Following a wealthy decedent’s death, a primary concern of beneficiaries is the ability to generate sufficient liquidity to pay what can sometimes be a massive estate tax bill. Sophisticated pre-death estate planning approaches can create a situation in which estate tax liability is minimized, and even creative post-death planning can help keep the tax bite down. But what can be done when the tax assessment value of estate assets is high, but the ability to liquidate those assets is nil?
Two recent affairs highlight what might be an unworkable “Catch-22” with regard to certain kinds of assets:
Taxes as High as the Eagle Soars.
When art dealer Ileana Sonnabend died, her estate included a sizable collection, including an iconic mixed-media painting/collage/sculpture by Robert Rauschenberg, called “Canyon.”
Canyon included a stuffed American bald eagle carcass.
In response to the question “is it art?” reasonable minds may differ. But in response to the question “is it illegal art?” the answer is clear: Yes. Because Canyon includes an endangered species, it violates the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act, which Acts prohibit possessing or trafficking in an American bald eagle (dead or alive).
In the federal estate tax return, Ms. Sonnabend’s estate said that the fair market value of Canyon was $0. That value was based on the premise that, as illegal art, there is no legal resale market; the estate could not sell Canyon without facing criminal penalties.
The IRS disagreed. In audit of the estate tax return, the IRS and its Art Advisory Council took the position that Canyon had a value of $65 million, and asserted that the estate therefore owed an additional $29 million in estate tax and nearly $12 million in penalties. Theorizing that the work has intrinsic value and there might be an “extralegal avenue” available for its sale, the IRS essentially took the position that a $65 million value was warranted because there could be a “black market” for Canyon.
Perhaps feeling a bit like an endangered species itself, Ms. Sonnabend’s estate filed suit in the U.S. Tax Court to contest the $65 million value.
Ultimately, the dispute was settled. As part of that settlement, the IRS dropped the tax assessment, and the family donated Canyon to a museum (the Museum of Modern Art) for public exhibition. But the family was not able to claim any tax deduction. One wonders: Had Canyon been donated by Ms. Sonnabend prior to her death, or if it had been an express charitable bequest under her estate plan, would the IRS have accepted a “fair (black) market value” of $65 million for purposes of calculating a charitable deduction?
Elephants Never Forget a Tax Bill.
Okay, not too many of us own ornithological Rauschenbergs. But there are numerous collectors of ivory, Native American artifacts, antiquities, and even seashells who could find themselves (or their estates) confronted with similar unusual tax problems.
The Advisory Council on Wildlife Trafficking has recently proposed a ban, to take effect this summer, on nearly all ivory sales in the U.S., as part of a new “National Strategy on Wildlife Trafficking” intended to prevent poaching. Under the ban, owners of items containing ivory would be required to obtain a permit by proving that items offered for sale or export comply with the Endangered Species Act, which generally means that the ivory must have been imported into the U.S. before 1989, or must be proven to be antique ivory, more than a century old. But even with a permit, sale would not be allowed across state boundaries. Given the severe limitations and the inherent difficulties in satisfying documentary requirements, the net effect of the ban could be to effectively prohibit the sale of any object containing any ivory, even if it was legally acquired decades ago.
One can easily imagine a decedent’s estate which includes objects containing ivory – jewelry, pianos, musical instruments, chess sets, and a myriad of other decorative objects. But what’s a nonmusical heir to do with dad’s classic Martin guitars (with ivory pegs and bridges)? Will the IRS take the position that grandma’s collection of 17th century netsukes has a high value for purposes of calculating estate tax liability, even as the estate is unable to legally sell the items to generate the cash to pay the bill?
What due process issues arise when one hand of the government destroys the value of property legally acquired, while another hand asserts tax due on the value of that property?