value of illegal art and gift tax

Some heirs inherited art that contains a stuffed bald eagle. Since that artwork was created, Congress passed a law banning the sale of dead eagles. Thus the artwork is appraised at $0 as it can't be sold. The IRS claims that it is worth $65M and wants about $30M in gift taxes. They said it can be sold on the black market, but it's odd for a government agency to suggest this.

donated the item, they could perhaps deduct the $65M, but because of the limits on charitable deductions they could only deduct a little every year, and would take about 75 years to fully deduct everything given their projected income. But this statement is incorrect as charitable deductions can only be carried forward 5 years.

For another point of view on this see: "Canyon" Controversy - Blame The Advisers Not The IRS" at:

For another point of view on this see: "Canyon" Controversy - Blame The Advisers Not The IRS" at:

I don't think the IRS has a valid position. Let's look at the fundamental definition:

"Fair Market Value:" The value at which two unrelated parties are willing to transfer an asset for consideration.

If there is no market for an item (whether a legal market or not), there is no value. Zero is the correct result.

In my opinion, for the IRS to prevail, it must establish that a "black market" for the asset in fact exists since there is no legal market for the item. What we have so far is IRS conjecture that a market exists without proof to back it up. All the other contraband types suggested in the articles DO have markets. A market is where one finds willing buyers and willing sellers. Due to the legal restrictions, there are no willing sellers, thus no market at all. How is the IRS going to overcome that problem? Does the IRS have proof that someone else has sold this type of contraband in the past 72 years?

As for the item itself, it's simply not that good to even have more than a two-digit dollar value let alone eight digits. As the child of two well-known American artists, I do know crap when I see it. Even if "Canyon" had value, the IRS is clearly wrong here. They must be smoking or sniffing some of that other contraband.

I have another way to value it. (An expert opinion is required to get actual numbers here, I'm just making them up.)

Suppose for bribes -- er, "campaign donations" -- totalling, say, $10 million, Congress could be persuaded to allow the sale of artwork containing an eagle carcass that was made prior to the law not permitting it. Given that, and the fact (if it is such) that it could sell for $65 million if it were legal to sell it, then it would have a value of $55 million.

Another possibility (this requiring a good legal opinion): there are some laws that prohibit behavior in the US, and some that apply worldwide. If the "No Sale" law is of the former type, then perhaps the displaying museum could arrange an international tour for the piece, and while it's outside the US, the owners could fly to the country where it is on display and sell it there.

Seth

But when you make those $10M campaign donations, you don't know that you will actually get the new law. One logical thing is that the item has a value of zero, but then when it becomes possible to sell it then you have a huge collectible gain (with a cost basis of zero). Then again, the gift tax rate (35%) is different from the collectible rate (28%).

The law says

BEGIN QUOTE

(a) Prohibited acts; criminal penalties Whoever, within the United States or any place subject to the jurisdiction thereof, without being permitted to do so as provided in this subchapter, shall knowingly, or with wanton disregard for the consequences of his act take, possess, sell, purchase, barter, offer to sell, purchase or barter, transport, export or import, at any time or in any manner any bald eagle commonly known as the American eagle

END QUOTE

The key is "subject to the jurisdiction thereof", which means that treaties may come into play. In fact, 668D talks about the Migratory Bird Treaty Act.

That's just silly. It is insured, and couldn't cost more than $10,000 to hire someone to vandalize it beyond repair; so the value is $64,990,000.

I think the IRS has a slam-dunk case here, other than the determination of the actual non-zero valuation. If you read the text of the law, there is an exemption for specimens that were taken before 1940. The artist, Rauschenberg attested that the eagle was killed and stuffed by one of Teddy Roosevelt's Rough Riders. So there shouldn't be any obstacle to the ownership or sale of the piece. Even if the heirs could successfully claim that it was illegal to sell the piece, it would still have substantial value because there is no barrier to a foreign individual owning it and everyone agrees that Rauschenberg art has "some" value. Should the heirs sell the piece "illegally" (that is, if it truly is illegal to sell this piece), they would be subject to a penalty of up to $5000 and up to one year in prison. This is a small monetary penalty on a multi-million dollar sale (and I doubt a prison term would be part of the sentence).

Given the logic above, it makes sense that the heirs are currently negotiating with the IRS to settle before trial. They don't want a $65million valuation and are trying to get the valuation as low as possible.

Ira Smilovitz

Press reports consistently say that it's illegal to sell or export the eagle. It's normally illegal even to possess an eagle carcass, but the artist managed to get an exception when he showed how old his was. Does anyone really think that the parties didn't consider all of the angles?

I don't ever recall a valuation based on "you probably won't go to jail if you do this."

R's, John

Oh, some lawyers charge a lot of money to tell that to some clients.

___ Stu

And I don't know that it would actually sell for $65 million if it were legal to sell it, either. Both are estimates, as is any valuation that doesn't include a firm offer to buy.

What does gift tax have to do with anything? This is inheritance.

Paris, France is not subject to the jurisdiction of the US. "Transport" would be the problem with arranging an international tour.

Seth

The quote from the law stops too soon.

Further down in the same paragraph: "Provided further, That nothing herein shall be construed to prohibit possession or transportation of any bald eagle, alive or dead, or any part, nest, or egg thereof, lawfully taken prior to June 8,

1940, [...]"

Given that, I don't see any legal impediment to determining a valuation for the work.

Ira Smilovitz

I don't think it is a good idea for the owner of the art to transfer it to another country and then sell it. I'm sure an activist adminstration may find him guilty of violating the substance of the law. It's similar to the idea of gifting someone more than 13k tax-free through this mechanism: gift the person 13k, gift someone else 13k who then gifts the first person, thereby giving the first person 26k.

No way.

I never heard of formal appraisals of this sort -- putting a price on corruption. However, I think you're splitting hairs. Besides, with government you can give campaign donations, but there's no garauntee it will work. The President has many factions to keep happy, Congress with its 535 members may not go with the new law, the Supreme Court may overturn it.

I think they're the same tax rate. My point is that if the 65M is taxed as inheritance, it is taxed at 35%. But if it is not taxed, but becomes taxable when later the law is repealed and they sell it and have a large collectible gain. But this time the rate is 28%. Was just pointing that out -- that in an alternative scheme where the item is not taxed because it can't be legally sold, but then becomes taxable because Congress repeals the law, you have a gain but the rate may be different.

But if there is a treaty between the two countries, Paris is subject to these treaty laws, just as US would prosecute French citizens doing illegal things here.