This past week I worked with a client who has a rather large art collection, which for the most part, she is leaving to family members. However, certain pieces she plans to leave to a museum if the museum agrees to place the pieces on exhibit in the museum after her passing. Other pieces she wishes to be sold upon her death. Issue: As with any other asset which requires a valuation at death for tax purposes, the question of value of a piece of artwork that is particularly difficult to sell or cannot be sold is often times a difficult one. Even establishing the cost basis for a ‘work of art’ is often a tough nut to crack. Discussion: Interestingly, and related to the question of valuation, the New York Times had a recent article on July 22 about this issue. The object under scrutiny is “Canyon” a masterwork of 20th century art created by Robert Rauschenberg that Mrs. Sonnabend’s children inherited when she died in 2007. The work, a “sculptural combine,” includes a stuffed bald eagle, a bird under federal protection, so that heirs would be committing a felony if they ever tried to sell it. As a result, their appraisers for the family valued the work at zero. The IRS took a different view. It appraised “Canyon” at $65 million and is demanding the owners pay $29.2 million in estate taxes. The family is now challenging the judgment in tax court. This figure came from the IRS’ Art Advisory Panel which is made up of experts and dealers and meets a few times a year to advise the IRS Art Appraisal Services Unit. The IRS stance puts the heirs in a difficult situation. If they don’t pay, they will violate federal tax laws. If they try to sell the piece, they could go to jail for violating eagle protection laws. To make matters worse, if the children assert that the piece has no dollar value for estate purposes, they could not claim a charitable deduction by donating the piece to a museum. And if the IRS prevails in the $65 million valuation, the heirs would have to pay an estimated $40.9 million in taxes and penalties regardless of the donation. According to the article, the children could only deduct a small part of the work’s value each year so it would take about 75 years for them to absorb the deduction. Apparently Mrs. Sonnabend’s total art collection is roughly valued at $1 billion. The children have sold $600 million worth of the collection to pay the taxes they owed. Comment: Valuation in these cases is often times a difficult dilemma. The IRS and state authorities assesses estate taxes on date of death value and the appraisals are generally reviewed carefully when the estate tax return is submitted. At times it becomes a battle of expert opinions. For clients with large collections such as this, it is important for them to have planned, such as with the purchase of one or more life insurance policies to provide liquidity to the estate. Anyway, I thought this was interesting enough to share. Steven E. Shane Principal Offit│Kurman Attorneys At Law 301.575.0313 Washington 443.738.1513 Baltimore 410.218.9339 Mobile 301.575.0335 Facsimile Please note the above material discussed is intended to provide only general information. Do not, under any circumstances, solely rely on this information as legal advice. Legal matters are often complicated. For assistance with your specific legal problem or inquiry please contact me directly.