelopment. These properties which were adjacent to each other were essentially derelict. The purchase included a lane from the Council which serviced the separate properties but which on amalgamation of the titles would be no longer required. This additional land was to be incorporated into a single title.

    As the lane land had no zoning the new title needed what was termed a “ministerial reasoning.” At the time this was a routine bureaucratic procedure.

    A change of government occurred and because some ministerial reasonings in the past had become the subject of public controversy, the incoming government suspended ministerial rezonings. As a consequence, our company could do nothing with the land as it did not have a zoning at all. We couldn’t get a development approval to proceed with the project for which it was purchased. We couldn’t sell the property as it had no zoning.

    Much to our consternation, the state government issued land tax assessments based on land valuations determined around the date of acquisition based on the purchase price.

    This state of affairs continued for at least 2 years during which time the “recession we had to have” kicked in. The whole project became unviable and we were saddled with the property for the next 8 years.

    When it was pointed out to the Land Tax Commissioner that the property was worthless we were scoffed at. Land tax and rates were based on the unimproved value of the land. That land was worth nothing however we were forced to pay holding charges in excess of $120k per year while the mess was sorted out.

    These guys were gougers of the first order. It was a decision which almost sent the company to the wall but they didn’t give a damn.

  7. thefrollickingmole

    There is a less technical term for this, theft.

  8. Naed

    I’m having a hard time understanding why they couldn’t just use the IRS valuation when they donated it to the museum and get the charitable deduction associated. I realise I’m using logic here which is most likely my first mistake.

  9. Keith

    The bird was killed and stuffed before the legislation came into effect.

    Thanks Sinclair, then surely subsequent sale(s) would be ruled exempt from the protection acts and a non-zero valuation is appropriate. In which case, the IRS should at least facilitate the sale at minimum. Anyway, I really don’t understand the US system where tax is payable on unrealised capital gains.

  10. Sinclair Davidson

    Keith – you would think so, but seemingly not.

  11. I’m missing something here.
    Why on earth is tax owed on an art object, that the family has owned for decades?

  12. Why on earth is tax owed on an art object, that the family has owned for decades?

    Because they are rich bastards of course.

  13. Rabz

    The presence of the stuffed eagle meant it couldn’t be sold without violating the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act.

    The ‘bird’ isn’t only stuffed, it’s dead, FFS.

    It’s passed on.
    This bald eagle is no more.
    It has ceased to be.
    It’s expired and gone to meet its maker.
    This is a late bald eagle.
    It’s a stiff.
    Bereft of life, it rests in peace.
    If Rauschenberg hadn’t nailed it to the artwork “Canyon”, it would be pushing up the daisies.
    Its metabolical processes are of interest only to historians.
    It’s hopped the twig.
    It’s shuffled off this mortal coil.
    It’s run down the curtain and joined the choir invisible.
    This…. is an ex-bald eagle.

  14. Anne

    Yes, Rabz, it’s shuffled off to Buffalo. We get it!

    Without reading the legislation I assume the point of it is to discourage people from KILLING them.

    Its not obvious how ‘attached’ the bird is the the rest of the art work. If detachable, perhaps the painting could be sold at auction for $60M with a promissory note that it be accompanied by the bird at no cost.

  15. John

    My first reaction was “just destroy the art work” and tell the gov to stick it.

  16. amcoz

    Deaf-Inn-Ate-Lee, this is all about dead money.

  17. Chris

    Steve – tax is owed because they inherited the artwork and about a billion (yes billion) dollars worth of other pieces and there is an estate tax in the US. The stupid situation arose because it literally can’t be sold because the artwork is itself of a protected species. But the IRS was working on the basis of its value if it could be legally traded.

  18. jupes

    The ‘bird’ isn’t only stuffed, it’s dead, FFS.

    It’s passed on.
    This bald eagle is no more.
    It has ceased to be.
    It’s expired and gone to meet its maker.
    This is a late bald eagle.
    It’s a stiff.
    Bereft of life, it rests in peace.
    If Rauschenberg hadn’t nailed it to the artwork “Canyon”, it would be pushing up the daisies.
    Its metabolical processes are of interest only to historians.
    It’s hopped the twig.
    It’s shuffled off this mortal coil.
    It’s run down the curtain and joined the choir invisible.
    This…. is an ex-bald eagle.

    No it’s not. It’s pining for the fjords.

  19. Rococo Liberal

    Land tax is imposed on the unimproved value of land, and in the vast majority of cases that amount is less than the market value of the land. It follows that in most cases the propoerty owner would refuse an offer from the Government to buy the land at the value upon which land tax is assessed.

  20. Anne

    John, that’s got me thinking…

    Set aside the death duty issue. What if the artwork were accidentally destroyed and they had owned it for many years and it’s sale would attract capital gains tax; would the Government be entitled to any of the insurance settlement?

    Just wondering not plotting… 

  21. Sinclair Davidson

    It follows that in most cases the property owner would refuse an offer from the Government to buy the land at the value upon which land tax is assessed.

    I agree … but how does that change the basic idea?

  22. brc

    It would be helpful if someone could tell us why tax is owed on an inherited artwork. Is this death duties showing their ugly head?

