Art Letter

2/24/10 Giacometti or Jail

Giacometti or Jail?

This month's $104 million, record-breaking auction sale of Alberto Giacometti's Walking Man foretells the return of the art market to a healthier condition.

And it reminds me of when I owned a gallery and had to contend with the shenanigans of a few of my patrons who were trying to avoid paying sales tax - often illegally and often to their own detriment.

In the small picture, a collector insisting an avoiding sales tax by shipping the art out of state probably won't get caught - unless one of two things happens. If the gallery gets audited and there's a discrepancy noticed by the auditor the collector can be liable for some unpleasant penalties. Or if any one of a number of government agencies wants to go after you for something artistically irrelevant, tax fraud is a pretty popular and easy way to go about it. Just ask Dennis Kozlowski (Prisoner 05A4820) who is serving a minimum of 8 years in a Connecticut prison.

Penalties like that should be a deterrent, but often people are penny wise and pound foolish.

Take for example the couple, let's call them Bill and Jane Jacobs, who on their honeymoon in Paris in the mid-1930's stumbled across a new, and not yet mature Surrealist piece by Alberto Giacometti. Ultimately, it was these works that established Giacometti as a significant artist, but when the Jacobs acquired this Giacometti "keepsake" as a memento of their honeymoon, they didn't realize how lucky they were - or so it would have seemed.

But the Jacobs weren't really art collectors. They just had a nice piece, by someone whose name they couldn't remember, that sat on a table in a corner of then den, typically surrounded by piles of books.

But Bill, Jr., when he took a college art appreciation course to get an easy credit, recognized that his folks had a small treasure. He told his parents about his discovery. They were thrilled - for about a week - and then they forgot about it again.

But Bill remembered it when his parents died in an accident when he was about 35. Unsure of his inheritance, Bill figured he better cover his bases. Though grieving, he went into the house, scooped up the Giacometti and left.

End of story? Unfortunately, not quite. People like Bill, who exercise the 'empty-hook" method of estate planning, invariably overlook key criteria:

There is no statute of limitations for estate tax fraud under code section 6501(b3). This fraud follows inheritors forever.
There are unforeseen circumstances that may necessitate the sale of the artwork down the line, making its existence public: the triple D's of death, divorce and debt. (It's damned hard to account for what our heirs are going to do!)
When Bill, Jr. passed rather suddenly a few years ago. His son, Trey, knew the history of the Giacometti sculpture, knew that his grandparents acquired it on their honeymoon and that his father and treasured it for years, albeit rather quietly. So with his parents passing, Trey "inherited" the piece the same way his father had - he took it.

And as much as Trey loved the piece, he loved his profligate lifestyle more.

He decided to place the Giacometti sculpture at auction. Extrapolating from like pieces, he deduced that he'd get close to $10 million for it (a very few years ago) and was profoundly shocked to learn that the auction houses estimate was significantly lower - they said it was because the piece had no provenance, no receipt for the purchase, no documentation, no exhibition history - nada.

But Trey had to sell it anyway, which is where things got really sticky. The IRS of course learned of the sale and came knocking - they wanted their cut and when they realized that estate taxes hadn't been paid, twice, they demanded a lot more than Trey had.

Not pleasant. Trey is now serving 8 years of "rehab," but is meeting a whole array of gentlemen he wouldn't otherwise have been introduced to.

The moral of the story, of course, is that honesty is the best policy and that planning for one's heirs and the future is pragmatic.

Yes, with proper planning, Bill, Sr's heirs could have gotten full value with no recourse, and, so too, could have Bill Jr's.

Not only that, well thought-out Art Succession plans can easily include providing for your legacy, gifts to the next generation, charitable endowments and contributions, strategic selling, using art to generate tax deductions, and ways to significantly reduce capital gains and estate taxes - all with the blessing of the IRS.

But you've got to do it while you are alive!

Thank you,
Paul Klein