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We'll put you prison if you sell that, but we'll tax it at a $65 million value

February 24, 2012

When Joseph Heller wrote Catch 22, he didn't realize he was also writing the manual for IRS estate tax examinations. Janet Novack tells the bewildering story of modern art dealer Ileana Sonnabend and the most famous piece that she owned when she died in 2007:

As I report in a story here that appears in the March 12th issue of Forbes, Sonnabend’s heirs sold off works by 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. But they couldn’t even consider selling what might have been the most famous piece in her collection — “Canyon” by Robert Rauschenberg— because the collage contains a stuffed bald eagle and selling it would be a criminal offense, punishable by a year in federal pen.

Given that restriction, the Sonnabend estate tax return (and three different appraisers the estate hired) valued the work at $0. The IRS says it 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.

Three appraisers say it's worthless, but the IRS still wants valuation penalties. Apparently the executors are expected to risk a year in prison to find a willing buyer, who would also presumably do time - and possibly lose the work under criminal forfeiture statutes. It's good to know we can count on the IRS to be reasonable.

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