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.
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