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What’s the Value of Illegal Art?

If an inherited artwork is illegal to sell, should the beneficiaries of the artwork be taxed on a value of zero or on the appraised value as if the artwork were legally salable, or possibly somewhere in between? That’s the issue in a case discussed in a recent New York Times article and it raises an interesting debate among experts on estate taxation.

Here’s a bit of background on how artwork is appraised for estate taxation:  When a tax return that includes an appraisal of a single work of art valued at $50,000 or more has been selected for audit, the IRS local office must refer the case to the Art Appraisal Services (AAS) unit in the Office of Appeals for the IRS, which refers it to the Art Advisory Panel of the Commissioner of Internal Revenue when applicable. The Art Advisory Panel provides advice and makes recommendations to the AAS.

The Art Advisory Panel is now under scrutiny because of this recent case involving valuation of artwork that can’t legally be sold. In the case at issue, the Panel recommended an adjusted valuation of $65 million on a collage by artist Robert Rauschenberg, which the estate of its deceased art dealer owner, Ileana Sonnabend, asserted had no value because it could not legally be sold. The work known as “Canyon” includes a stuffed bald eagle and federal law makes it a crime to possess, sell, purchase, barter, transport, import or export any bald eagle—alive or dead.

A Panel member, Stephanie Barron, Senior Curator of Twentieth Century Art at Los Angeles County Museum of Art, reportedly stated that the group evaluated “Canyon” solely on its artistic value, without reference to any accompanying restrictions or laws.

The attorney representing the decedent’s children, Ralph E. Lerner, reportedly stated that the IRS initially valued the work at $15 million and increased the valuation after the children refused to pay.

Common sense may favor the estate, but bear in mind that estate tax values are always hypothetical values, i.e., “the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Treas Reg §20.2031–1(b). Previous attempts to assert that artwork had little or no value because no market existed have met with a notable lack of success.

There has been reported speculation that “there could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.” It seems unreasonable to think that the IRS would be encouraging a black market sale. But this does not mean the value of the work is zero.

Although some estate tax may be unavoidable, it should be possible to recoup at least a portion of the tax by making a charitable donation of the work and claiming an income tax deduction for the estate tax value. A charitable donation also would remove the value of the work from the children’s taxable estates.

What do you think? Should artwork that would be illegal to sell have no value, or should value be based on the possible existence of a willing buyer? The charitable donation solution may reduce the heirs’ tax bill in this case, but it doesn’t help decide the underlying issue.

This issue, and a recent summary report of Panel decisions, are discussed in the August issue of CEB’s Estate Planning & California Probate Reporter. There’s also an entire chapter in CEB’s Estate Planning for Special Assets (chap 7), written by Mr. Lerner, the author of a treatise on Art Law, dedicated to taxation and valuation issues related to charitable giving of artwork.

© The Regents of the University of California, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

6 Responses

  1. Even people who don’t collect art probably own a painting or sculpture or two. At some point, one of two things is likely to happen: One, the artwork will be given away, perhaps as a noncash charitable contribution for which the owner will claim an itemized deduction, or as a taxable gift. Or, two, it will wind up as part of the owner’s estate, the value of which may be subject to estate tax.

    • Note that itemized deductions and taxable gifts are not mutually exclusive. For donors with taxable estates, the gift tax deduction and income tax deduction are something of a double dip. For example, a $1 million tax-free gift today could save $350,000 in estate tax at death and $350,000 in income taxes provided the donor has a large enough income and lives long enough to use the deduction, including the 5-year carryover of excess contributions over the limitation amount (generally 30 percent of adjusted gross income for so-called capital gain property).

  2. A charitable gift has to be accepted to be completed. I find it hard to imagine that a charity (say, a university museum) would accept a gift of a piece if it’s illegal to own it, no matter what the “value” might be.

    • Since the owner had a permit to exhibit the work, which currently hangs in the Metropolitan Museum, it’s reasonable to assume a charitable donee could obtain a similar permit. I think the IRS would then be estopped to deny that it had a charitable deduction value equal to its estate tax value.

  3. Art and objects are only as valued as someone places their interest and value on the piece. What something is valued today will be different tomorrow. Fakes and forgeries (and I know a lot i.e. Mark Landis) will some day come into their own, but it comes to what you think you are willing to spend, share and receive.

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