Usually, most taxpayers make mistakes by overstepping tax law boundaries. However, the IRS is not above making mistakes too, and can create tax problems and disputes as a result. When this happens, we stop and take notice. An article by Janet Novack of Forbes The IRS Art Advisory Panel Has Its Head In the Clouds reports on one such noticeable case; the strange and bizarre tax dispute between the IRS, its IRS’ Art Advisory Panel and the estate of deceased art collector, Ileana Sonnabend.
IRS Tax Issues Began with a Value of Zero
Sonnabend died in 2007 with an estate valued at $876 million. Her massive art collection including works by Jeff Koons, Roy Lichtenstein, Andy Warhol and Cy Twombly were all appraised at fair market value by Sotheby’s except one: Robert Rauschenberg’s famous collage “Canyon.” This special art piece; part painting part sculpture was given the value of “$0” because it cannot legally be sold. The reason: the piece includes a stuffed bald eagle that if sold, the seller would risk violating two federal laws protecting bald eagles and face a year in jail. In 1981, Sonnabend was issued a special permit by U.S. Fish and Wildlife agents and allowed to keep “Canyon” to lend to museums. Its current spot is at New York’s Metropolitan Museum of Art.
The IRS values art such as “Canyon” through its Art Advisory Panel. The panel consists of independent experts, an IRS official chair and the Director of Art Appraisal Services. The New York Times reports in their article Art’s Sale Value? Zero. The Tax Bill? $29 Million that one expert who analyzed “Canyon” Stephanie Barron is a senior curator at Los Angeles County Museum of Art (LACMA), where “Canyon” was exhibited for two years. She said this piece was “a stunning work of art” and valued solely on its artistic value without regard to laws regarding the eagle. The panel estimated the piece to sell for $65 million.
IRS Creates Value, Demands Tax Debt and Penalties
Believing the panel’s valuation may have been too high, the lead IRS auditor valued “Canyon” at $15 million. Ralph E. Lerner, the estate’s attorney disagreed with the art having value and pretty soon the estate received an IRS Notice of Deficiency stating the value of “Canyon” to be $65 million and for the estate to pay the following:
o An additional $29 million in tax
o $11.7 million “gross valuation misstatement” penalty
Lerner complained to the IRS Director of Art Appraisal Services and was told by the Director that the art was given this value because there “could be” a market for such a piece supposing “a recluse billionaire in China might want to buy it and hide it.” Since Sonnabend or her heirs have no “black market” business dealings, and it would be illegal to peddle the art in any marketplace, it’s hard to believe the $65 million valuation will stick.
Tax Resolution May Come with Negotiation
The situation is tricky. If the estate does not pay back taxes and penalties, they will be in violation of federal tax laws, but if they try to sell “Canyon” to pay their tax debt, they could go to jail. The Sonnabend heirs can only hope their tax lawyers will bring them some tax relief by negotiating with the IRS to drop this matter or at the very least, get the $29.2 million in delinquent taxes and IRS penalties reduced to a more manageable amount.
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