How can you set a $65 million property value on a work of art and ask for more than $29 million in estate tax if the artwork cannot be sold? Readers in Loudoun County, Virginia, may be surprised to learn that the IRS did just that for a sculpture that family members inherited after an art dealer died in New York. The artwork cannot be sold because it includes a stuffed bald eagle, a protected species. If the heirs ever sold the artwork, they would be charged with a felony, so it has been appraised at zero. This story shows that even the best estate planning can leave heirs to pay high estate taxes.
The IRS appraised the sculpture, titled "Canyon," and created by the famous 20th century artist Robert Rauschenberg, at $65 million and required the heirs to pay $29.2 million in taxes. In an unusual twist on one of the common complexities of estate planning, the heirs are left in a bind. They already paid millions in estate tax on other artwork and feel they should not have to pay taxes for "Canyon" because it cannot be legally sold. Inheritances are taxed at gradual rates and the IRS claims that the heirs misstated the true value of "Canyon," causing them to incur penalties. The IRS contends that its property valuation is fair, based on the sale prices of similar works.
This story illustrates the complex nature of estate planning. When administering an estate, taxes have to be paid at various levels. Giving tax-free gifts and setting up certain types of trusts can delay the taxes that would be paid.
Estate tax may have to be paid at both the federal and state levels, depending on the state and the value of the estate. However, Virginia does not currently have an estate tax after it was repealed through legislation in 2006. Even so, it is wise to start estate planning early so that all components of an estate plan are in place.
Source: The New York Times, "Art's Sale Value? Zero. The Tax Bill? $29 Million," Patricia Cohen, July 22, 2012