What is the fair market value of an object that cannot be sold?
The question may sound like a Zen koan, or verbal puzzle, but it is one that lawyers for the heirs of the New York art dealer Ileana Sonnabend and the Internal Revenue Service are set to debate when they meet in Washington next month.
The object under discussion is Canyon, a masterwork of 20th-century art created by Robert Rauschenberg that Sonnabend’s children inherited when she died in 2007.
Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.
But the IRS takes a different view. It has appraised Canyon at $65 million and is demanding that the owners pay $29.2 million in taxes.
“It’s hard for me to see how this could be valued this way because it’s illegal to sell it,” said Patti S. Spencer, a lawyer who specializes in trusts and estates but has no role in the case.
The family is now challenging the judgment in tax court, and its lawyers are negotiating with the IRS in the hope of finding a resolution.
Some estate planners, tax lawyers and collectors are alarmed at the agency’s position, arguing that the case could upend the standard practice of valuing assets according to their sale in a normal market.
At the moment, tax experts note that the IRS’ stance puts the heirs in a bind: If they don’t pay, they would be guilty of violating federal tax laws, but if they try to sell Canyon to zero-out their bill, they could go to jail for violating eagle-protection laws.
Because the children assert the Rauschenberg has no dollar value for estate purposes, they could not claim a charitable deduction by donating Canyon to a museum, according to their lawyer, Ralph E. Lerner.
If the IRS were to prevail in its $65 million valuation, he said the heirs would still have to pay the $40.9 million in taxes and penalties regardless of a donation. Then, given their income and the limits on deductions, he said, they could deduct a small part of the work’s value each year.