Monday, July 23, 2012

Catch-29 Million

Post Stockton, post Solyndra, post GM, you'd think we had pretty much plumbed the depths of rapacious government.

Sorry, but no. From today's International Herald Tribune:
What is the fair market value of an object that cannot be sold?

The question may sound like a Zen koan, but it is one that lawyers for the heirs of the New York art dealer Ileana Sonnabend and the Internal Revenue Service are set to debate when they meet in Washington next month.

The object under discussion is “Canyon,” a masterwork of 20th-century art created by Robert Rauschenberg that Mrs. Sonnabend’s children inherited when she died in 2007.

Because the work, a sculptural combine, includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they ever tried to sell it. So their appraisers have valued the work at zero.

But the Internal Revenue Service takes a different view. It has appraised “Canyon” at $65 million and is demanding that the owners pay $29.2 million in taxes.

Lemme see if I have this right. Its purported value is $65M, but it is worthless, so cough up $29M. Which, presuming my précis is correct, makes me feel somewhat delusional, despite being completely sober and compos mentis.

But wait, there's more. This, err, valuation comes despite "IRS guidelines [saying] that in figuring an item's fair market value, taxpayers should 'include any restrictions, understandings, or covenants limiting the use or disposition of the property.'"

In this instance, 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 — alive or dead. Indeed, the only reason Mrs. Sonnabend was able to hold onto “Canyon,” Mr. Lerner said, was due to an informal nod from the United States Fish and Wildlife Service in 1981.

Now, as it happens, the heirs probably fuel their hot-tub with mounds of crispy Benjamins whilst pondering how best to grind the lower orders under the diamond studded soles of their Maniks.

But let's change the facts a little. Let's say I did something particularly noteworthy for Mrs. Sonnabend -- whatever that might be I'll leave to the reader as an exercise -- and I inherited this thing.

I couldn't sell it, and I couldn't afford to keep it.

Framed in this way, the solution practically hurls itself onto the page. Perhaps my artistic values are somehow wanting, or the picture doesn't do the work justice, but if that thing showed up on my yard, I'd burn it.

That would be a win-win. First, it would provide the perfect opportunity to very publicly present the single-digit salute to the IRS. But wait, there's more. By getting away with not paying my taxes, I could for once, and that's about the limit for a lifetime, prove AOG wrong.


Blogger Bret said...

"What is the fair market value of an object that cannot be sold" ...

... legally?

Everything has a fair market value. The fact that it's illegal to sell (in certain countries) certainly reduces its fair market value, but does not necessarily make it zero.

July 23, 2012 10:10 AM  
Blogger Harry Eagar said...

This comment has been removed by the author.

July 23, 2012 8:16 PM  
Blogger Harry Eagar said...

I don't think burning it would affect the tax valuation, which was dated at the time of death.

If, for example, you inherited K&H stock worth $500 million on the date of death, but K&H later went to $0, I suppose you'd still owe inheritance tax -- but perhaps you'd enjoy a big loss carry forward on your income.

If you still had income.

(The example is close to, but not exactly what happened to the writers of Dragon Dictation software.)

July 23, 2012 8:16 PM  
Blogger Susan's Husband said...

This actually happened basically to some dot com billionares / millionares. Because they were owners / founders and got significant chunks of the stock they were taxed on the value at distribution. When the tax bill came due the value of the stock was less than the taxes owed on it.

July 23, 2012 9:04 PM  
Blogger Hey Skipper said...


The IRS valued it as if there were no restrictions on its sale.

Also, how does one assert a market value on something for which there is, by definition, no market?

July 23, 2012 10:11 PM  
Blogger Bret said...

There's a (black) market for everything.

The restrictions on its sale are pretty limited really. Pay someone a modest amount to smuggle it out of the country and then sell it, no big deal.

July 24, 2012 8:19 AM  

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