When someone dies, their “estate” may be subject to the Estate-Tax. In this context, the word “estate” means “all property to the extent of the decedent’s interest in it at the time of the decedent’s death.” That includes everything you own or have any control over, or access to, when you die.
You only have to file a return (and pay any tax due) if the total taxable estate exceeds the estate tax exemption amount, which is now over $5 million and adjusted to inflation so should rise almost yearly. (Technically we are really talking about the unified credit but for most purposes the “exemption equivalent” or exemption amount is easier to talk about.)
One of the big issues with estates comes down to valuation. The Estate is taxed on the value of the property at death. That’s easy with bank accounts or stocks – you just look it up or read the bank statement. With other items, like artwork, there’s a lot of room for debate.
This brings us to our interesting case. Wealthy art dealer/collector Ileana Sonnabend died in 2007 with a collection of artworks worth around $1 billion. The estate had all of the assets appraised, filed an Estate-Tax return, and paid $471 million in Estate-Tax. You’d think that would be good enough for the folks at the IRS, but they weren’t satisfied with the valuations.
Specifically, the estate used a value of zero for a composite piece by Robert Rauschenberg called “Canyon.” They valued that piece of art as worthless because it contained a stuffed bald eagle. Under Federal law, one cannot sell or trade any part of a bald eagle. Since it would be a crime, that piece of artwork can never be sold or even traded. It can only be kept or given away. So clearly, to most ordinary people, that means it has no value.
However, the IRS is apparently staffed with extraordinary people, because they thought there was a value to the piece, even if it could not be sold without committing a crime. These are the same folks who try to tax drug dealers on their illegal products (and we allow them to do so in the name of the “war on drugs”). The logic is clear, after all, Al Capone was imprisoned for tax evasion, not murder. If the FBI fails, the IRS is right behind to finish the job!
The IRS said “Canyon” was worth $65 million so the estate owed an extra $40.9 million in taxes and penalties. After a protracted court battle, the IRS and the Estate have reached a compromise. They have agreed that no taxes will be due on the piece if the family donates it to a museum and claims no tax deduction for the donation.
In effect, the IRS is having their cake and eating it too. If there is nothing to deduct as a charitable donation when giving it to the museum, they are admitting it has no value. But, they will only do so if the children don’t keep the piece, they are making them give it to charity to avoid the $40+ million in extra taxes on its “value” of $65 million.
Well, sometimes there is no good result when you fight with the IRS. The children have decided to donate the artwork to the Museum of Modern Art in New York. Now, all of us regular folks who would be jailed if we even had an eagle feather in our possession, can go there and see this piece of art and judge its value for ourselves.