Unsellable Artwork Donation Saves Estate Tax Liability

December 6, 2012

The heirs of art dealer Illena Sonnabend faced a very unique problem after the woman's death in 2007. One the most valuable pieces of her estate was a work by Robert Rauschenbeg known as "Canyon." The 1959 piece of art is a collage that include various three dimensional materials, including a stuffed bald eagle. Canyon would prove to be a sticking point in the heir's attempt to settle the estate--a process which ultimately dragged on for five years.

Taxes Always Due
For estate tax purposes, the value of artwork in an estate is appraised and the tax is owed based on the total appraisal value. Sonnabend's estate had a significant number of pieces and the artwork taken together was valued at over $1 billion. According to a Wall Street Journal story on the case, this led to an estate tax bill of about $471 million. The two heirs to the estate sold about $600 million of the artwork to pay for that bill.

However, the Canyon piece was a different story. Because the work featured a stuffed bald eagle, it could not be sold under U.S. law. That is because the 1940 Bald and Golden Eagle Protection Act as well as the 1918 Migratory Bird Treaty Act prohibited sale of the items. Since Canyon could not be sold, the three appraisers for the estate gave the artwork a value of zero for estate tax purposes.

But the IRS disagreed.

The IRS sent the family a report valuing the artwork at $15 million-even though it couldn't be sold for $5, let alone $15 million. The family rejected the IRS valuation. This drew the ire of the government tax collectors who responded by re-appraising the art as worth $65 million. On top of that, they claimed that the intial appraisal by the family of zero dollars triggered an "undervaluation penalty" of 40%. All told, the family was being asked to pay $40.4 million in taxes on an object that they could not make a dime from selling.

Few Options
Confused logic aside, the family had few options. Eventually, they chose to donate the piece to the New York Museum of Modern Art. This allowed them get around having to pay the hefty estate tax--charitable donations (like inheritances to spouses) generally fall outside the purview of the estate tax. Unfortuantely, however, the family was unable to use the gift for charitable deduction purposes as happens in most cases. That is because, even though the gift was made to get around estate taxes, at the end of the day it still had no value because it could not be sold.

This bizarre case is a testament to the lengths that the IRS may go to collect what it deems it is owed, even when logic suggests otherwise. It's a reminder that local residents should never try to plan for these details or handle long-term financial affairs without experienced professional assistance.

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