Paul L. Caron

Saturday, February 25, 2012

Forbes: Estate Planning for Illegal Assets

Forbes, Even Rich Heirs Deserve A Fair Shake From The IRS, by Janet Novack:

Canyon 2[A]rt dealer Ileana Sonnabend ... died in 2007 at the age of 92. As I report in a story here that appears in the March 12th issue of Forbes, Sonnabend’s heirs sold off works by Jeff Koons, Roy Lichtenstein, Andy Warhol and Cy Twombly to pay estate taxes of $331 million to Uncle Sam and $140 million to New York State. But they couldn’t even consider selling what might have been the most famous piece in her collection — “Canyon” by Robert Rauschenberg [right] — because the collage contains a stuffed bald eagle and selling it would be a criminal offense, punishable by a year in federal pen.

Given that restriction, the Sonnabend estate tax return (and three different appraisers the estate hired) valued the work at $0. The IRS says it is worth $65 million and is demanding an additional $29 million in tax and an $11.7 million “gross valuation misstatement” penalty from the estate. ...

California art law attorney Joy Berus says she’s not surprised by the IRS’ position in this case. The government has long asserted (with some support from case law) that contraband items in an estate (drugs, stolen art, stolen jewels or a purchased artwork that turns out to be a protected antiquity, say belonging to foreign government or a Native American tribe) can be valued for estate tax purposes at their black or “illicit market” value. ...

How to deal with this Catch-22? Berus, who lectures widely on the subject, tells her shocked audiences that collectors in possession of a verboten item should “get rid of it before they die” by giving it to a rightful owner—for example, a Native American museum authorized to hold a Native American artifact. The giver won’t qualify for an income tax deduction, but at least his or her heirs won’t be stuck paying tax on a supposed black market value they can’t (legally) realize. ...

I’m no lawyer and no art expert. Still, the IRS’ position in this case offends both my common sense and my sense of fairness

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It could be worse, they could be arrested by the federal Fish and Wildlife department. They are constantly on the look out for a non-Indian possessing even one feather.

Posted by: save_the_rustbelt | Feb 26, 2012 6:12:08 AM

I believe the IRS is right on the inclusion issue and very wrong on the valuation issue. In TAM 9152005 and TAM 9207004 the IRS rightly indicated that contraband drugs and stolen art work properly belonged in the estate of those who held them. This is pretty consistent with established case law on the taxation of stolen goods and other contraband. The valuation issue was poorly treated with the IRS insisting that the drugs in the hands of a bulk importer be valued at its street value. There is an article on this, "The Pink Panther Meets the Grim Reaper: The Estate Taxation of the Fruits of Crime" that I wrote in 72 N.C.L. Rev. 163.

Posted by: Bill | Feb 26, 2012 7:33:37 AM

Next, the IRS assesses tax on the street value of a kidney, heart, and a couple of corneas from the deceased.

Posted by: Woody | Feb 26, 2012 9:08:52 AM

(1) Is the IRS saying that the 65 million dollar value is the black market value, or the value if it could be sold legally?

(2) Could the collage be exported to Yemen and sold legally there to a Japanese collector?

(3) The estate planning advice seems totally wrong. If the old lady gives the collage to a museum, doesn't she get a tax deduction of the black market value? (Can she give away equity in it in 5% hunks, one year at a time, if her income isn't very great?)

Posted by: Eric Rasmusen | Feb 26, 2012 6:54:15 PM

How does the Service know what value this piece would bring at sale?

Posted by: ledzepped | Feb 27, 2012 6:21:02 AM

Add to my list of tax wrongs: If a person legally purchased an art piece and later the government passed a law that diminished its value by making it illegal to sell, the government should compensate the owner for that loss or, at least, allow a tax deduction for the reduction in value. The same thing should apply in declaring a house a historical place and the restrictions that entail.

Posted by: Woody | Feb 27, 2012 8:35:32 AM