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$65 Million or Zero? You Decide.

$65 Million or Zero? You Decide.

Did you know that it is illegal in the United States to “possess, sell, purchase, barter, transport, import or export any bald eagle — alive or dead?”  And it is on this basis that New York art dealer Ileana Sonnabend’s heirs have valued her Robert Rauschenberg masterwork “Canyon” at zero for estate tax purposes.  The rationale is, if they cannot sell it or even give it away, there is obviously no market for it and therefore, it has no ascertainable value.  The article in Sunday’s New York Times “A Catch 22 of Art and Taxes, Starring a Stuffed Eagle”  was facinating reading.  Some highlights:

  • The estate valued the work at zero because of the IRS’ own guidelines for determining the fair market value (FMV) of property which state that taxpayers should “include any restrictions, understandings, or covenants limiting the use or disposition of the property.”  (Sidebar – this explains the common estate planning technique of the “family limited partnership” – a way to legally discount the value of lifetime transfers).  Because of this restriction, the family contends that “Canyon’s” FMV is zero.  Interestingly, the article does not discuss the fact that it is a crime to merely “possess” the dead eagle.  Ms. Sonnabend was able to legally get around that technicality but what about her heirs?
  • According to Stephanie Barron, one of the members of the IRS’ Art Advisory Panel, the group evaluated “Canyon” solely on its artistic merits, without reference to any accompanying restrictions or laws.  Hmm… If value is determined in part by any restrictions on use or disposition, then how could the panel NOT consider any legal restrictions?  Says Ms. Barron: “It’s a stunning work of art and we all just cringed at the idea of saying that this had zero value.  It just doesn’t make any sense.”  Perhaps so, but did the panel err in not considering this obscure legality?
  • A bizarre argument advocating a black market valuation was advanced by a former director of the IRS’ Art Appraisal Services Unit.  Said Joseph Bothwell as quoted in Forbes:  “There could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.”  Yeah, or maybe the heirs could carry the work under a raincoat to a dark alley and sell it to some random passerby.  To me, this line of reasoning is very dangerous.
  • There was an initial valuation by the IRS of $15 million; when the estate refused to pay the additional tax and penalty, a Notice of Deficiency was issued stating that the value was in fact $65 million.  Although an intriguing turn of events, I do not want to argue the dollar amounts here, I want to stick to the principles of valuation.
  • What about gifting the piece to charity and getting a charitable deduction for the value (what value? – and isn’t the fact that they can’t dispose of the thing the whole point of this discussion?)  Get over it – the value passed on to the heirs would be the FMV as determined in the negotiation.  The contribution would be made by the heirs, not the estate, and taxes and penalties would still be owed at the estate level.  According to the heir’s attorney, they would then face the limits on deductibility based on their current and future adjusted gross income.  Assuming a $65 million valuation, it would take them about 75 years to absorb the deduction in full.  Not the best piece of tax or charitable planning.

Most fascinating of all from my viewpoint is what started this whole thing, the restriction on the ownership and transference of any bald eagle, dead or alive.  So I went to the actual federal law to see what all the fuss was about.  Yes, it is a crime but: “….. whoever violates any …… regulation issued pursuant to this subchapter, shall be fined not more than $5,000 or imprisoned not more than one year or both.”  Now, imprisonment for one year appears to be a bit of a restriction (worth what?), but $5,000?  On a potentially $65 million valuation?  And couldn’t such a criminal penalty be negotiated separately to end the uncertainty?  Methinks there is much more here than meets the eye.  Stay tuned for the Tax Court case……..

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