What is the value of
something that you cannot sell?
Someone walked face-first
into this issue with the IRS.
We are talking about Ileana
Sonnabend, an avid art collector and a very wealthy woman. She died in 2007,
leaving an art collection that included works by Andy Warhol, Jasper Johns and
Robert Rauschenberg. Her estate was in the billion-dollar range, prompting her
executors to sell pieces from the collection to pay federal and New York estate
taxes. Those taxes approached $500 million.
There was a troublesome piece
in the collection – Rauschenberg’s “Canyon.” Rauschenberg was a post – World
War II American artist, and some of his work is described as “combine.” This
means that the work includes different materials, such as Picasso mixing sand
into his paints. The issue with “Canyon” is that it includes a stuffed bald
eagle.
There are federal laws – the
1918 Migratory Bird Treaty Act and the 1940 Bald and Golden Eagle Protection
Act – that says that one cannot traffic in bald eagles, even a stuffed one.
Ms Sonnabend purchased “Canyon”
in 1959, well after the 1940 law. In 1981 (yes, 22 years later) the Department
of Fish and Wildlife contacted her to inform her that her ownership violated
federal laws. She was able to obtain a permit to retain “Canyon” and loan it to
museums, but she was forbidden to sell it. She got the permit because
Rauschenberg – who made the piece – provided a written statement that the bald
eagle had been killed and stuffed by one of Teddy Roosevelt’s Rough Riders,
well before 1940.
The government decreed that
it must be informed of “Canyon’s” location at all times. If the artwork left
the country for an exhibition, it would have to apply for a visa.
Seriously?
Ms Sonnabend died. The
executors had to put a value on “Canyon” for the estate tax return.
How do
you value art for an estate? You get an appraisal. The estate got an appraisal
on “Canyon” from Christie’s, the auction house. Their appraisal? It was worth
zero – nada, zippo, subtract one from one. One cannot sell “Canyon” without
going to jail, with greatly cuts into its marketability. Two other auction houses
gave the same appraisal, so the estate filed an estate tax return showing a
zero value for “Canyon.”
The IRS
of course saw otherwise. In 2011 the IRS sent the estate a report proposing a
value of $15 million for “Canyon.” The estate disagreed and refused to pay. The
IRS – in an example of why people hate the IRS – issued a formal Notice of
Deficiency upping the value to $65 million.
NOTE: It is not as though your local IRS revenue agent
came up with this value. This is specialized work. The IRS has an Art Advisory
Panel that helps with these cases. The most that a Rauschenberg has ever
received at auction however is $14.6 million, which seriously calls their $65
million figure into question.
Just to
put sand in the paint, the IRS levied a special “understatement” penalty of
40%.
So how
did the bright bulbs on the Art Advisory Panel come up with the $65 million
figure? One of them, Joseph Bothwell, said that there:
... could be a market for the work. For example, a
reclusive billionaire in China might want to buy it and hide it.”
Huh? An
illegal sale to a “reclusive billionaire in China” is not considered an
accepted valuation technique.
Another
bulb, Stephanie Barron, further explained that the Panel evaluated “Canyon”
without reference to any restrictive laws.
“The ruling about the eagle is not something the Art
Advisory Panel considered,”’ she explained.
What?
The most
important factor in “Canyon’s” valuation and you did not consider it?
We all just cringed at the idea that this had zero
value. It just didn’t make any sense,” she continued.
Good
grief.
Let’s
have a brief review of the facts for Stephanie Barron. Ms Sonnabend owned an
item. The government did not approve of her owning the item. This item could be
anything. Let’s say – for example - that it is a Big Gulp in Times Square. The
government does not want you to have it and wants to take it from you. The
government could call in a drone, I suppose, but it instead shows restraint. The
government cleverly takes the item from Ms Sonnabend without actually taking it
from her possession. Is that a fair summary of what happened here?
OBSERVATION: One could argue that Ms Sonnabend
suffered a theft loss.
The
executors had a decision to make. If they didn’t pay the taxes, they would face
IRS collections action. If they sold “Canyon” to raise the money to pay the taxes,
they would go to prison for violating federal law.
How did
this turn out? This month the IRS dropped its claim against the estate of
Ileana Sonnabend over “Canyon.” The estate donated the work to the New York Museum
of Modern Art. The estate agreed not to claim a tax deduction for the donation,
as it previously argued that the work had no value.
This
was not the IRS’ finest effort.
