New from the IRS - Taxing us for what we DO NOT SELL!

What follows is an article from the July 21, 2012 Minneapolis Star-Tribune paper. 
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What is the fair market value of an object that cannot be sold?

Lawyers for the heirs of the New York art dealer Ileana Sonnabend and the Internal Revenue Service are set to debate that question when they meet in Washington next month.

The object under discussion is "Canyon," a masterwork of 20th-century art created by Robert Rauschenberg that Sonnabend's children inherited when she died in 2007. Because the work, a signature Rauschenberg sculptural "Combine," includes a stuffed bald eagle, a bird under federal protection, the heirs would be committing a felony if they tried to sell it. So their appraisers have valued the work at zero.

But the IRS takes a different view. It has appraised "Canyon" at $65 million and is demanding that the owners pay $29.2 million in taxes.

The family is now challenging the judgment in tax court, and its lawyers are negotiating with the IRS in the hope of finding a resolution. Some estate planners, tax lawyers and collectors are alarmed at the agency's position, arguing that the case could upend the standard practice of valuing assets according to their sale in a normal market.

Tax experts note that the stance puts the heirs in a bind: If they don't pay, they would be guilty of violating federal tax laws, but if they try to sell "Canyon" to raise money to pay the IRS, they could go to jail for violating eagle protection laws.

Since the children assert that the work has no dollar value for estate purposes, they could not claim a charitable deduction by donating "Canyon" to a museum, their lawyer Ralph Lerner said. If the IRS were to prevail in its $65 million valuation, he said the heirs would have to pay $40.9 million in taxes and penalties.