Stuck Between and Rock and a Hard Place (Must Read)

Forbes is running a interesting article on the Estate of collector and galleriest Ilena Sonnabend, and an unmarketable collage by Robert Rauschenberg which includes a stuffed bald eagle which, since 1940 and 1918 federal laws, it is illegal to sell.  Sonnabend had a waiver to own the piece from the government, and to lend to museums, but was not allowed to sell it.

The estate (total value of over $800 million) valued the piece at 0 since it can not be sold, and the IRS has contested that value saying at first it was worth $15 million and later raided the value $65 million.  Three different appraisers valued the collection and placed a 0 value on the Rauschenberg piece. The rest of the estate values were not called into question and included works by Jeff Koons, Roy Lichtenstein, Andy Warhol and Cy Twombly. According to the article, the IRS took the stance that the piece is highly collectible and would bring a high value on the black market, and therefore placed a value on the piece (yes, even thought it could not legally be sold).

Of course the case is pending.

I recommend all appraisers download, save and read the full Forbes article.  Thanks to Xiliary Twill of Art Asset Management group for sending.
Lerner says the “most shocking part” of his interaction with the IRS, is that he first received an unsigned report from the IRS suggesting “Canyon” would be valued at $15 million. After Lerner refused to agree it had any value, the estate was sent a formal Notice of Deficiency last October valuing “Canyon” at $65 million. According to Lerner, when he called Joseph Bothwell, the head of the  art panel,  to complain about the $65 million valuation, “he told me there could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.” Last month, the estate filed suit in U.S. Tax Court contesting the IRS Notice of Deficiency and Lerner vows it will fight the case all the way through the courts.  “The government is saying we want $35 million in tax but if you sell it to get the money we’ll put you in jail,’’ he fumes.The IRS, which as a policy does not comment on individual cases, declined to comment on the Sonnabend case or on what Bothwell did or didn’t say to Lerner, or why the IRS jacked up its proposed value for Canyon from $15 million to $65 million. (In the IRS’ defense, it may have considered the original $15 million a compromise offer and not the true black market value of Canyon.)

So just how creative is the IRS being here? California art law attorney Joy Berus says she’s not surprised by the IRS’ position in this case. The government has long asserted (with some support from case law) that contraband items in an estate (drugs, stolen art, stolen jewels or a purchased artwork that turns out to be a protected antiquity, say belonging to foreign government or a Native American tribe) can be valued for estate tax purposes at their  black or “illicit market” value. One reader of my initial story suggested the estate could donate Canyon for a $65 million tax deduction.  Nope.  Both Lerner and Berus say the owner of a work like Canyon can’t, under IRS rules, claim that deduction.
source: Forbes - Click HERE to read the full article.

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