It's "ill-eagle"

Today’s New York Times, in between some serious news stories, carries the tale of an IRS enforcement action that would be funny if it were not true.  The heirs of art dealer Ileana Sonnabend paid quite an estate tax bill when they got the $1 billion or so art collection that she left behind.  However, they did not pay taxes on a sculptural piece by Robert Rauchenberg, because it contains a stuffed bald eagle.  As it is illegal to sell a stuffed bald eagle art appraisers valued the piece at $0 because it has no market value.  (The restriction on the sale is no joke.  In fact, the heirs can’t have custody of the piece as the former owner had to agree to keep it on exhibit in a museum as part of complying with the law around the conservation issue.)

The IRS does assess taxes on artwork based on “market value”.  In fact they even have an Art Advisory Panel that helps determine the true value of the piece.  This panel came up with a figure of about $65 million for the piece, not knowing that it couldn’t be sold.  The IRS is aware of the restriction, but has decided to assess tax because the heirs could choose to sell the piece illegally.  Which while they could do this, they actually haven’t.

The good news is this is an unprecedented case.  Lawyers interviewed for the article couldn’t cite anything that showed the IRS using a hypothetical black market value to compute a tax liability.  An example of this distinction is Al Capone.  He was sent to jail for not paying taxes on ill-gotten gains, but he had in fact gotten said gains.  The bad news is when you fight the IRS without paying up front; they keep piling on the penalties and interest. At this point the heirs’ tax bill is up an additional almost $12 million on that amount alone.  There has to be better way.