How do you pay $41m in taxes on a painting which can't be sold?

The value of a painting is how much you can sell it for. But Robert Rauschenberg's "Canyon" is illegal to sell, leaving the Sonnabend estate in a pickle.

When modern art dealer Ileana Sonnabend died in 2007, her family had to sell a heck of a lot of paintings to pay their inheritance tax bill. They eventually valued the total estate at $876m, and had to say goodbye to works by Lichtenstein, Warhol and Twombly to come up with the $471m they owned.

But one of the most important paintings they owned was valued at $0, in a move which has led to the IRS (the Internal Revenue Service, the American tax office) taking them to court for to reclaim a further $41m from them. But this is not tax evasion gone wrong. The painting is quite literally priceless – or perhaps more accurately, valueless.

The work, called Canyon, is by American pop artist Robert Rauschenberg. It is a mixed-medium canvas, featuring "oil, housepaint, pencil, paper, fabric, metal, buttons, nails, cardboard, printed paper, photographs, wood, paint tubes, mirror string, pillow" – and a stuffed bald eagle:

Since trafficking in the bird, a formerly endangered species and national icon, is illegal whether it is dead or alive, the painting cannot be resold. In fact, Sonnabend had to obtain special dispensation to lend the work to museums, and even keep it at all, once federal agents spotted it in 1981.

Now, as any economist knows, there is no such thing as intrinsic value. An item is worth what it can be resold for. It's value certainly isn't what you paid for it, as anyone who bought a full set of Charles and Diana wedding memorabilia will attest to. And neither is it what it would be in a different, hypothetical, situation. If I own an autographed copy of Sticky Fingers​ which will be worth a lot "when (if?) Keith Richards dies", that's all very well, but it's not worth that now.

All of which is to say that if you own a painting which cannot legally be sold, and which can only even be retained through a rarely competent bureaucratic exemption, it is pretty fair to describe it as worth $0. (Although a more accurate valuation would be [sale price in an open market]x[probability of the restrictions being lifted], but if the latter is zero then the whole thing is as well). But the IRS, apparently, don't agree. They claimed to the estate's lawyer that:

There could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.

Yesterday, the New York Times threw some light on how they actually reached their valuation:

That figure came from the agency's Art Advisory Panel, which is made up of experts and dealers and meets a few times a year to advise the I.R.S.’s Art Appraisal Services unit. One of its members is Stephanie Barron, the senior curator of 20th-century art at the Los Angeles County Museum of Art, where "Canyon" was exhibited for two years. She said that the group evaluated "Canyon" solely on its artistic value, without reference to any accompanying restrictions or laws.

"The ruling about the eagle is not something the Art Advisory Panel considered," Ms. Barron said, adding that the work’s value is defined by its artistic worth. "It’s a stunning work of art and we all just cringed at the idea of saying that this had zero value. It just didn’t make any sense."

Reuters' economics blogger Felix Salmon, who harbours part time fascination with the art world, doesn't think too highly of Barron for this:

The assumptions baked in to this are both jaw-dropping and entirely unsurprising at the same time. Barron is the senior curator of 20th-century art at Lacma, which puts her at the pinnacle of the non-profit art world, the place where art is supposedly valued just for its own sake and not because it’s worth lots of money. And yet, faced with a literally priceless work of art, Barron and her fellow panelists “just cringed” at ratifying precisely that concept. If a work has great artistic value, in Barron’s view, it must have great financial value as well. And, conversely, if a work has no financial value, then it cannot have artistic value.

Salmon is right that there is something peculiarly specific to the art world in this error, and that's what he focuses on for the rest of his very good piece. But it's also representative of a more widespread form of economic illiteracy. Take, for example, arguments around the introduction of a wealth tax.

The idea is that since a) inequalities in wealth are far greater than inequalities in income, and b) wealth is a better indicator of "richness" than income (people rarely have temporary spikes in wealth, for instance), then we ought to be collecting a tax on wealth (of, say, half a per cent of total wealth over £1m per year).

This is all good, but the problem comes when people start comparing liquid and illiquid assets. Much – most – of the wealth of the richest Britons is tied up in land and property. Unless Inland Revenue want to start collecting percentages of houses (and it's unclear what they would do if they seized, say, your front porch) then some people are going to have to start selling those homes, liquidating their assents.

When there's a glut of properties on sale, the value falls. If the value falls, the value of what can be taxed correspondingly falls. There is no such thing as the "true" value of someone's wealth which the Revenue can address, and if they do, they end up with cock-ups like the IRS's. Let that be a lesson to them.

A noble, majestic bald eagle, indirectly responsible for a $41m tax bill. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Is defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.