An artistic work’s beauty may be in the eye of the beholder, but its valuation for taxation purposes is in the eye of the Internal Revenue Service. Recently, one of Robert Rauschenberg’s works captured attention for an uncommon tax and art valuation imbroglio surrounding the combine, Canyon. The IRS claims the work is worth $65 million and that the owners of the work owe $40 million in estate taxes for the work, despite having received three expert appraisals that held the work to be valueless.

The owners and appraisers of the work contend that the work (which incorporates a taxidermy specimen of a bald eagle, shot and stuffed by one of Theodore Roosevelt’s Rough Riders) is valueless because selling the work constitutes a felony under The Bald and Golden Eagle Protection Act (16 U.S.C. 668). Enacted in 1940, the Act prohibits anyone to “take, possess, sell, purchase, barter, offer to sell, purchase or barter, transport, export or import, at any time or any manner, any bald eagle … [or any golden eagle], alive or dead, or any part, nest, or egg thereof." Violators of the Act can be fined up to $200,000 and imprisoned for one year for a first offense. A further violation of the Act is a felony and invites increased fines and imprisonment terms.

As such, the sale of Canyon would be illegal and it arguably has no market value. The piece could be donated to an organization with the lawful ability to own such a work, but this donation would not affect the now overdue tax bill. As the eagle in the piece was killed and stuffed before 1940, the owners have been able to retain the work, but the location of Canyon, which has been on long-term loan to New York’s Metropolitan Museum of Art, must always be known by US officials. At present, the piece must also carry special permits whenever it is scheduled for exhibition or travel. Finally, there is no international market for the piece because US authorities will not grant an export permit for the piece to be sold.

Any tax statement that contains an object of art valued at $50,000 or more is reviewed by the IRS and must be accompanied by a statement of the fair market value (FMV) of the work by a qualified appraiser. Similarly, the IRS uses this FMV to determine how to tax its owner. Any valuation claim submitted by an owner is also reviewed by the Art Advisory Panel, which is part of the Art Appraisal Services unit in the IRS. This Panel is charged to substantiate, dispute, or corroborate the values that are submitted with the owner’s tax returns. In existence since 1968, the Panel is diverse. Its members have variously served as museum curators, art scholars and private dealers. Disagreement among Panelists as to a work’s value is rare according to the IRS’s 2011 report on the activities of the Panel. The Panel’s recommendation about the work’s market value is then reviewed by the Art Appraisal Services unit and, if approved, becomes the position of the IRS. For 2011, the unit adopted 93% of Panel recommendations in full. Valuation matters can be appealed by furnishing new information to the IRS which might affect the unit’s assessment.

Despite the legal reality that Canyon cannot have any legal domestic buyers, and cannot be legally exported for sale, the IRS can alternately maintain the work’s tax valuation based on a theory about its black market value, as it has for other works in the past. For example, a World War II veteran’s successors inherited rare illuminated manuscripts and artifacts that were stolen by the G.I. from a German cathedral in Quedlinburg and secreted in a Texas bank vault for decades. Upon the veteran’s death, his heirs attempted to sell the items on the black market despite the lack of provenance and war-loot status, and were caught and tried for a variety of federal crimes. In addition, the IRS assessed tax penalties based on the black market value of objects that otherwise could not lawfully or legitimately be sold. Accordingly, fear the owners of Canyon, an object that otherwise cannot be sold at any price might still have value for taxation purposes.

The lawful conduct exhibited by the owners of the work in this case makes it, unlike the Quedlinburg case, extremely unlikely that there would be any attempt at realizing the piece’s black market value. In response to this tax quandary, the owners of Canyon have filed suit against the IRS to challenge the work’s valuation. Negotiations are set for in August, 2012, and some evidence suggests that the IRS art experts simply failed to consider the unique legal issues surrounding the piece in its valuation. Whether the tax bill represents a disciplined reasoning of the object’s value, or a flight of fancy on the part of the IRS, remains to be seen.                    

Please see Sheppard Mullin’s next item on art and taxation focusing on the tax implications of works stored in international freeports.