The IRS Invents a Chinese Billionaire? Black Market Art Valuation and the Estate Tax

Thanks to a foreign billionaire – who doesn't actually exist  – the IRS wants $40.9 million in taxes and penalties for a piece of art that is illegal to sell and that three appraisers, including Christie’s, valued at zero dollars.  How is that possible?  Enter:  The black market.  But first, some background . . .

At 92 years old, modern art dealer, Ileana Sonnabend, died in 2007 with an Estate worth $875,000,000.  Her assets were heavily taxed ($331 million in estate taxes to the federal government and $140 million in estate taxes to New York State) but her Estate seemingly dealt fairly, and squarely, in settlement.  The item at issue is one that was included on her Estate’s Form 706 (the U.S. Estate Tax Return) – Robert Rauschenberg’s “Canyon,” a famous piece featuring a stuffed bald eagle, the much-loved United States emblem.

This particular bald eagle was apparently killed prior to 1940 by one of Teddy Roosevelt’s Rough Riders, the popular name for the first U.S. Volunteer Cavalry Regiment.  The bird’s early date of death is the reason why Ileana was allowed to own the piece in spite of the 1918 Migratory Bird Treaty Act and the 1940 Bald and Golden Eagle Protection Act, which restrict such ownership.  Her ownership was not complete, however, because the government required that the piece remain on loan at a public museum (for your information, it is currently housed at The Metropolitan Museum of Art).  Additionally, she could not sell the piece – it would have been a federal crime for her to do so.  Because it could not be sold, the piece was appraised at zero dollars.

Not so, said the IRS Art Advisory Panel, which is comprised of dealers, scholars, and museum curators, and who Forbes says has “Its Head In The Clouds.”  The Panel recommended to the IRS Art Appraisal Services that Canyon was worth $65 million, and the IRS concurred.  Apparently, while illegal to sell in the legal market, the IRS justified the price tag based on the belief that Canyon would sell for such sum on the black market to a hypothetical billionaire from China.  Shocking?  Well, only somewhat.  Indeed, the IRS has valued items with zero legal currency, like stolen art and jewels, using their black market value when the deceased owner demonstrated that he or she may have engaged in such transactions.  Here, however, the Estate evinced no such intention.

The Estate is suing the IRS in Tax Court, so for now we are left to contemplate the real liquidity problem here.  Consider that Ileana’s heirs sold famous works from her collection (including a Warhol) in order to pay the Estate taxes; now they are asked to pay tax on a piece that cannot legally be sold.  What’s an art dealer to do?  Before you die, you can return items like these to their true owners, or to a place authorized to hold them. And everyone should keep in mind that if they do not own sufficient liquid assets, valuable property may need to be sold in order to write those Estate checks.  To avoid this scenario, call us at (301) 468-3220 or email us at so that we can help you plan.

-  Gary Altman, Esq. and Coryn Rosenstock


Standing on Ceremony:  Will Signing
Protecting the Ultimate Liquid Asset:  Wine

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