More Details on the Sonnabend Estate Case…

6 Mar

Janet Novack at Forbes.com provides us with a little more insight into the Sonnabend Estate vs. the IRS case.

Recap:
Legendary modern art dealer Ileana Sonnabend died in 2007 at the age of 92. Her heirs sold off works by modern masters 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.  The most famous piece in her collection — “Canyon” by Robert Rauschenberg—  was not even considered for sale because the collage contains a stuffed bald eagle and selling it would be a criminal offense, punishable by a year in federal jail.  The estate had three appraisals done, and all three appraisers agreed independently that the fair market value of the artwork was $0, since it could not be sold legally on the open market.  The IRS says the work 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. 

 

We know Ralph Lerner’s position on the case.  He’s the one representing the Sonnabend Estate and filing suit in U.S. Tax Court against the IRS in protest of the back taxes and penalties owed on “Canyon”.  Lerner fumes: “The government is saying we want $35 million in tax but if you sell it to get the money we’ll put you in jail.”  It’s Catch-22.

California art law attorney, Joy Berus, is not surprised by the IRS’s position, as there is case law that contraband items in an estate (drugs, stolen art, stolen jewels, etc.) can be valued for estate tax purposes at their  black or “illicit market” value.  So what should you do?  Berus tells clients to “get rid of it before they die” to avoid this situation for your heirs.  Donating the works to a museum seems to be the best solution – but there’s no financial benefit for doing so, as the giver won’t qualify for an income tax deduction.  UGH, but at least the heirs won’t be stuck paying tax on a supposed black market value they can’t (legally) realize.  Says Berus regarding Rauschenberg’s “Canyon”: “Under current case law, it is includable in the estate and the IRS can value it based on the the black market value. But it doesn’t seem logical or fair.”

I’m excited to see what happens.  I think there is a real opportunity here to establish new case law that makes sense and doesn’t punish people for following the law.

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