IRS Values Stolen or Illegal Items at Black Market Value

Ileana Sonnabend was a legendary modern art dealer who passed away in 2007. After her death, her heirs sold some of her collection to pay a whopping estate tax bill. Sonnabend’s estate ended up owing $331 million to the IRS and $140 million to New York State.

To pay the estate tax bill, the heirs sold famous works from Jeff Koons, Andy Warhol, and Cy Twombly among others. The heirs were not able to sell Robert Rauschenberg’s “Canyon”, because it violates federal law. Two federal laws bar possession or trafficking of bald eagles, living or dead, and the famous Rauschenberg piece contains a stuffed bald eagle. United States Fish and Wildlife agents found out about the eagle in 1981, and they issued a permit to Sonnabend allowing her to retain “Canyon” and lend it to museums. It is currently hanging in New York’s Metropolitan Museum of Art pursuant to that permit.

The IRS billed the estate $65 million for “Canyon” alone. Ralph E. Lerner is a reputable art lawyer who is suing the IRS in tax court over this amount because he argues that the valuation method of the IRS is improper. The IRS has long taxed stolen or illegal items based on the price one would pay for the item on the black market. Lerner argues that Sonnabend complied with the law and the permit that was issued to her. Additionally, there is no black market for such an iconic piece. The IRS insists that there could be a market. It is possible that a quiet Chinese billionaire could surface and want to purchase the work and hide it.

See Janet Novack, The IRS Invents a Chinese Billionaire, Forbes, Feb. 22, 2012.