Tax on Unsellable Property

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Under normal circumstances, you would only be taxed if you derive some form of income which includes earned revenue from the sale of any property. But what about property that cannot be sold? It may be taxable if it falls under the estate of a deceased individual. Such property is subject to estate duty tax. This is the exact situation faced by lawyers of art dealer, Ileana Sonnabend of New York.  Click here to read or watch more IRS Help resources.

Ms Sonnabend passed away in 2007 and left a certain work of art to her children. The piece of art in question is called is “Canyon,” a masterwork of 20th-century art created by Robert Rauschenberg. The problem arises because “Canyon” is a sculptural “Combine,” that includes a stuffed bald eagle, a bird under federal protection and so it is against the law to sell it. Sonnabend’s children would be committing a felony if they sold it. As a result, their appraisers gave the work no monetary value.

But the IRS has valued the piece of art differently. According to IRS valuation, “Canyon” is valued at $65 million which means it is subject to $29.2 million in tax. The IRS action has caused alarm to many estate planners, tax attorneys and art collectors. Giving her comment on this case, one lawyer who specializes in trusts and estates said, “It’s hard for me to see how this could be valued this way because it’s illegal to sell it.” Most tax experts are concerned that the IRS valuation would go against the conventional method of valuing property according to its market value.

The Sonneband children face a catch-22 situation. If they do not pay the tax, they would be guilty of breaking tax laws, but if they try to sell the artwork to raise money to pay the IRS, they would be violating eagle protection laws.

The Sonneband heirs have not been shirking their responsibility to pay taxes. In fact, the beneficiaries, Nina Sundell and Antonio Homem, have paid $471 million in federal and state estate taxes on Ms Sonneband’s assets valued at about $1 billion. This included works by various artists like Jasper Johns and Andy Warhol. The Sonneband children have already sold off a many pieces Ms Sonneband’s art collection (about $600 million worth) to pay the estate taxes. In the case of “Canyon”, their lawyers say the Sonneband heirs could face up to $40.9 million in taxes and penalties.

Needless to say, the Sonnabend children are disputing this tax and have brought the case to the tax court. They hope to arrive at a mutual resolution with the IRS.

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