This week’s winner of the you-can’t-make-this-stuff-up contest is undoubtedly a front-page story in this morning’s New York Times. When New York art dealer Ileana Sonnabend died in 2007, she left her children a fabulous collection of modern art valued at $1 billion. Her children have already paid $471 million in estate taxes on the collection, being forced to sell off most of it to meet the bill. (This is a beautiful example, by the way, of why estate taxes should be abolished and replaced with a capital gains tax on inherited assets—the collection, an artistic whole in itself, had to be destroyed to pay the taxes due.)
But there is one item in the collection, a work by Robert Rauschenberg that cannot be sold. It contains a stuffed bald eagle and under the terms of the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Act, it is a felony to “possess, sell, purchase, barter, transport, import or export any bald eagle — alive or dead.” The estate, advised by three experts, including one from Christie’s, therefore, valued the work at zero. The IRS decided it was worth $65 million, and is demanding $29.2 million in taxes and $11 million in penalties because the heirs “inaccurately” stated its value.
The trouble, of course, is that the heirs didn’t inaccurately state its value. Anything that cannot, for whatever reason, be sold, is worth zero by economic definition. The value of anything is only what someone else is willing to pay for it. And to pay a dime for this particular artwork would be to commit a federal felony. To sell it for a dime would be to commit a federal felony.
The IRS has an “Art Advisory Panel,” that provides expert advice on the value of art works involved in estates. It was the panel that decided it was worth $65 million. Stephanie Barron, a member of the panel and an art curator at the Los Angeles County Museum of Art, said that, “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.”
It makes perfect sense and Ms. Barron’s statement is a classic example of the fallacy of the just price, that things have inherent value independent of the marketplace. They may have artistic value, emotional value, religious value, etc. But if they cannot be sold then they have no monetary value because they cannot be converted into money.
The IRS Art Advisory Board, I assume, is made up of art experts. It should add an economist to give the other board members a lesson in economics 101 when necessary. And the IRS should have someone empowered to tell the Bureau, “Are you crazy? This will make us look like idiots, and vindictive idiots at that.”
But they are vindictive idiots. I once got a letter from the IRS stating that because people in my profession at the time typically made over $100K, that I owed some $20K in taxes. I simply told them that if they would point out who owed me that $100K, and assist me in collecting it, that I would gladly pay the tax. That was the last I heard of that silliness.
Excellent post, but with regard to this: " why estate taxes should be abolished and replaced with a capital gains tax on inherited assets" n nWhy not abolish them and replace them with nothing? Why should the government have any legitimate claim to those assets? Presumably income taxes were paid on the money that, with the leftover, was used to buy them. Better still, eliminate all that and simply have specific taxes to pay for desired (Constitutionally allowed) services such as military and courts. This will make clear that you are paying for something valid and X is what it costs. n nNaturally, this presupposes that spending will be limited to what is appropriate and Constitutionally allowed. Until that is accomplished all tax schemes are useless, including the one I propose. But if we genuinely desire a practical tax system that is actually just, this is the only way.
Now you're thinking like a libertarian. The problem is, the government figures that all the money Out There is really theirs (since, after all, nobody gets anywhere without government help). n nI remember the Old Days, when if you got something and it appreciated, you didn't owe any taxes until it was sold.
And this my friends qualifies to be on the front page of the NYT….Enough said
From the NYT article: n n"the government revisited the issue in 1998. … Mrs. Sonnabend was then able to retain ownership as long as the work continued to be exhibited at a public museum. The piece is on a long-term loan to the Metropolitan Museum of Art in New York, which Mr. Lerner said insures it …" n nIn other words, not only are the Lerners barred from selling the work, they are also barred from possessing it. In Therefor not only should it be valued at zero, the Lerners should not be considered to be its owners. n nRemember folks, they will also be in charge of your health care.
to respond to Jeff Perren, an estate tax is the fairest one of all—u r dead and do not even know it was collected, much less care. wouldn't it be great if the dead paid all the taxes, while the living pay much less? second, Jeff, thanks for not calling it a "death tax." nHowever, Jeff, almost ALL money incurs a tax liability when it changes hands. Even though your company has already paid taxes on that money, u pay taxes as well, and your barber, in turn, pays tax on what u pay him. nThird, there r many taxes besides income tax. Even though u pay income tax, u still r still liable for gasoline tax, sales tax, school, and real estate tax. whether u sell your property or keep it, u still incur real estate tax. nHey, Jeff, u cannot take it with u. n n n n
Not only can you not take it with you, you can't even give it to your heirs. When "you" are dead, obviously it doesn't matter to "you". But "you" worked for it, and you should be able to do with it whatever you want – before or after.
I disagree with any taxes on estates, it is a simple transfer of title of the property. In this case the title to the collection was transferred within the family. Now if part of that property is sold then standard income taxes come into play. As to "the bird" why would you want to imprison a perfectly innocent economist with a bunch of stuffed shirt art critics, that's really cruel and unusual punishment. Rather it's the board members that should be forced to take an econ 101 course as a prerequisite to serving on the board. A good tax lawyer should, I would think, get them out of the pickle.
Don't take this as meaning I'm siding with the IRS or am in favor of estate taxes, but I'd be very interested to learn if the piece is insured, and for what value. n nI have a hunch they'd be more accepting of that value if they were to donate it in some manner which made it a tax write-off. n nAfterthought- the same law makes it a felony even to POSSESS the eagle — how can they be hanging on to it at all??? Maybe they should donate it to the IRS!
In the NYT article, the eagle was originally aquired and mounted prior to the current laws, by one of Teddy Roosevelts Rough Riders. n nThe Secretary of Interior has granted special permission for the eagle to be used in the art, because it was dead and mounted prior to 1918. Without this permission, the art would be illegal. n nThe permission for it to be used though doesn't extend to selling it. It is still illegal to sell
good solution: give the IRS the eagle. n nBetter solution: STFU about how much taxes you have to pay on the billion dollars you got from your accidental relationship to someone who's greatest contribution to society was to die. n n
The interesting question would be if the family was to turn around and make a "taking" claim against the US Govt in the amount that the IRS alleges the bird to be worth. There has been successful litigation on this in the case of wetlands that could not be developed and the argument would be that the endangered species law constituted a "taking" of property that otherwise would have a commercial value, with the value of the taking set by the IRS' experts. n nOr, more simply, using the IRS against itself — claim that the taking as a loss and use it to offset other taxes due. And destroy the bird as trash. n