What is the fair market value of an object that cannot be sold?
The question may sound like a Zen koan, but it’s one lawyers for the heirs of the New York art dealer Ileana Sonnabend and the Internal Revenue Service are set to debate when they meet in Washington next month.
The object under discussion is “Canyon,” a masterwork of 20th-century art created by Robert Rauschenberg that Sonnabend’s children inherited when she died in 2007.
Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero. But the IRS takes a different view. It has appraised “Canyon” at $65 million and is demanding that the owners pay $29.2 million in taxes.
“It’s hard for me to see how this could be valued this way because it’s illegal to sell it,” said Patti S. Spencer, a lawyer who specializes in trusts and estates but has no role in the case.
The family is challenging the judgment in tax court and its lawyers are negotiating with the IRS in the hope of finding a resolution.
Heirs to important art collections are often subject to large tax bills. In this case, the beneficiaries, Nina Sundell and Antonio Homem, have paid $471 million in federal and state estate taxes related to Sonnabend’s roughly $1 billion art collection, which included works by Modern masters from Jasper Johns to Andy Warhol. The children have sold off a large part of it, $600 million worth, to pay the taxes they owed, said their lawyer, Ralph E. Lerner. But they drew the line at “Canyon,” a landmark of postwar Modernism made in 1959 that three appraisers they hired, including the auction house Christie’s, had valued at zero. Should they lose their fight, the heirs, who were unavailable for comment, will owe the taxes plus $11.7 million in penalties. Lerner estimated it would take about 75 years for them to absorb the deduction.
Inheritances are generally taxed at graduated rates depending on their value. In this case, the $29.2 million assessment for “Canyon” was based on a special penalty rate because the IRS contends the heirs inaccurately stated its value.
While art lovers may appreciate the IRS’ aesthetic sensibilities, some estate planners, tax lawyers and collectors are alarmed at the agency’s position, arguing the case could upend the standard practice of valuing assets according to their sale in a normal market. IRS guidelines say that in figuring an item’s fair market value, taxpayers should “include any restrictions, understandings, or covenants limiting the use or disposition of the property.”
In this instance, the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act make it a crime to possess, sell, purchase, barter, transport, import or export any bald eagle — alive or dead. Indeed, the only reason Sonnabend was able to hold on to “Canyon,” Lerner said, was due to an informal nod from the U.S. Fish and Wildlife Service in 1981.
The piece is on a long-term loan to the Metropolitan Museum of Art in New York, which Lerner said insures it, but the policy details are confidential.
I think the IRS has a losing argument, but I also think that if the heirs donate it to a museum their tax deduction for charitable contribution should be 0 too
I think the IRS has a losing argument, but I also think that if the heirs donate it to a museum their tax deduction for charitable contribution should be 0 too
Considering the bath they took on the other art works, they'd probably be happy to get rid of it.
Why insure it if it truly has zero value? I am curious what the payout would be for insurance purposes.
I was wondering the same thing. Interesting that the insurance policy is confidential. And that its not a crime to insure dead eagle art.
The article is fascinating. I agree that the IRS is probably wrong but I want to know more about this insurance policy, because if it has an insurable value, then I could see why its being considered as an asset
Why insure it if it truly has zero value? I am curious what the payout would be for insurance purposes.
I was wondering the same thing. Interesting that the insurance policy is confidential. And that its not a crime to insure dead eagle art.
The article is fascinating. I agree that the IRS is probably wrong but I want to know more about this insurance policy, because if it has an insurable value, then I could see why its being considered as an asset
But you can insure things that have no intrinsic market value, can't you? Or at least insure them for more than the market value. Like, my house and all the shit inside of it are insured for more than I could sell it all for since it's insured for the replacement cost.
Or like supermodels who insure their legs. They make money on the use of that item (like the musuem profits from the use of this artwork) even though the item itself cannot be legally sold on the free market. And it's not as if the IRS can tax a supermodel's daughter because she was genetically gifted with the same money-making body type.
Kind of a stretch I think, but I just mean I can see the difference between a saleable asset and something with insurable value.
I was wondering the same thing. Interesting that the insurance policy is confidential. And that its not a crime to insure dead eagle art.
The article is fascinating. I agree that the IRS is probably wrong but I want to know more about this insurance policy, because if it has an insurable value, then I could see why its being considered as an asset
But you can insure things that have no intrinsic market value, can't you? Or at least insure them for more than the market value. Like, my house and all the shit inside of it are insured for more than I could sell it all for since it's insured for the replacement cost.
Or like supermodels who insure their legs. They make money on the use of that item (like the musuem profits from the use of this artwork) even though the item itself cannot be legally sold on the free market. And it's not as if the IRS can tax a supermodel's daughter because she was genetically gifted with the same money-making body type.
Kind of a stretch I think, but I just mean I can see the difference between a saleable asset and something with insurable value.
Fair enough, but models insuring body parts strikes me as more akin to disability and life insurance than property insurance. They insure the parts not because someone will steal them, but because if they became disfigured, they wouldn't be able to work. It's no different than any other disability policy, really.
It strikes me as odd that if the art was stolen, these people would receive some unspecified amount of money, but simultaneously are arguing that it has no value and they shouldn't pay taxes on it. Maybe the solution is that they only have to pay taxes on any insurance payout, if that were to ever happen. Since it would be at that moment that the piece of art would turn from being valued at 0 to a tangible sum of money.
If the piece makes money for the museum, why isn't the museum insuring it?
I guess I'm naive, but why can they tax inherited non-cash items if the heir does not sell them?
They are property and part of the estate. If we didn't tax them, then everyone would just buy tons of shit while on their death bed, and their heirs could sell that shit and keep the cash, tax free.
I guess I'm naive, but why can they tax inherited non-cash items if the heir does not sell them?
They are property and part of the estate. If we didn't tax them, then everyone would just buy tons of shit while on their death bed, and their heirs could sell that shit and keep the cash, tax free.
If they sell, then they should be taxed. If they don't sell, why should they pay?