Friday, May 17, 2019

Modern Art is a Giant Tax Scam

Our correspondent from Louisiana:

Maybe you saw this news story and thought, "what idiots," to pay $91 million for a balloon animal any clown could make. Actually, the joke's on you, the American taxpayer.

The entire modern art industry, except for the rubes who get conned into thinking it's real art, is a giant tax scam. Being from Louisiana, I have a superpower in that when I see things involving large amounts of money that make no sense, I know someone's running a scam (people from other states, except NY/NJ, very gullible and trusting in my observations). I figured this out years ago reading about aggressive tax strategies, but this one felt too dishonest to pursue. Here's how it works:

To run a great tax scam, you need something that is cheap to produce, has no inherent value, but can plausibly be marked up to ungodly prices for no reason whatsoever. Modern art checks all those boxes. It's legal monopoly money.

Step One: Find a chain smoking degenerate who thinks he or she is an "artist." Whatever random trash they've put together as their art doesn't matter. The main thing is that the artist will play ball, and is charismatic and can convince others that he or she is a genius through clever and elaborate verbal descriptions of their art. You need a number of true believers as your useful idiots to keep the scam going.

Step Two: You and your friends in on the scheme buy up most of the artist's work directly from the artist. Because you're on the board at a museum, preferably one in NY, you pull strings to get your artist featured with an exhibition. Maybe you use your influence on the board to have the museum buy a few pieces at a significant markup to your cost. Now, boom, by social proof, random starving artist is now a BIG DEAL.

Step Three: You send a piece or two from your collection to auction. Your buddies bid it up and let's say they sell for $1 million each. You probably don't directly reimburse your buddies for their sham purchase - that would be my first thought if I were running this, but Louisiana people get in trouble because they're too honest when pursuing a scheme - there's just an "understanding" among collectors that you help each other paint the tape at auction.

Step Four: You say you have 10 pieces in your collection from this newly minted million-dollar artist. You only paid $5,000 each for them (cost basis $50,000), but through the beauty of the tax law that doesn't matter. They are now worth $1 million each, and even better, you can get an appraisal that they're worth $1 million each - because a similar piece just sold for the same amount thanks to your friends! With your appraisal in hand, you now own art worth $10 million. Amazingly, the law allows you to write this off at the appraised value, not the cost basis. Friends of yours in some flyover modern art museum influence their board to accept all 10 pieces as a donation. The rubes at this museum are very impressed with their new collection of work from the hot new artist in NYC. High school students with marginal talent come see the exhibit and seeing the art requires no technical skill, convince themselves they could become an artist too. The cycle begins anew.

Do the math: if you're from New York, you have an effective marginal tax rate of 55%. A $10 million tax deduction is worth $5.5 million to you, all on an investment of $50,000, 100x return. You can write off up to 30% of your income each and every year this way under the tax law.

Modern art is unique in that no other asset class allows something nearly worthless to arbitrarily become worth millions in a thinly traded market. A lot of the social pressure to accept this stuff as art is about keeping the scam going.
Previously on CBS, The $12 Million Stuffed Shark. Now that you've read this post, no reason to read the book.


eahilf said...

Holy shit -- your blog is great for this sort of "LOL" stuff -- and of all places via a correspondent in Louisiana -- not that there's anything wrong with Louisiana.

eahilf said...

Steve Cohen Unmasked As Mystery Buyer Of $91 Million Bunny

The mystery buyer who paid $91 million for Jeff Koons' now-infamous rabbit sculpture - a purchase that prompted WSJ to speculate about the art market entering a "frothy period" - has been unmasked: According to ArtNet, it's Steve Cohen.


Cohen's motives in buying the piece are unclear.


In any case, the match makes sense: Though Cohen had previously denied making the purchase, he is one of the world's foremost collectors of art, and his personal collection has amassed dozens of invaluable works.



CP said...

That is classic.

eahilf - Where ya been? Haven't seen you around the blog in a while.

eahilf said...

I'll take the fact you noticed as a small compliment -- if I may.

Haven't seen you around the blog in a while.

I still read it, just not as often -- and comment even less often.

Where ya been?

To use a cliche: life gets in the way -- personal, professional...issues.

I work as an engineer -- that's my day job -- I took notice of the 2008/2009 financial crisis for the same reason most people did: it was BIG news, and it affected my life -- before that, I just tried to pick a few good mutual funds.

I had a little fun with all that; the absurdity of it -- then ZIP kept me engaged, interested -- trying to get some return -- maybe also a penchant for risk-taking -- market swings are enticing that way.

Nowadays I'm rather jaded -- more than anything I'm troubled by what I see as the immorality of inter-generational government indebtedness and the way so many young people are saddled with high student loan debt -- growing wealth inequality -- an Establishment that watched and did nothing as the 'Rust Belt' developed -- the opioid epidemic, where overdoses are now the leading cause of death for Americans under 50 -- having to choose between Trump and HRC -- something is not right with all that -- something has gone terribly wrong.

Also the way the markets seem to revolve around the Federal Reserve -- they are no longer so much somewhere to invest your money as somewhere to place your bets.

You seem to have found a reasonable market niche.

Hope life is treating you well -- again thanks for noticing.

Anonymous said...

If he instead started to draw NFTs, and sell it from his KYC account to his dirty wallet, could he still be convicted? What if only one out of every 100 NFTs his dirty wallet purchased was from his KYC account?

Or what if he decided to create his own crypto-currency and it just so happened that his dirty wallet was an early investor of ETH to his fund.

Seems like he could have done more to distance himself.

Anonymous said...

Gagosian could set up his own museum, like the late Eli Broad, whose collection is now housed in a sleek white structure twelve miles east of the Los Angeles patio where Larry once peddled posters. (Broad acquired some eight hundred works—forty per cent of his collection—through Gagosian.) Among the very wealthy, a private foundation has become a fashionable way to present art and get a tax writeoff at the same time. These supposedly public-facing collections can be farcically inaccessible. Peter M. Brant, Gagosian’s friend and client, opened one location of the Brant Foundation Art Study Center down the road from his Greenwich, Connecticut, estate, in a converted 1902 farm building that formerly housed an indoor tennis court. The collection is tax exempt, despite admitting visitors by appointment only and having no signage welcoming the public. (When I tried to plan a visit to the Greenwich location, earlier this summer, I learned that it is “temporarily closed.”)

Anonymous said...

There was a lot of money at stake. Johnson, a Republican megadonor and part owner of the San Francisco Giants, had gotten an appraisal valuing the property at $130 million, a price higher than any publicly reported home sale in the U.S. up to that time, and five times the $26 million he and his wife, Ann, had reportedly paid 14 years earlier to buy and restore what then was a dilapidated property. The plan worked. The IRS granted the foundation tax-exempt status. That allowed the Johnsons to collect more than $38 million in tax savings from the estate over five years, confidential tax records show. But the Johnsons never opened Carolands to the public for 40 hours a week.