I struggled with the title of this item......the story itself has been a godsend to headline writers and I don't feel mine really stacks up. I will share some of the cream of the crop at the end and you can make the call. And what could possibly give so much fun to journalists and bloggers? Yes, it's our old friend, the discount for lack of marketability!
Modern art dealer Ileana Sonnabend died in 2007, leaving an estate worth over $1 billion, most of it in artwork. Included in her estate was a work of art entitled "Canyon" by Robert Rauschenberg that combines painting with "found" objects to create a type of collage. The issue here stems from the facts that (i) in "Canyon", Rauschenberg combined his painting with a stuffed bald eagle and (ii) selling a stuffed bald eagle is illegal under the 1940 Bald and Golden Eagle Protection Act.
Three qualified appraisers engaged by the Sonnabend Estate valued the artwork as having a value of zero for estate tax purposes, since the owners of "Canyon" cannot legally sell the piece. Essentially, the appraisers applied a 100% discount for lack of marketability. This position appears consistent with earlier rulings from the U.S. Fish and Wildlife agency that the restrictions in the Bald Eagle Act applied to "Canyon" and that the work could not therefore be sold either in the USA or abroad.
The position of the IRS' "Art Advisory Panel" however, did not take these restrictions into account as they valued the artwork at $65 million, based on the 2007-2008 sales of certain "peer" artworks by artists such as Andy Warhol. When pressed, the Art Advisory Panel finessed the discount on marketability issue by saying that "there could be a market for the work, for example, a reclusive billionaire in China might want to buy it and hide it."
So the Estate and the IRS have locked horns over this issue. At stake is potential estate tax of $29 million - plus penalties. Most commentators expect that the matter will be settled, which is a shame since it would make an entertaining court case.
From my perspective, the case presents an interesting perspective on the definition of fair market value and the mind-set of a "hypothetical willing buyer". The IRS position suggests that such a buyer should be willing to consider committing a criminal act (i.e. selling the bald eagle in contravention of Federal law) to liquidate an asset. My feeling is that this is a step too far and that the discount claimed by the Estate is valid.
And some of the headlines that this story has spawned?
"The IRS Art Advisory Panel Has Its Head In The Clouds"
"New Case Causing Quite the Screech In the Estate and Gift Tax Realm"
"Should the Taxpayer Give the IRS the Bird?"
"It's a Bird! It's a Plane! It's a $29 Million Tax Bill!"
"Bald Eagle Is a White Elephant Thanks to Uncle Sam"
"Rauschenberg Eagle Ruffles Feathers"