"Il-eagle" Assets?

7/25/2012

Our estate tax system is quite different from our income tax system. The income tax, as its name implies, focuses on how much money individuals, trusts, and business entities make. The estate tax system, in contrast, focuses on how much assets are worth. Most assets aren’t hard to value. Stocks, bonds, mutual funds, and similar assets are valued at their publicly–traded fair market value (FMV) as of the date of death (or the executor can choose an “alternate valuation date” nine months later). But some assets are a little harder. Real estate, for example, is also valued at its FMV – but who’s to say what a unique or expensive property is really worth, especially in today’s volatile market? Closely–held businesses can be even harder to appraise. And high-end collectibles, like the kind of art and antiques that usually sell at auction, can be hardest of all.
 

Occasionally, the IRS reviews assets that are especially tricky to value. For instance, how do you value an asset that would be illegal to sell? That was the challenge the IRS faced with the estate of art dealer Ileana Sonnabend. Sonnabend died at age 92 after amassing one of the country’s most important collections of contemporary art, including works by Jeff Koons, Roy Lichtenstein, Andy Warhol, and Cy Twombly. Her heirs valued her estate at $875 million, and sold several works to pay taxes of $331 million to Uncle Sam and $140 million to the state of New York.
 

But Sonnabend’s collection also included a 1959 work called “Canyon” by Robert Rauschenberg, best–known for his “combine–paintings” incorporating nontraditional materials and objects. And there’s a problem with that piece – it includes a stuffed bald eagle. Bald eagles aren’t just a symbol of America, they’re an endangered species. Selling any part of an eagle, even a single feather, is illegal – punishable by a fine of up to $100,000 and a year in prison (and yes, they will make a federal case out of it). Indeed, back in 1981 the Department of Fish and Wildlife notified Sonnabend that ownership of the piece was restricted by federal law. Sonnabend received permission to retain the piece and lend it to museums, but understood that she could never sell it or export it for sale.
 

Sonnabend’s executors took that constraint into consideration and valued the piece at zero for estate tax purposes. The IRS disagreed. They valued “Canyon” at $65 million, assessed $29 million in tax, and threw in an $11.7 “gross valuation misstatement” penalty! The executors have filed suit, but the IRS has a history of valuing illicit assets, like Native American artifacts and stolen art and antiquities, at their black market value. Smart planning could have avoided this whole mess. Sonnabend could have donated “Canyon” to a U.S. museum before her death. That would have avoided the absurd result of owing tax on an asset that has no legal value and facing jail time for selling it to pay the tax. While you may not have assets totaling $875 million, it’s important to know how estate tax regulations could affect you and your assets. The IRS looks at estate returns carefully – over 10% of estate tax returns were audited in 2010 – so make sure you plan ahead and consider the tax implications of your estate.