IRS tax determination

Should tax be paid on unsellables?
Published : 08/10/12
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Americans don’t love the IRS. This is understandable, given the common belief that taxes are too high, and the IRS’s role as the agency that collects those taxes. But sometimes the IRS does something both inexplicable and really deserving of our disdain, with nobody but itself to blame.

In 1959, the artist Robert Rauschenberg, famous for using everyday objects in his sculpture-painting combinations, created a work titled Canyon, which features, among other things, a stuffed bald eagle attached to a canvas. The work is currently on long-term loan to the Metropolitan Museum of Art in New York, and is considered a masterpiece.

However, by virtue of the Bald and Golden Eagle Protection Act of 1940, which applies to “any bald eagle ... alive or dead,” nobody can legally “possess, sell, purchase, barter, offer to sell, purchase or barter, transport, export or import” this work. As a result, when the current owners inherited Canyon from their mother, they valued it at $0 for estate tax purposes, and forwarded three appraisals at that amount, one from Christie’s.

IRS disagrees

The IRS disagreed, placing a value of $65 million on Canyon and demanding $29.2 million in taxes, which has now grown to more than $40 million with interest and penalties. The owners asked how a work that could not be sold could be “worth” $65 million.

Interestingly, the U.S. government doesn’t want to take possession of Canyon, and in 1981 the Fish and Wildlife Service showed some interest, but backed off, doing so a second time in 1998 when Rauschenberg himself provided a notarized statement that the eagle he used had been stuffed by one of Theodore Roosevelt’s Rough Riders long before the law took effect in 1940.

Fictional value

So the issue is entirely over whether a work that will probably remain where it is forever (where else could it go?) should nevertheless be taxed at an extraordinary fictional value every time its owner passes away. The IRS consulted with its Art Advisory Panel, which according to press interviews did not consider the illegality of the work when appraising it.

Disturbingly, a former director of the IRS Art Appraisal Services unit has been quoted as saying that the IRS could take into account that “a recluse billionaire in China might want to buy it and hide it.” There’s no excuse for the IRS using a “black market” valuation, assuming illegal transfer of the work by its owners, and one member of the panel has denied the suggestion. But by valuing Canyon without regard to its legal situation, the IRS has done just that.

A similar question was raised regarding the Langbord family’s failure to pay estate taxes on their 10 1933 gold $20 pieces. It could be argued, based upon the verdict in the case between the Langbords and the government, that those coins had zero value for estate tax purposes because they belonged to the government, not the Langbords.

Certainly one would have expected the IRS, which is part of that same government, to agree with the Justice Department on that one. But can we really expect the IRS to behave rationally after seeing its position regarding Canyon?

Armen R. Vartian is an attorney and author of A Legal Guide to Buying and Selling Art and Collectibles.

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