OK, I know that tax law is not always logical. Wait, that’s wrong, that should read, “I know that tax law is often incomprehensible.”
Still, I ran across an article today published in the online edition of Forbes magazine that is strange even by tax law standards. Wacky even.
First, here’s the link to the story in Forbes by Janet Novack, entitled “The IR Invents a Chinese Billionaire.”
In essence, here’s the lowdown.
A wealthy art collector dies and owes the IRS a whole bunch of money in estate taxes. In this case, a whole bunch is approximately $331 million. In addition, the estate owed about $140 million in estate taxes to the State of New York.
In order to pay the tax bill, the estate had to sell a number of extremely valuable works of art, including some by such artists as Andy Warhol and Roy Lichtentstein.
However, it was one particular work of art that makes this story move from the realm of ordinary tax law to the twilight zone, and that work of art is entitled, “Canyon.”
Unless you were an art major in college, you might be like me. I had never hear of “Canyon,” but apparently the IRS was aware of it. “Canyon” is a collage by the artist Robert Rauschenberg, and its claim to fame is that it includes a stuffed bald eagle.
Well, there are federal laws on the books that make it a criminal offense to possess or sell a bald eagle, even a stuffed one like the one in the collage, “Canyon.” However, in this case, the owner of “Canyon” had obtained many years ago a permit making it lawful to possess the work of art. For the past many years, “Canyon” has been on display in museums. You can go see “Canyon” now if you’re in NYC and want to visit the Metropolitan Museum of Art.
Back to tax world.
You would think that the value of “Canyon” might be a bit devalued for estate tax purposes since it’s basically a criminal offense that could land you in prison if you tried to sell it and convert the stuffed bald eagle into some greenbacks with eagles on them. The estate apparently thought this was a logical position as well and reported the value of “Canyon” at $-0-.
The IRS had a different point of view (not surprisingly). Valuing “Canyon” a bit north of $-0-, the IRS said that the work of art was actually worth $65 million.
Wow!
If you think that is unbelievable, just wait until you hear the basis for valuing a work of art that is illegal to sell for even $1 at a whopping $65 million—according to the IRS, as reported by an attorney for the estate in the Forbes’ article, there might actually be a market for “Canyon” in China in the form of a “recluse billionaire.”
Sounds about right. No market in an estate asset. None at all, unless the estate were to violate federal law and hook up with a theoretical Chinese billionaire. I wonder why this fictitious Chinese art collector is only willing to cough up $65 million. For a one of a kind piece like “Canyon,” you would think he could come up with at least twice that amount.
According to the Forbes article, the estate has already commenced a case in the Tax Court to challenge the IRS in this matter, so stay tuned. The saga of “Canyon” and the Chinese billionaire should make for fascinating reading in the coming months.