Should the Taxpayer give the IRS the bird?
It’s not often you get an estate tax valuation issue like this. When the famous art dealer Ileana Sonnabend died in 2007, she left an estate worth over $1 billion, most of it in artwork. Much of the artwork had to be sold to pay estate taxes, which were over $300 million. However, one work of art has become a masterpiece of intertangled valuation issues worthy of The Maltese Falcon.
"Canyon", by Robert Rauschenberg, is one of his famous “combines”, artworks that combined his paintings with physical objects to create a unique style of collage. The only problem with "Canyon" is that is that Rauschenberg combined this painting with a stuffed bald eagle. Selling a stuffed bald eagle is illegal under the 1940 Bald and Golden Eagle Protection Act as well as the 1918 Migratory Bird treaty, so three experienced, qualified appraisers valued the artwork at $0 for estate tax purposes. In business valuation language, that’s a 100% discount for lack of marketability.
The $0 valuation appears consistent with the artwork’s history. In 1981, the U.S. Fish and Wildlife agency informed the owner that restrictions written into the bald eagle and migratory bird acts applied to the work. The owner had to obtain a special permit in order to retain possession of the stuffed bird. Moreover, the government agents ordered that the work could not be sold either in the USA or abroad, which sounds like grounds for a discount for lack of marketability that would make the most restrictive limited partnership agreement seem liberal. In addition, the government ordered that it be informed of the artwork’s location at all times, and if the artwork left the country for a foreign exhibition, it would have to apply for a special “visa”, which sounds like grounds for a discount for lack of control.
In 1998 while applying for a “visa”, the Sonnabend gallery was told its permit to have the eagle would be revoked, as it was not a non-profit organization, unless it could prove the eagle was stuffed prior to 1940. A notarized statement from the taxidermist stated the bird was indeed pre-1940, so Sonnabend was confirmed as owner, but the “visa” was denied. More grounds for a discount for lack of control.
For estate tax purposes, the IRS initially sent a notice that the painting was worth $15 million, which presumably was based on the sale of another Rauschenberg artwork at Sotheby’s for $14.6 million in 2008. The taxpayer refused to pay saying the value was $0. Then the IRS’ “Art Advisory Panel” a few weeks later valued the artwork at $65 million! This was apparently based on the 2007-2008 sales of certain “peer” artworks by artists such as Andy Warhol. This seems like trying to value a 2008 Cadillac by ignoring the sales prices of 2008 Cadillacs, and instead substituting the prices of 2008 Bentleys, using the justification that they are both desirable luxury cars. However, it seems a departure from best practices in applying the market approach to value, where ensuring true comparability is important. Plus the stubborn issue of the discount for lack of marketability remains. The ”Art Advisory Panel” got around this issue by saying that perhaps a reclusive foreign billionaire might buy the painting and spirit out of the country. Of course that would leave the seller in the uncomfortable position of trying to explain both the location of the artwork and a mysterious $65 million deposit in his bank account.
The taxpayer has pledged to fight the tax assessment, which will cost both the taxpayer and the government money. Perhaps there is a better solution: the taxpayer should give the IRS the bird. Give the artwork, bald eagle and all, to the IRS, which could donate it to the National Gallery of Art. And give the taxpayer a $65 million credit against the net asset value of the estate.
Raymond J. ("RJ") Dragon MBA, MS, ASA, CFFA is a Principal in Citrin Cooperman's Valuation & Forensic Services practice in the New Jersey / New York City area. His work encompasses valuations for litigation support, marital dissolution, shareholder disputes, estate and gift tax, intangible asset valuation, purchase price allocation and financial reporting.