  23. Pedro

    That is an extraordinary story. As much as we might argue about levels of tax, I figured pretty much everyone agreed that taxes have to be payable from the asset or activity on which they are assessed.

    BTW, I’ve successfully used that zero value argument on duty assessments of land that could not be transferred to anyone but the transferee in question.

  24. manalive

    What if the artwork were accidentally destroyed …

    Good thinking Anne — ‘accidentally’ burn the ‘art’ atrocity and claim the insurance.

  25. Anne

    Brc, it would seem the US has estate tax.

    Cato, I don’t think we do here…yet. Do we? ….excepting that post 1984 property CGT deal.

  26. @ Chris 4.56pm: Thank you. Inheritance tax. Didn’t realise such a thing existed in this world.

    Now that I know this, nobody is ever again going to get away with (in my presence) stating that the USA is the best country on earth.

    Golly, what an enlightened jurisdiction I live in, now it needs only the right to bear arms, and to go about my business/daily life without nanny state interference, and it’ll be worth living in!

  27. sdog

    Is this death duties showing their ugly head?

    Yes, and if Obama gets his way the current death tax of 35% on all estates worth $3 million or more will go to 55% on all estates worth $1 million or more next year.

    Which means that when you die, the government gets more of all you’ve worked your whole life to earn and save than your family does. If you have a home worth $2 million as your major asset and you die without having managed to put it in some sort of protective trust, your heir(s) will have to cough up $1.1 million to the IRS. If your heir does not have that kind of money lying around, they will have to sell the house to get it. And you can’t gift it to them just before you die to get around that – there is a Gift Tax on values of over $12,000. And even if you are already a dual citizen of, say, the US and Australia, it is now too late to renounce your US citizenship to get around these things, because you will sacrifice most of your US-based assets due to taxes and fees payable to “expatriate” your own money (that you’ve already paid US taxes on at least once). And yes US death duties are payable to the US government even on that which you earned in another country (and which are held in another country – say a house or a super account) while you were a citizen and resident of that other country.

    This is why estate planning is a huge thing in the States. Don’t get me started.

  28. Pyrmonter

    And its insured value was? Sorry, as a small government favouring “l” liberal, anti-tax advocacy can take on irrational arguments.

    Considering Land Tax – it is a tax on the unimproved value (so minimising the extent of Rothbard’s anti-Henry George argument that some part of the “economic rent” is really a return for enterprise), not on the net value after mortgages etc. CBD land – instanced by Amortiser – is capable of re-zoning and therefore has, at least, an option value (and typically a high one). No great harm to levying a bit of a tax on it – probably less than taxing personal exertion income at 50%.

  29. wreckage

    No great harm to levying a bit of a tax on it

    What a great idea. It could be on capital gain. We could call it… geez, I got a blank here.

  30. wreckage

    And even if you are already a dual citizen of, say, the US and Australia, it is now too late to renounce your US citizenship to get around these things, because you will sacrifice most of your US-based assets due to taxes and fees payable to “expatriate” your own money (that you’ve already paid US taxes on at least once).

    But it costs almost nothing to destroy it, salt the earth, and go on the pension. Worth considering. No, I’m not joking.

  31. wreckage

    Australia had estate taxes, State level. Then Joh Bjelke Petersen ditched them in Qld, and everyone over 50 moved to Qld. Subsequently estate taxes died.

  32. wreckage

    55% on all estates worth $1 million or more next year.

    Basically eliminating the family farm. Well, de-Kulakisation is the first thing Communists do. maybe he really is a commie.

  33. Uber

    It has zero value because it’s absolute shit.

  34. sdog

    Basically eliminating the family farm.

    Yes. The uber-wealthy will have ways and means to insulate themselves to some extent. It’s the moderately well-off who spent their whole life working hard and living modestly in the hopes of giving the next generation a hand up (a million dollars in assets is not really an extraordinary amount to have accumulated these days) and those who want to pass along moderately-but-not-wildly successful ranches, farms and small businesses who will really get screwed.

  35. Splatacrobat

    Death duties are a Greens policy as well.

    introduce an estate tax with full provisions to protect the family farm, the family home and small business with a threshold of $5 million as indexed from the year 2010.

  36. sdog

    So the Greens are actually being (slightly) more reasonable about their scheme than Obama is. FMD.

    Meanwhile both Russia and China have dropped death duties entirely.

  37. .

    It has zero value because it’s absolute shit.

    Hahahaha!

    Truer words have never been spoken.

  38. wreckage

    Three million is a viable farming operation. It’s nothing more than that. It doesn’t even account for having the cash reserves to last one year of drought, which would bump the total up to 3.5 million. That’s not a big farm, just enough to pension the grandad and keep dad and son’s discretionary spending around the lifestyle of a professional or successful tradesman.

  39. wreckage

    Death duties are a tax by inhuman cannibals, for inhuman cannibals.

  40. sdog

    Well, de-Kulakisation is the first thing Communists do.

    ‘The people whose wallets will be drained in the new war on “the rich” are high-earning, but hardly plutocratic professionals like engineers, doctors, lawyers, small business owners and the like. Once seen as the bastion of the middle class, and exemplars of upward mobility, these people are emerging as the modern day “kulaks,” the affluent peasants ruthlessly targeted by Stalin in the early 1930s.’

    The Revolt of the Kulaks has begun.

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