Appraising Illegal Assets

With so much attention focused on appraising illegal assets, WealthManagement.com has a very good article on the process and some of the misconceptions, AAA appraiser Alan Breus.  Given the publicity of the Sonnabend estate, there has been much more of a focus on appraising illegal assets.  As appraisers, it is in our own best interest to know the market and regulations when appraising valuable property, and to be familiar with all sides of a complex issue.

The interesting item, and this has been brought up in other publications, proper estate planning and a donation of the Rauschenberg piece could have been, and probably should have been donated before death in order to take advantage of the tax deduction.

Thanks to Xillary Twill of Art Asset Management Group, Inc. for sending the post.

WealthManagement.com reports

When donating an item that the Internal Revenue Service maintains has an FMV, but isn’t a legal commodity, you can’t determine the FMV of the particular item of property by a forced sale price. “Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most sold to the public.”2 The FMV then exists, even if, as noted in Private Letter Ruling 9152005 (Aug. 30, 1991), the market is an illegal one. There’s a “fair market” present and the donor will still receive the relatable tax advantage. Thus, the donation of these items by the donor, prior to death, will reduce the estate through disposing of items that would have to be included on the estate tax return, which would have left the heirs without the ability to sell the collectibles to pay the tax.

Concerning the illicit market (in which ivory objects are regularly sold), in Publicker v. Commissioner, 206 F.2d 250 (3rd Cir. 1953), the court considered the FMV for gift tax purposes of unique jewels. The question arose as to whether, because of the uniqueness of the jewels, there was a viable retail market. In Publicker, the court stated that there were dealers willing to purchase the items, which established an available market, making note of the fact that uniqueness doesn’t condemn a property to no market. Therefore, the court concluded that, even though property may be unique, a “market” nevertheless exists in which to measure the value of the property. Also, in Jarre v. Comm’r, 64 T.C. 183 (1975), the court stated that “the fact that there may be a limited market does not prevent the property from having substantial value.”

In Estate of Sonnabend, now pending in the U.S. Tax Court, Docket No. 000649-12, the estate appraisers valued an iconic Rauschenberg, with an “attached” rare stuffed bald eagle (covered by the Eagle Protection Act), at zero. The IRS and the Art Advisory Council took a very different view of the painting and valued the piece at $65 million and demanded payment of a $29.2 million estate tax and an $11.7 million penalty and fine. Even though there’s no legal market for this painting, there “may be” an extralegal avenue, and the true intrinsic value of the art “must” be considered due to its stunning and stellar quality. Had the painting been donated prior to the owner's death (they were aware of the problems) the proposed FMV would have meant a deduction (with its inherent advantages) and the estate wouldn’t have been burdened with the problem.

True, there aren’t many Rauschenbergs with illegal “attachments,” but there are many collectors of ivory, Indian artifacts, etc., that could be facing similar tests.

Sell Before Death

While in the process of estate planning, review all tangible assets with an eye for any that might be challenging to sell upon death. Doing so can be both productive and profitable. By donating these items before death, the value can be captured as a deduction, as opposed to a liability, with no means to recoup the estate taxes.

Source: Wealth Managment.com