Last week at my other tax blog: Trillions hidden in worldwide offshore accounts; Bypassing complicated U.S. tax breaks
Cayman Islands to tax foreign workers

Art's value to the IRS, states' bottom lines and your enjoyment

When is fair market value not the appropriate valuation for tax purposes?

When the Internal Revenue Service says it isn't.

The value controversy is part of the tax fight now underway between heirs of New York art dealer Ileana Sonnabend and the IRS.

Included in Sonnabend's estate is the Robert Rauschenberg work "Canyon." The piece, described as a sculptural combine, contains a stuffed bald eagle.

That's right, the symbol of the United States.

Sonnabend got an informal OK from Uncle Sam to hold onto "Canyon" even though the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act make it a crime to possess, sell, purchase, barter, transport, import or export any bald eagle, whether alive or dead.

Those same anti-eagle trafficking laws, say Sonnabend's heirs, are why "Canyon" is worthless for tax purposes. Since it can't be sold, they argue, its value is zero.

And that means no added dollars to the taxable Sonnabend estate.

Not so, says the IRS.

It has appraised "Canyon" at $65 million and figures that the U.S. Treasury is now due $29.2 million. That IRS amount includes taxes and penalties calculated at a special rate because the tax agency contends that the Sonnabend heirs inaccurately stated the artwork's value.

It's also this week's By the Numbers figure.

29-point-2 million Sonnabend Canyon IRS bill

The "Canyon" value and tax bill is now awaiting hearing by the U.S. Tax Court, although both sides reportedly still are negotiating.

Other art collectors and their heirs who usually end up with the works and any subsequent tax bills are closely watching the Sonnabend situation.

$0 vs. $65 million: The Sonnabend heirs hired three appraisers, each of whom valued "Canyon" at zero.

Why would an acknowledged modern masterpiece be of no value?

Because the usual way to value assets for tax purposes is by their potential sale in a normal market, aka fair market value. The IRS says that in determining the value, the asset owner should "include any restrictions, understandings, or covenants limiting the use or disposition of the property."

The eagle protection laws, say the Sonnabend heirs, therefore make the work unsalable and therefore worthless. The art work is on a long-term loan to the Metropolitan Museum of Art in New York.

The IRS, however, is going by assessments from its Art Advisory Panel. This special, and secretive, group of art experts and dealers advises the IRS' Art Appraisal Services division. And the advisory panel evaluated "Canyon" on its artistic value alone, not any resale potential.

"It's a stunning work of art and we all just cringed at the idea of saying that this had zero value. It just didn't make any sense," Art Advisory Panel member Stephanie Barron told the New York Times. So the panel looked at comparable works and what they sold for at put a price tag of $65 million on "Canyon."

Who's to blame for the value controversy? An earlier report by Forbes on the artwork's value noted that the IRS hypothesized that an art lover in a another country, say China, might be willing to buy and hide the illegally purchased eagle-bearing work, therefore making it worth something, not nothing.

But such black market assumptions in coming up with a fair market value strikes some as wrong.

Janet Novack writes in Forbes that although the IRS has asserted that contraband items in an estate can be valued for estate tax purposes at their black or "illicit market" value, that's usually been where the deceased owner had shown a readiness to traffic in the black market.

That's not the case for Sonnabend or her heirs. In this situation, says Novack, the IRS art panel has its head in the clouds.

But Matt Erskine, a principal of The Erskine Company LLC in Worcester, Mass., says Sonnabend's advisers also bear some of the blame for the current tax controversy.

"The ownership and control of artwork is usually a trigger for an audit, especially if the object is subject to a welter of conflicting laws, such as 'Canyon' is," writes Erskine in a guest blog post on Forbes. "Taking the position that 'Canyon' is valueless is on its face ridiculous. The MET obviously values it enough to give it some of its very limited wall space for display."

The Sonnabend advisers, says Erskine, baited the IRS and its art experts by claiming the work is valueless. Worse, he says, they didn't give the family options to avoid the tax in the first place.

Obviously, the Sonnabend case is a special one.

And just as obvious is the fact that most of us will not have to worry about the value for tax purposes of the items on our homes' walls. C'mon. There are just way too many velvet Elvises (Elvi?) to make them worth much on the open market.

But the fair market value issue is one that comes into play in determining taxes on all sort of capital property upon which we might have gains. And I am a bit disconcerted by the IRS' seeming arbitrary willingness to change the definition.

I suspect that the tax gap and Congressional pressure on the IRS to collect as much money as possible, not to mention the public presence of "Canyon" in an iconic New York museum, all played a bigger part in the IRS' valuation -- and the better tax result it produces for Uncle Sam -- than did actual art appreciation on the agency's part.

The wide-ranging value of art: The art component of the Sonnabend estate tax case is of particular interest to me right now because the hubby and I just got back from viewing some art that by some assessments is priceless.

MFAH Rembrandt Kahlo Japanese July 2012Works from Kenwood House in England are on display at the Museum of Fine Arts, Houston. The centerpiece work is Rembrandt's self portrait.

But there also were some wonderful pieces by the acclaimed portraitists of their age. I was particularly taken by an artist I'd never heard of or seen before, George Romney. His "Emma Hart at the Spinning Wheel" was one my favorites.

And no, despite the recent Anglo-Saxon heritage campaign references, I have no evidence that the 18th century painter is an ancestor of the 2012 Republican presidential candidate.

Also in MFAH galleries are some modern Latin American artworks (yes, Frida and Diego are there), as well as some really cool ancient Japanese scrolls and screens.

If you're in the Bayou City area while these items are still on exhibit, stop by. You won't be disappointed.

And Houston's and Texas' tax collectors also will appreciate your aesthetic sensibilities.

The value of art and other cultural endeavors is a now a popular economic factor for a lot of state and local governments.

I know we boosted Houston's and the Lone Star State's bottom lines with our hotel stays, restaurant meals, gift shop purchases, gasoline fill-ups and all the associated taxes. Our contributions, however, are negligible when compared to the overall amount of money that arts and cultural programs can return to cities and states.

Stateline reports that a study by Americans for the Arts found that the nonprofit arts and culture sector supports 4.13 million full-time jobs and generates $6.67 billion in state tax revenue nationally.

So wherever you are, support not the arts in your community.

Your visits to museums and concerts and other productions not only will offer you invaluable pleasure, but your patronage of the arts will also help out your state and city.

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